UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☑ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2017~~2018

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-15751

eMAGIN CORPORATION

(Exact name of registrant as specified in its charter)


Delaware	56-1764501
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

2070 Route 52, Hopewell Junction, NY 12533

(Address of principal executive offices)

(845) 838-7900

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months ). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☑

Emerging growth company ☐

~~Emerging growth company~~ ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes ☐ No ☑

The number of shares of common stock outstanding as of ~~October 30, 2017~~July 31, 2018 was ~~34,972,589.~~45,111,273.

eMagin Corporation

Form 10-Q

For the Quarter ended ~~September~~June 30, ~~2017~~2018

Table of Contents



		Page
Statement Regarding Forward Looking Information
PART I FINANCIAL INFORMATION
Item 1	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2018 (unaudited) and December 31, ~~2016~~2017	4
	Condensed Consolidated Statements of Operations for the Three Months and ~~Nine~~Six Months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4	Controls and Procedures	25

PART II OTHER INFORMATION
Item 1	Legal Proceedings	2625
Item 1A	Risk Factors	2625
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3	Defaults Upon Senior Securities	2726
Item 4	Mine Safety Disclosures	2726
Item 5	Other Information	2726
Item 6	Exhibits	2827
SIGNATURES
CERTIFICATIONS – see Exhibits

STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q, or Report, contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect our results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed in the ~~section~~sections entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016 .~~2017, and in this Quarterly Report on Form 10-Q. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Report and the documents that we reference in this Report and have filed with the Securities and Exchange Commission, or the SEC, as exhibits to this Report, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

In particular, forward-looking statements in this Report include statements about:

Our ability to successfully develop and market our products to customers;

Our ability to generate ~~and satisfy~~ customer demand for our products in our target ~~markets;~~markets:

The development of our target markets and market opportunities, including ~~our planned entry in~~ the consumer ~~and commercial markets for our night vision products;~~market;

Our potential exposure to product liability claims; ~~our~~

Our ability to ~~manufacture suitable~~manufacturer our products at a competitive cost;

Our ability to successfully ~~launch~~implement new equipment on our manufacturing line;

Market pricing for our products and for competing ~~product; the extent~~products;

Increasing competition;

Provisions in certain of ~~increasing competition;~~our commercial agreements and our military business that may prevent or delay an acquisition of, partnership with, or investment in, our Company and our ability to develop original equipment manufacturer (“OEM”) and mass production partnerships;

Technological developments in our target markets and the development of ~~alternate;~~alternate, competing technologies in them;

Our anticipated cash needs and our estimates regarding our capital requirements; ~~and~~

Our needs for additional financing, as well as our ability to obtain such ~~financing.~~additional financing on reasonable terms and the interest rate and expense we incur on any debt financing; and

Our efforts to sell or otherwise dispose of our consumer night vision products business.

The forward-looking statements in this Report represent our views as of the date of this Report. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. Therefore, these forward-looking statements do not represent our views as of any date other than the date of this Report.

In this Report, references to “eMagin Corporation,” “eMagin,” “the Company,” “we,” “us,” and “our company” refer to eMagin Corporation and our wholly owned subsidiary, Virtual Vision, Inc. References to “Consumer Night Vision” refers to our consumer night vision products business.

ITEM 1. Condensed Consolidated Financial Statements

eMAGIN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



	September 30,		December 31,		June 30,		December 31,
	2017		2016		2018		2017
	(unaudited)				(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,964	$	5,241	$	8,663	$	3,526
Accounts receivable, net		3,428		2,834		3,481		4,528
Unbilled accounts receivable		475		1,401		947		406
Inventories		9,080		7,435		7,814		8,640
Prepaid expenses and other current assets		1,132		1,040		715		1,328
Total current assets		16,079		17,951		21,620		18,428
Equipment, furniture and leasehold improvements, net		8,802		8,980		8,403		8,553
Intangibles and other assets		241		282		336		326
Total assets	$	25,122	$	27,213	$	30,359	$	27,307

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,272	$	1,432	$	2,135	$	1,714
Accrued compensation		1,285		1,528		1,658		1,557
Revolving credit facility, net		920		1,689		—		3,808
Common stock warrant liability						4,614		784
Other accrued expenses		492		1,069		1,490		719
Deferred Revenue		988		445
Deferred revenue						—		765
Other current liabilities		566		590		408		469
Total current liabilities		5,523		6,753		10,305		9,816

Commitments and contingencies (Note 8)
Commitments and contingencies (Note 9)

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 September 30, 2017 and December 31, 2016		—		—
Common stock, $.001 par value: authorized 200,000,000 shares, issued 35,134,655 shares, outstanding 34,972,589 shares as of September 30, 2017 and issued 31,788,582 shares, outstanding 31,626,516 shares as of December 31, 2016		35		32
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		246,312		239,915		254,425		244,726
Accumulated deficit		(226,248)		(218,987)		(233,916)		(226,770)
Treasury stock, 162,066 shares as of September 30, 2017 and December 31, 2016		(500)		(500)
Treasury stock, 162,066 shares as of June 30, 2018 and December 31, 2017						(500)		(500)
Total shareholders’ equity		19,599		20,460		20,054		17,491
Total liabilities and shareholders’ equity	$	25,122	$	27,213	$	30,359	$	27,307



	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Revenues:

Product	$	4,014	$	3,536	$	13,050	$	13,612	$	6,216	$	4,655	$	12,079	$	9,036
Contract		266		769		2,559		2,227		850		605		1,854		2,293
License		—		—		—		1,000
Total revenues, net		4,280		4,305		15,609		16,839		7,066		5,260		13,933		11,329

Cost of revenues:

Product		3,802		2,545		10,918		9,639		3,971		3,658		8,330		7,116
Contract		200		478		1,346		1,248		299		353		827		1,146
License		—		—		—		—
Impairment of Consumer Night Vision inventory										2,690		—		2,690		—
Total cost of revenues		4,002		3,023		12,264		10,887		6,960		4,011		11,847		8,262

Gross profit		278		1,282		3,345		5,952		106		1,249		2,086		3,067

Operating expenses:

Research and development		1,271		1,666		3,782		4,468		1,720		1,177		3,351		2,511
Selling, general and administrative		1,970		2,041		6,586		6,044		2,031		2,153		4,943		4,616
Total operating expenses		3,241		3,707		10,368		10,512		3,751		3,330		8,294		7,127

Loss from operations		(2,963)		(2,425)		(7,023)		(4,560)		(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		(27)		(8)		(249)		(28)		(30)		(188)		(72)		(223)
Other income, net		(2)		4		11		8		37		(1)		58		14
Total other income (expense)		(29)		(4)		(238)		(20)
Total other expense										(1,420)		(189)		(938)		(209)
Loss before provision for income taxes		(2,992)		(2,429)		(7,261)		(4,580)		(5,065)		(2,270)		(7,146)		(4,269)
Provision for income taxes		—		(1)		—		(1)
(Provision) benefit for income taxes										—		—		—		—

Net loss	$	(2,992)	$	(2,430)	$	(7,261)	$	(4,581)	$	(5,065)	$	(2,270)	$	(7,146)	$	(4,269)

Loss per share, basic	$	(0.09)	$	(0.08)	$	(0.22)	$	(0.15)	$	(0.11)	$	(0.07)	$	(0.16)	$	(0.13)
Loss per share, diluted	$	(0.09)	$	(0.08)	$	(0.22)	$	(0.15)	$	(0.11)	$	(0.07)	$	(0.16)	$	(0.13)

Weighted average number of shares outstanding:

Basic		34,972,589		30,292,166		33,214,262		29,689,458		45,111,273		33,019,478		43,691,117		32,320,527

Diluted		34,972,589		30,292,166		33,214,262		29,689,458		45,111,273		33,019,478		43,691,117		32,320,527


��

	Nine Months Ended				Six Months Ended
	September 30,				June 30,
	2017		2016		2018		2017
	(unaudited)
Cash flows from operating activities:
Net loss	$	(7,261)	$	(4,581)	$	(7,146)	$	(4,269)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,588		1,214		991		1,205
Increase (reduction) in inventory reserve		50		(159)
Change in fair value of common stock warrant liability						924		—
Impairment of Consumer Night Vision inventory						2,690		—
Impairment of Consumer Night Vision tooling						76		—
Stock-based compensation		520		658		335		330
Loss on sale of asset		—		1
Changes in operating assets and liabilities:
Accounts receivable		(594)		1,032		1,047		(276)
Unbilled accounts receivable		926		281		(541)		628
Inventories		(1,695)		(2,967)		(444)		(1,615)
Prepaid expenses and other current assets		(92)		(488)		209		(262)
Deferred Revenues		543		(51)
Deferred revenues						(765)		786
Accounts payable, accrued expenses, and other current liabilities		(895)		(669)		138		222
Net cash used in operating activities		(6,910)		(5,729)		(2,486)		(3,251)
Cash flows from investing activities:
Purchase of equipment		(1,157)		(997)		(849)		(1,005)
Net cash used in investing activities		(1,157)		(997)		(849)		(1,005)
Cash flows from financing activities:
Proceeds from warrant exercise, net		—		4,294
Expenses from warrant offering						—		(12)
Repayments under revolving line of credit, net		(932)		—		(3,808)		(1,852)
Proceeds from public offering, net		5,811		—		12,171		5,837
Payment of debt issuance costs		(158)		—
Payments of debt issuance costs						—		(158)
Proceeds from warrant exercise, net						46		—
Proceeds from exercise of stock options		69		38		63		69
Net cash provided by financing activities		4,790		4,332		8,472		3,884
Net decrease in cash and cash equivalents		(3,277)		(2,394)
Net increase (decrease) in cash and cash equivalents						5,137		(372)
Cash and cash equivalents, beginning of period		5,241		9,273		3,526		5,241
Cash and cash equivalents, end of period	$	1,964	$	6,879	$	8,663	$	4,869

Cash paid for interest	$	65	$	22	$	30	$	65
Cash paid for income taxes	$	—	$	1	$	—	$	—

eMagin Corporation (the “Company”) designs, develops, manufactures, and markets OLED (organic light emitting diode)–on-silicon microdisplays and virtual imaging products which utilize OLED microdisplays. The Company’s products are sold mainly in North America, Asia, and Europe.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of eMagin Corporation and its subsidiary reflect all adjustments, including normal recurring accruals, necessary for a fair presentation. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosure normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the Securities and Exchange Commission. The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited condensed consolidated financial statements are read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. The results of operations for the period ended ~~September~~June 30, ~~2017~~2018 are not necessarily indicative of the results to be expected for the full year. The consolidated condensed financial statements as of December 31, ~~2016~~2017 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

As of September 30, 2017, the Company has an accumulated deficit of $226.2 million. The Company incurred a net loss of $7.3 million and used cash in operating and investing activities of $8.1 million during the first nine months of 2017. In addition, at September 30, 2017, the Company had cash and cash equivalents of $2.0 million, $0.9 million in outstanding borrowings under its asset based lending (“ABL”) debt facility, and borrowing availability under the facility of $3.7 million.

~~Management evaluated whether the conditions above raised substantial doubt about the Company’s ability to continue as a going concern.~~ The Company’s ability to continue current operations is dependent on its existing cash and working capital balances and the ability to generate sufficient cash flows from operations. The Company expects that it may need additional capital to fund its operations over the next twelve months from the date of issuance of these financial statements. If the Company is unable to raise additional capital or obtain debt when required or on acceptable terms, the Company may have to reduce or delay operating expenses as deemed appropriate in order to conserve cash.

In March 2017, the Company entered into an unsecured debt financing arrangement with Stillwater Trust LLC, a significant investor in the Company. Under the financing agreement, the Company may borrow through June 30, 2018, up to $2 million for general working capital purposes and up to an additional $3 million should the Company’s existing lender not provide borrowing availability under its normal terms and conditions through its ABL debt facility. In accordance with the terms of the unsecured debt financing agreement, this arrangement expired on May 24, 2017, upon the completion of an equity offering.

On May 24, 2017, the Company completed an underwritten offering of 3,300,000 shares of its common stock and warrants to purchase up to 1,650,000 shares of common stock and realized net proceeds of $5.8 million dollars after underwriting discounts and offering expenses.

Management believes its current operating plan, current working capital levels including proceeds from its May public offering, current financial projections, and the ability to borrow under its ABL debt facility, has alleviated substantial doubt about its ability to continue as a going concern. Accordingly, these consolidated financial statements have been prepared on the basis that the Company will continue to meet its obligations and continue its operations for the next twelve months from the date of issuance of these financial statements.

In accordance with accounting principles generally accepted in the United States of America, management utilizes certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments related to, among others, allowance for doubtful accounts, warranty reserves, inventory reserves, stock-based compensation expense, deferred tax asset valuation allowances, litigation and other loss contingencies. Management bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Certain immaterial prior period amounts have been reclassified to conform to current period presentation with no impact on previously reported net income, assets or shareholders’ equity.

Revenues from product sales are recognized when persuasive evidence of an arrangement exists, such as when a purchase order or contract is received from the customer, the price is fixed, title and risk of loss to the goods has changed and there is a reasonable assurance of collection of the sales proceeds. We obtain written purchase authorizations from our customers for a specified amount of product at a specified price and consider delivery to have occurred at the time of shipment. Product revenue is generally recognized when products are shipped to customers.

Revenues from research and development activities relating to firm fixed-price contracts and cost-type contracts are generally recognized on the percentage-of-completion method of accounting as costs are incurred (cost-to-cost basis). Progress is generally based on a cost-to-cost approach; however, an alternative method may be used such as physical progress, labor hours or others depending on the type of contract. Physical progress is determined as a combination of input and output measures as deemed appropriate by the circumstances. Contract costs include all direct material, labor and subcontractor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates. These rates are subject to audit by the other party.

Revenues from sales or licenses of intellectual property are recognized when transferred to the customer, provided the license has stand-alone value and the contract provides the right to use the intellectual property as it exists at the point the license is granted, without further obligations of the Company to update the intellectual property after the license is transferred. If the license does not have standalone value, then the license is combined with other deliverables, such as Research and Development (“R&D”) or manufacturing services into a single unit of account. Revenue from the single unit of account is recognized when earned, typically as the R&D or manufacturing services are performed over the life of the contract.

In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance that narrows the application of when an integrated set of assets and activities is considered a business and provides a framework to assist entities in evaluating whether both an input and a substantive process are present to be considered a business. It is expected that the new guidance will reduce the number of transactions that would need to be further evaluated and accounted for as a business. The guidance is required to be applied by the Company in the first quarter of 2018, although early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

In March 2016, the FASB issued guidance which simplifies the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, financial statement presentation of excess tax benefits or deficiencies, and classification in the Consolidated Statement of Cash Flows. The guidance is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The Company elected to early adopt this guidance on a prospective basis as of December 31, 2016. The adoption of the new accounting guidance did not have a material impact on the company’s financial statements.

In February 2016, the FASB issued guidance which changes the accounting for leases. The guidance requires lessees to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term and, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis for all leases (with the exception of short-term leases). Under the new guidance, leases previously defined as operating leases will be presented on the balance sheet. As a result, these leases will be recorded as an asset and a corresponding liability at the present value of the total lease payments. The asset will be decremented over the life of the lease on a pro-rata basis resulting in lease expense while the liability will be decremented using the interest method (i.e. principal and interest). As such, the Company expects the new guidance will impact the asset and liability balances of the Company’s financial statements and related disclosures at the time of adoption. The new guidance is effective January 1, 2019.

In November 2015, the FASB issued guidance which requires deferred tax liabilities and assets be classified as noncurrent in the statement of financial position. This guidance requires entities with a classified balance sheet to present all deferred tax assets and liabilities as non-current. The guidance is effective for annual and interim periods beginning after December 15, 2016 and can be applied prospectively or retrospectively to adjustments with early adoption permitted at the beginning of an interim or annual reporting period. The adoption of the new accounting guidance did not have a material impact on the Company’s financial statements.

In July 2015, the FASB issued guidance on the measurement of inventory, which requires that inventory be measured at the lower of cost or net realizable value. The updated standard was adopted prospectively and is effective for annual reporting periods (including interim periods therein) beginning after December 15, 2016 with early adoption permitted. The adoption of the new accounting guidance did not have a material impact on the Company’s financial statements.

In April 2015, the FASB issued guidance that simplifies the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company adopted this guidance in the first quarter of 2016 and has presented its revolving credit facility debt net of unamortized debt issuance costs in the accompanying consolidated balance sheet.

In August 2014, the FASB issued guidance which defines management’s responsibility to assess an entity’s ability to continue as a going concern; and to provide related footnote disclosures if there is substantial doubt about its ability to continue as a going concern. The pronouncement was effective for annual reporting periods ending after December 15, 2016 with early adoption permitted. The Company has provided an assessment and related disclosures in Note 1 to the Condensed Consolidated Financial Statements.

In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers, which will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance when it becomes effective. The guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2017. The Company is still finalizing its assessment of this guidance, but does not currently expect its adoption to have a material impact on its consolidated financial statements. Based on the evaluation of its product, contract and licensing revenue streams, most will be recorded consistently under both the current and new guidance with differences possible in the accounting for product warranties which are not expected to be material. The Company has determined it will use the modified retrospective method as its transition method in the adoption of the new revenue guidance. The Company will continue to accumulate information that will be necessary for implementation and will identify and implement any changes in its processes, systems and controls necessary to meet the new standards enhanced reporting and disclosure requirements. The Company will continue its evaluation of this new guidance though the date of adoption.

~~Unbilled accounts receivable represents contract revenue recognized but not yet invoiced due to contract terms or the timing of the accounting invoicing cycle.~~

Acquired patents are recorded at purchase price as of the date acquired and amortized over the expected useful life which is generally the remaining life of the patent.

The total intangible amortization expense was approximately ~~$14~~$13 thousand and ~~$41~~$27 thousand for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Estimated future amortization expense as of ~~September~~June 30, ~~2017~~2018 is as follows (in thousands):



Fiscal Years Ending December 31,	Total Amortization		Total Amortization
	(unaudited)		(unaudited)
2017 (three months remaining)	$	13
2018		54
2018 (six months remaining)			$	27
2019		32		32
2020		9		9
2021		8		8
2021				8
Later years		32		24
	$	148	$	108

The Company generally offers a one-year product replacement warranty. The standard policy is to repair or replace the defective products. The Company accrues for estimated returns of defective products at the time revenue is recognized based on historical activity as well as for specific known product issues. The determination of these accruals requires the Company to make estimates of the frequency and extent of warranty activity and estimate future costs to replace the products under warranty. If the actual warranty activity and/or repair and replacement costs differ significantly from these estimates, adjustments to cost of revenue may be required in future periods.

The following table provides a summary of the activity related to the Company's warranty liability included in other current liabilities, (in thousands):


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Beginning balance	$	589	$	540	$	584	$	599	$	362	$	609	$	468	$	584
Warranty accruals		(17)		(105)		118		3
Warranty accruals and adjustments										55		19		(17)		135
Warranty claims		(8)		(23)		(138)		(190)		(35)		(39)		(69)		(130)
Ending balance	$	564	$	412	$	564	$	412	$	382	$	589	$	382	$	589

Basic loss per share is computed using the weighted average number of common shares outstanding during the period, and excludes any dilutive effects of common stock equivalent shares such as stock options, warrants, and convertible preferred stock. Diluted loss per share is computed using the weighted average number of common shares outstanding and potentially dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.

The Company’s Series B Convertible Preferred stock (“Preferred Stock – Series B”) is considered a participating security as the preferred stock participates in dividends with the common stock, which requires the use of the two-class method when computing basic and diluted earnings per share. The Preferred Stock – Series B is not required to absorb any net loss. Although the Company paid a one-time special dividend in 2012, the Company does not expect to pay dividends on its common or preferred stock in the near future.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share and share data) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016:~~2017:



	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
	(unaudited)				(unaudited)				(unaudited)				(unaudited)
Net loss	$	(2,992)	$	(2,430)	$	(7,261)	$	(4,581)	$	(5,065)	$	(2,270)	$	(7,146)	$	(4,269)
Income allocated to participating securities		—		—		—		—		—		—		—		—
Loss allocated to common shares	$	(2,992)	$	(2,430)	$	(7,261)	$	(4,581)	$	(5,065)	$	(2,270)	$	(7,146)	$	(4,269)

Weighted average common shares outstanding - Basic		34,972,589		30,292,166		33,214,262		29,689,458		45,111,273		33,019,478		43,691,117		32,320,527
Dilutive effect of stock options		—		—		—		—		—		—		—		—
Weighted average common shares outstanding - Diluted		34,972,589		30,292,166		33,214,262		29,689,458		45,111,273		33,019,478		43,691,117		32,320,527

Net loss per share:
Basic	$	(0.09)	$	(0.08)	$	(0.22)	$	(0.15)	$	(0.11)	$	(0.07)	$	(0.16)	$	(0.13)
Diluted	$	(0.09)	$	(0.08)	$	(0.22)	$	(0.15)	$	(0.11)	$	(0.07)	$	(0.16)	$	(0.13)

The following table sets forth the potentially dilutive common stock equivalents for the three and ~~nine~~six month periods ended ~~September,~~June 30, 2018 and 2017 ~~and 2016~~ that were not included in diluted EPS as their effect would be anti-dilutive:



	Three Months Ended		Nine Months Ended		Three Months Ended		Six Months Ended
	September 30,		September 30,		June 30,		June 30,
	2017	2016	2017	2016	2018	2017	2018	2017
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Options	5,142,448	5,010,993	5,142,448	5,010,993	4,817,370	4,864,898	4,817,370	4,864,898
Warrants	5,081,449	3,331,449	5,081,449	3,331,449	9,055,773	5,081,449	9,055,773	5,081,449
Convertible preferred stock	7,545,333	7,545,333	7,545,333	7,545,333	7,545,333	7,545,333	7,545,333	7,545,333
Total potentially dilutive common stock equivalents	17,769,230	15,887,775	17,769,230	15,887,775	21,418,476	17,491,680	21,418,476	17,491,680

Cash, cash equivalents, accounts receivable, short-term investments and accounts payable are stated at cost, which approximates fair value due to the short-term nature of these instruments. The revolving credit facility is also stated at cost, which approximates fair value because the interest rate is based on a market based rate plus a margin.

We have categorized our assets and liabilities that are valued at fair value on a recurring basis into three-level fair value hierarchy in accordance with GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3).

Assets and liabilities recorded in the balance sheets at fair value are categorized based on a hierarchy of inputs as follows:

Level 1 – Unadjusted quoted prices in active markets of identical assets or liabilities.

Level 2 – Quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

The common stock warrant liability is currently the only financial asset or liability recorded at fair value on a recurring basis, and is considered a Level 3 liability. The fair value of the common stock warrant liability is included in current liabilities on the Condensed Consolidated Balance Sheets, as the warrants are currently exercisable.

The following table shows the reconciliation of the Level 3 warrant liability measured and recorded at fair value on a recurring basis, using significant unobservable inputs (in thousands):

The fair value of the liability for common stock purchase warrants at issuance and at June 30, 2018 was estimated using the Black Scholes option pricing model based on the market value of the underlying common stock at the measurement date, the remaining contractual term of the warrants from 3.9 to 4.6 years, risk-free interest rates ranging from 2.67% to 2.71%, no expected dividends and expected volatility of the price of the underlying common stock ranging from 47.1% to 48.8%.

The Company purchases principally all of its silicon wafers, which are a key ingredient in its OLED production process, from two suppliers located in Taiwan and Korea.

For the three and six months ended June 30, 2018, there were no single customers accounting for over 10% of net revenues. As of June 30, 2018, one customer accounted for 11% of the Company’s consolidated accounts receivable balance and no other single customer accounted for over 10% of the consolidated accounts receivable.

In February 2016, the FASB issued guidance which changes the accounting for leases. The guidance requires lessees to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term and, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis for all leases (with the exception of short-term leases). Under the new guidance, leases previously defined as operating leases will be presented on the balance sheet. As a result, these leases will be recorded as an asset and a corresponding liability at the present value of the total lease payments. The asset will be decremented over the life of the lease on a pro-rata basis resulting in lease expense while the liability will be decremented using the interest method (i.e. principal and interest). Although the Company is still evaluating and quantifying the impact, the new guidance will affect the asset and liability balances of the Company’s financial statements and related disclosures at the time of adoption. The new guidance is effective January 1, 2019.

During the quarter ended June 30, 2018 the Company made a decision to exit the business associated with its two consumer night vision products, the BlazeSpark and the BlazeTorch, the (“Consumer Night Vision”) business. The Company’s decision was based on lower than anticipated sales and an assessment performed during the quarter of the anticipated level of additional engineering, marketing and financial resources necessary to modify the products for an expanded market. As a result, the Company concluded an impairment had occurred and wrote-down $2.7 million of related Consumer Night Vision inventory, which includes an accrual of $1.4 million of inventory purchased by a contract manufacturer in anticipation of future production, and $0.1 million of production tooling, which are reflected in cost of revenues in the accompanying Condensed Consolidated Statements of Operations.

All of the Company’s revenues are earned from contracts with customers and are classified as either Product or Contract revenues. Contracts include written agreements and purchase orders, as well as arrangements that are implied by customary practices or law.

Product revenue is generated primarily from contracts to produce, ship and deliver OLED microdisplays. eMagin’s performance obligations are satisfied, control of our products is transferred, and revenue is recognized at a single point in time when control transfers to our customer for product shipped. Our customary terms are FOB our factory and control is deemed to transfer upon shipment. The Company has elected to treat shipping and other transportation costs charged to customers as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. As customers are invoiced at the time control transfers and the right to consideration is unconditional at that time, the Company does not maintain contract asset balances for product revenue. Additionally, the Company does not maintain contract liability balances for product revenues, as performance obligations are satisfied prior to customer payment for product. The Company offers a one-year product warranty, for replacement of product only, and does not allow returns. The Company offers industry standard payment terms that typically require payment from our customers from 30 to 60 days after title transfers.

The Company also recognizes revenues under the over time method from certain research and development (“R&D”) activities (contract revenues) under both firm fixed-price contracts and cost-type contracts. Progress and revenues from research and development activities relating to firm fixed-price contracts and cost-type contracts are generally recognized on an input method of accounting as costs are incurred. Under the input method, revenue is recognized based on efforts expended to date (e.g., the costs of resources consumed or labor hours worked, or machine hours used) relative to total efforts intended to be expended. Contract costs include all direct material, labor and subcontractor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates. These rates are subject to audit by the other party. Any changes in estimate related to contract accounting are accounted for prospectively over the remaining life of the contract. Under the over time method, billings may not correlate directly to the revenue recognized. Based upon the terms of the specific contract, billings may be in excess of the revenue recognized, in which case the amounts are included in deferred revenues as a liability on the Condensed Consolidated Balance Sheets. Likewise, revenue recognized may exceed customer billings in which case the amounts are reported as unbilled receivables. Unbilled revenues are expected to be billed and collected within one year. The incidental costs related to obtaining product sales contracts are non-recoverable from customers; and accordingly, are expensed as incurred.

The Company adopted the provisions of ASC No. 606, Revenue from Contracts with Customers, and related amendments (“ASC 606”) on January 1, 2018 using the modified retrospective adoption method with the cumulative effect of initially applying the guidance recognized at the date of initial application. During 2017, the Company analyzed its revenue recognition policies under ASC 606 and then current revenue recognition policies and determined that the performance obligations, transaction price, allocation of transaction price, recognition of contract costs and timing of revenue recognition would not be materially impacted by adopting ASC 606. Accordingly, there was no modified retrospective adoption adjustment necessary as of January 1, 2018.

The Company's sells its products directly to original equipment manufacturers and military contractors in a diverse range of industries encompassing the military, industrial, medical, and consumer market sectors. R&D activities are performed for both military customers and U.S. Government defense related agencies. Product and Contract revenues are disclosed on the Condensed Consolidated Statements of Operations. Additional disaggregated revenue information for the first quarters of fiscal 2018 and 2017 were as follows (in thousands) :

Accounts Receivable from Customers Accounts receivable, net of allowances, associated with revenue from customers were approximately $3.5 million and $4.5 million as of June 30, 2018 and December 31, 2017, respectively.

Unbilled Accounts Receivables (Contract Assets) - Pursuant to the over time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled accounts receivable is recorded to reflect revenue that is recognized when 1) the proportional performance method is applied and 2) such revenue exceeds the amount invoiced to the customer. Unbilled receivables are disclosed on the Condensed Consolidated Balance Sheet as of June 30, 2018.

The Company recognizes a contract liability when it has billed and received consideration from the customer pursuant to the terms of a contract but has not yet recognized the related revenue. These billings in excess of revenue are classified as deferred revenue on the Condensed Consolidated Statements of Operations.

Total contract assets and liabilities consisted of the following amounts (in thousands):




		June 30,		December 31,
		2018		2017
		(unaudited) (unaud(unaudited)
Unbilled Receivables (contract assets)	$	947	$	406
Deferred Revenue (contract liabilities)		-		(765)
Net contract asset (liability)	$	947		(359)

In the second quarter and first half of fiscal 2018, the Company recognized revenue of approximately $188 thousand and $765 thousand, respectively related to its contract liabilities that existed at December 31, 2017.

Remaining Performance Obligations. The Company has elected the practical expedient, which allows disclosure of remaining performance obligations only for contracts with an original duration of greater than one year. Such remaining performance obligations primarily relate to engineering and design services. As of June 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $1.7 million. The Company expects to recognize revenue on approximately 94% of the remaining performance obligations over the next 12 months, with the remainder being recognized within 15 months.

The majority of the Company’s commercial accounts receivable are due from Original Equipment Manufacturers (“OEM’s”). Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required.



	September 30,		December 31,		June 30,		December 31,
	2017		2016		2018		2017
	(unaudited)				(unaudited)
Raw materials	$	4,153	$	3,619	$	2,734	$	4,054
Work in process		1,646		1,576		1,902		1,352
Finished goods		4,832		3,740		4,760		5,024
Total inventories		10,631		8,935		9,396		10,430
Less inventory reserve		(1,551)		(1,500)		(1,582)		(1,790)
Total inventories, net	$	9,080	$	7,435	$	7,814	$	8,640

On December 21, 2016, the Company entered into a revolving credit facility with a lender that provides for up to a maximum amount of $5 million based on a borrowing base equivalent of 85% of eligible accounts receivable plus the lesser of $2 million or 50% of eligible inventory, (the “ABL facility”). The interest on the ABL facility is equal to the Prime Rate plus 3% but may not be less than 6.5% with a minimum monthly interest payment of $2 thousand. The Company is also obligated to pay the lender a monthly administrative fee of $1 thousand and an annual facility fee equal to 1% of the maximum amount borrowable under the facility. The ABL facility will automatically renew on December 31, 2019 for a one-year term unless written notice to terminate the agreement is provided by either party. In conjunction with entering into the financing, the Company incurred $228 thousand of debt issuance costs including lender and legal costs that will be amortized over the life of the ABL facility. In accordance with recently issued accounting guidance, ~~the~~any revolving credit facility ~~balance is~~balances outstanding are presented net of these unamortized debt issuance costs on the accompanying Consolidated Balance Sheet.

The ABL facility is secured by a lien on all receivables, property and the proceeds thereof, credit insurance policies and other insurance relating to the collateral, books, records and other general intangibles, inventory and equipment, proceeds of the collateral and accounts, instruments, chattel paper, and documents. Collections received on accounts receivable are directly used to pay down the outstanding borrowings on the credit facility.

The ABL facility contains customary representations and warranties, affirmative and negative covenants and events of default. The Company is required to maintain a minimum tangible net worth of $13 million and a minimum working capital balance of $4 million at all times. As of ~~September~~June 30, ~~2017, we~~2018, the Company had no borrowings outstanding, had unused borrowing availability of $3.7 million and ~~were~~was in compliance with all financial debt covenants.

For the three months and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, interest expense includes interest paid, capitalized or accrued of ~~$27~~$30 thousand, and ~~$249~~$72 thousand, respectively, on outstanding debt. Interest expense for the ~~nine months~~three and six-month periods ended ~~September~~June 30, ~~2017, also~~2018 includes the ~~write off~~amortization of ~~$158 of capitalized~~ debt issuance costs ~~associated with the expiration~~ of ~~the unsecured debt financing agreement.~~

On March 24, 2017, the Company entered into an unsecured debt financing arrangement with Stillwater Trust LLC, an investor who, with affiliates, collectively control approximately 46% of the Company’s outstanding common stock. Under the financing agreement, the Company may borrow, through June 30, 2018, up to $2 million for general working capital purposes$20 thousand and up to an additional $3 million should the Company’s lender not provide borrowing availability under its normal terms and conditions through its ABL facility. The agreement expires and borrowings become due upon the earlier of June 30, 2020; the completion of one or a series of equity financings which raise collectively $5 million or greater of gross proceeds; or an event of default, as defined in the agreement. Amounts borrowed under the financing agreement, once repaid, cannot be reborrowed. In accordance with the terms of the agreement, this arrangement expired on May 24, 2017, upon the completion of an equity offering. Upon termination of this facility, the Company wrote off $158$41 thousand, ~~of related debt issuance costs, and recorded a charge to interest expense in the second quarter of 2017.~~respectively.

Mr. Christopher Brody, a member of the Company’s board of directors, is also the President and Managing Director of Stillwater Holdings LLC and is the Vice President of Stillwater Trust LLC, which is the Company’s largest stockholder. The decision of Stillwater Trust LLC to enter into the financing arrangement was made independently of Mr. Brody and the financing was not required or suggested by Mr. Brody. The terms of the financing were determined solely by negotiation among the Company and Stillwater Trust LLC. Mr. Brody did not participate in the deliberations of the Company’s board of directors or the special committee of the Company’s board formed to review the terms of the financing with respect to the approval of the financing and abstained from voting thereon.

The Company uses the fair value method of accounting for share-based compensation arrangements. The fair value of stock options is estimated at the date of grant using the Black-Scholes option valuation model. Stock-based compensation expense is reduced for estimated forfeitures and is amortized over the vesting period using the straight-line method.

The following table summarizes the allocation of non-cash stock-based compensation to our expense categories for the three ~~and nine~~ month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (in thousands):



	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Cost of revenues	$	6	$	10	$	18	$	20	$	20	$	3	$	34	$	12
Research and development		25		108		74		141		22		24		45		49
Selling, general and administrative		159		280		428		497		87		89		256		269
Total stock compensation expense	$	190	$	398	$	520	$	658	$	129	$	116	$	335	$	330

At ~~September~~June 30, ~~2017,~~2018, total unrecognized compensation costs related to stock options was approximately $0.7 million, net of estimated forfeitures. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of approximately 3 years.

The following key assumptions were used in the Black-Scholes option pricing model to determine the fair value of stock options granted:



	Nine Months Ended					Six Months Ended
	September 30,					June 30,
	2017			2016		2018			2017
	(unaudited)					(unaudited)
Dividend yield		0	%	0	%		0	%	0	%
Risk free interest rates		0.71-1.65	%	0.71-1.01	%		2.16-2.59	%	0.71-1.47	%
Expected volatility		45.3 to 59.4	%	51.3 to 53.5	%		46.4 to 50.0	%	49.1 to 59.4	%
Expected term (in years)		3.5 to 5.0		3.5 to 5.0			3.5 to 4.75		3.5 to 5.0

The Company does not expect to pay dividends in the near future. Therefore, the Company used an expected dividend yield of 0%. The risk-free interest rate used in the Black-Scholes option pricing model is based on yield available at dates of option grant, on U.S. Treasury securities with an equivalent term. Expected volatility is based on the weighted average historical volatility of the Company’s common stock for the equivalent term. The expected term of the options represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience and vesting schedules of similar awards.

A summary of the Company’s stock option activity for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 is presented in the following table (unaudited):



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)		Aggregate Intrinsic Value		Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2016		5,055,741	$	3.00
Outstanding at December 31, 2017										4,768,838	$	3.02
Options granted ~~(1)~~		498,803		2.25						318,600		1.62
Options exercised		(46,073)		1.52						(49,937)		1.26
Options forfeited		(50,001)		2.05						—		—
Options cancelled or expired		(316,022)		2.83						(220,131)		4.47
Outstanding at September 30, 2017		5,142,448	$	2.96		3.76	$	986,578
Vested or expected to vest at September 30, 2017		5,125,749	$	2.96		3.75	$	950,550
Exercisable at September 30, 2017		4,307,532	$	3.03		3.45	$	969,126
Outstanding at June 30, 2018										4,817,370	$	2.88		4.06	$	399,766
Vested or expected to vest at June 30, 2018 (1)										4,804,494	$	2.86		4.06	$	399,480
Exercisable at June 30, 2018										4,173,641	$	3.87		3.87	$	385,433

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock. For the ~~nine~~three months and six month periods ended ~~September~~June 30, ~~2017~~2018, the aggregate intrinsic value of options exercised was ~~$35~~zero and $15 thousand, respectively. The Company issues new shares of common stock upon exercise of stock options.

As of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, there were 5,659 shares of Preferred Stock – Series B issued and outstanding.

During the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2018, options to purchase ~~46,073~~49,937 shares were exercised for proceeds of ~~$69~~$63 thousand; and warrants to purchase 30,000 shares were exercised for proceeds of $46 thousand. There were no options or warrants exercised during the three months ended June 30, 2018.

On ~~May 24, 2017, the Company completed~~January 25, 2018 we entered into an ~~underwritten offering of 3,300,000~~underwriting agreement to issue and sell 9,807,105 shares of ~~its common stock at~~Company Common Stock, together with warrants to purchase 3,922,842 shares of Common Stock with an initial exercise price of $1.55 per share (at a public offering price of ~~$2.00~~$1.35 per fixed combination consisting of one share of Common Stock and associated warrant to purchase four tenths of one share of Common Stock). These share and warrant amounts include the exercise of an overallotment option by the underwriter to purchase 1,279,187 additional shares of Common Stock and additional warrants to purchase 511,674 shares of Common Stock. The Common Stock and Warrants were registered on a Form S-1. The offering closed on January 29, 2018 and the Company received net proceeds after underwriting discounts and expenses of $11.9 million.

In a concurrent private placement, certain of our directors and officers purchased an aggregate of 203,708 shares of Common Stock, together with warrants to purchase up to ~~1,650,000~~81,487 shares of Common Stock at the public offering price of $1.35 per fixed combination. The sale of these shares of common stock and ~~realized~~warrants was not registered under the Securities Act and is subject to a 180-day lock-up. The private placement closed on February 15, 2018, and the Company received net proceeds of $5.8 million dollars after underwriting discounts and offering expenses. The shares and warrants were purchased by a single institutional investor and by Stillwater, LLC, an affiliate of the Company. The Warrants have an exercise price of $2.45 per common share and a term of five years. $0.3 million.

On ~~August 18, 2016,~~December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”). This legislation makes broad and complex changes to the U.S. tax code, including, but not limited to, (i) reducing the U.S. federal statutory tax rate from 35% to 21%; (ii) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (iii) modifying the officer’s compensation limitation, and (iv) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. Specifically, the TCJA limits the amount the Company ~~entered into letter agreements with~~is able to deduct for net operating loss carryforwards generated in taxable years beginning after December 31, 2017 to 80% of taxable income; however, these net operating loss carryforwards can be carried forward indefinitely. The Company recognizes the effects of changes in tax law, including the TCJA, in the period the law is enacted. Accordingly, the effects of certain ~~warrant holders~~provisions of the TCJA have been recognized in the financial statements for the year ended December 31, 2017. As a result of the change in law, the Company recorded a reduction to its deferred tax assets of $19.0 million and a corresponding reduction to its valuation allowance due to the reduction in the U.S. federal statutory rate from 35% to 21%. In addition, the Company expects to file a claim for a federal tax refund of approximately $0.2 million for its AMT credit carryforward in tax years 2018 to 2021 pursuant to ~~which such warrant holders agreed to exercise warrants to purchase a total of 2,216,500~~the applicable provisions of the ~~Company’s common stock, at an exercise price of $2.05 per share, which they acquired in December 2015.~~

On August 24, 2016, in consideration for the exercise of the 2,216,500 warrant shares, the Company issued new common stock purchase warrants (the “New Warrants”) to purchase 2,947,949 shares of the Company’s common stock which is equal to 133% of the 2,216,500 warrant shares exercised. The New Warrants have an exercise price of $2.60 per share and are substantially similar to the warrants issued in December 2015, except that they are: (a) restricted; (b) not exercisable for six months from the date of issuance; and (c) have a term of five and a half years from the issuance date.

~~The Company raised approximately $4.5 million in gross proceeds from the transaction, which was used for general corporate purposes.~~

The issuance of the New Warrants was exempt from federal and state registration requirements. The Company has filed a resale registration statement to register the shares of the Company’s common Stock issuable upon the exercise of the New Warrants.

At September 30, 2017 there were New Warrants outstanding to purchase 2,947,949 shares of Company’s common stock at an exercise price of $2.60, which expire in February 2023. Warrants to purchase 383,500 shares remaining from the December 2015 issuance were outstanding at September 30, 2017 at an exercise price of $2.05, which expire in June 2021.

In addition, on March 24, 2017 a warrant to purchase 100,000 shares of common stock at an exercise price of $2.25 per share, was issued in conjunction with an unsecured line of credit as described in Note 4: Line of Credit, all of which remain outstanding as of September 30, 2017.

On May 24, 2017, as described above, the Company issued warrants to purchase up to 1,650,000 shares of common stock at an exercise price of $2.45 in conjunction with a public offering, all of which remain outstanding as of September 30, 2017.

The Company’s effective tax rate is calculated quarterly based upon current assumptions relating to the full year’s estimated operating results and various tax-related items. The Company’s effective tax rate for the three ~~and nine~~ month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 was 0%. The difference between the effective tax rate of 0% and the U.S. federal statutory rate of ~~34%~~21% for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 was primarily due to recognizing a full valuation allowance on deferred tax assets.

As of ~~September~~June 30, ~~2017,~~2018, the Company determined that based on all available evidence, both positive and negative, including the Company’s latest forecasts and cumulative losses in recent years, it was more likely than not that none of its deferred tax assets would be realized and therefore it continued to record a full valuation allowance.

The Company’s net operating loss ~~carry forward~~carryforward amounts expire through 2037 and are subject to certain limitations that may occur due to change in ownership provisions under Section 382 of the Internal Revenue Code and similar state provisions.

Due to the Company’s operating loss carryforwards, all tax years remain open to examination by the major taxing jurisdictions to which the Company is subject. In the event that the Company is assessed interest or penalties at some point in the future, it will be classified in the financial statements as tax expense.

The Company has committed to equipment purchases of approximately ~~$0.2~~$1.8 million at ~~September~~June 30, ~~2017.~~2018.

From time to time, the Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company accrues for losses related to litigation when a potential loss is probable and the loss can be reasonably estimated. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. All estimates are based on the best information available at the time which can be highly subjective.

We account for common stock warrants pursuant to applicable accounting guidance contained in ASC 815 "Derivatives and Hedging - Contracts in Entity's Own Equity" and make a determination as to their treatment as either equity instruments or a warrant liability.

During ~~2015,~~January 2018, in conjunction with a registered equity offering and a concurrent private placement that closed in February 2018, the Company ~~received~~issued warrants to purchase an aggregate of 4,004,324 common shares at an exercise price of $1.55. As of June 30, 2018 related warrants to purchase 3,974,324 shares of common stock remain outstanding. The warrants have alternative settlement provisions that, at the option of the holder, provide for physical settlement or if, at the time of settlement there is no effective registration statement, a ~~letter from an attorney representing a former employee claiming damages for age discrimination~~cashless exercise, as defined in the warrant agreement.

Based on analysis of the underlying warrant agreement, and ~~wrongful termination. In September 2016, this former employee commenced action against~~applicable accounting guidance, the Company ~~in Superior Court~~concluded that these registered warrants require the issuance of registered securities upon exercise and do not sufficiently preclude an implied right to net cash settlement. Accordingly, these warrants were classified on the Condensed Consolidated Balance Sheet as a current liability upon issuance and will be revalued at each subsequent balance sheet date.

The fair value of the liability for common stock purchase warrants is estimated using the Black Scholes option pricing model based on the market value of the underlying common stock at the measurement date, the contractual term of the warrant, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common stock.

We determined that, based on the Black Sholes methodology, the liability for the ~~State~~January and February common stock warrants had a combined initial fair value of ~~Washington.~~$2.9 million, and a fair value as of June 30, 2018 of $3.7 million. In ~~February~~addition, warrants the company issued that were classified as liabilities had a fair value of $0.8 million at December 31, 2017 and $0.9 million as of June 30, 2018. The combined changes in fair value as of June 30, 2018 was reflected as a loss from change in the ~~former employee’s counsel sent a discovery request to~~fair market value of common stock warrant liability of $1.4 million and $0.9 million in the ~~Company. In October 2017,~~condensed consolidated statement of operations for the ~~parties reached a tentative settlement, subject to payment of an amount not material to the Company, documentation of the terms~~three and ~~the expiration of a revocation period.~~

~~The following is a schedule of revenues by geographic location (in thousands):~~

~~The following table represents the domestic and international revenues as a percentage of total net revenues:~~

~~The Company purchases principally all of its silicon wafers from two suppliers located in Taiwan and Korea.~~

~~For the~~ nine months ended September 30, 2017, one customer accounted for 10% of net revenues and there were no other single customers accounting for over 10% of net revenues. For the three months ended September 30, 2017, one customer accounted for over 10% of net revenues. As of September 30, 2017, two customers accounted for 15 % and 10%, respectively of the Company’s consolidated accounts receivable balance and no other single customer accounted for over 10% of the consolidated accounts receivable.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~eMagin Corporation is headquartered in Hopewell Junction, New York, and was incorporated~~We are a leader in the ~~state~~manufacture of ~~Delaware in 1996. We are the leader in OLED (organic~~microdisplays using organic light emitting ~~diode) on~~diode (OLED) technology. We design, develop, manufacture and market OLED miniature displays, which we refer to as OLED-on-silicon microdisplays, virtual imaging products that utilize OLED microdisplays, and related products. We also perform research in the OLED field. Our virtual imaging products integrate OLED technology with silicon ~~microdisplay~~chips to produce high-resolution microdisplays which, when viewed through a magnifying headset, create virtual images that appear comparable in size to that of a computer monitor or a large‑screen television. Our products enable our OEM customers in the defense, industrial, enterprise and consumer markets to develop and market improved or new electronic products. We believe that a key growth area for us is the consumer electronic OEM market. Our potential channels to this market include licensing our direct patterning (dPdTM) technology and partnering for the mass production of microdisplays. We believe that our dPd technology is a key differentiator across all markets that we serve. For example, near term it enables higher performance in defense applications for aviation and ground programs. As the market evolves, it enables next generation augmented reality/virtual reality (AR/VR) hardware for the consumer and enterprise segments because of the brightness and the pixel density afforded by the technology

We believe that our OLED microdisplays offer a number of significant advantages over comparable liquid crystal microdisplays, including higher contrast, greater power efficiency, less weight, more compact size, and negligible image smearing. Using our active matrix OLED technology, many computer and electronic system functions can be built directly into the OLED microdisplay silicon backplane, resulting in compact, high resolution and power efficient systems. Already proven in military and commercial systems, our product portfolio of OLED microdisplays deliver high‑resolution, flicker‑free virtual images that perform effectively even in extreme temperatures and high‑vibration conditions. We also believe that our dPd technology gives us a substantial advantage over other OLED microdisplays because it allows us to produce microdisplays with the high brightness required for VR and AR. Traditional OLED microdisplays utilize white emitting OLED with color filters that lessen the intensity of emitted light by as much as 85%, significantly reducing brightness. Microdisplays manufactured by direct patterning do not require color filters to achieve color variations and allow for the application of more efficient OLED structures which achieve high brightness.

We have developed our own intellectual property portfolio that includes 33 U.S. patents and 28 U.S. patent applications, over 20 years of manufacturing know-how and ~~mobile display systems. eMagin manufactures high-resolution~~proprietary technologies to create high performance OLED ~~microdisplays~~microdisplays. We believe our technology, intellectual property portfolio and ~~integrates them with magnifying optics~~position in the marketplace give us a leadership position in OLED and OLED-on-silicon microdisplay technology. We believe that we are one of only a few companies to ~~deliver virtual images comparable to large-screen computer~~market and ~~television displays in portable, low-power, lightweight personal displays. eMagin microdisplays provide near-eye imagery in a variety~~produce significant quantities of ~~products for military, industrial, medical and consumer OEMs.~~high resolution, small molecule OLED-on-silicon microdisplays.

We derive the majority of our revenue from sales of our OLED microdisplay ~~products which we manufacture in our Hopewell Junction, New York, manufacturing facility.~~products. We also earn revenue from ~~government~~commercial and ~~commercial~~consumer product and government development contracts that may complement and support our internal research and development programs. In addition, we generate sales from optics and microdisplays combined with optics. ~~Our business model also includes licensing~~

We were formed through the merger of Fashion Dynamics Corporation, which was organized on January 23, 1996 under the laws of the State of Nevada, and FED Corporation, a developer and manufacturer of optical systems and microdisplays for use in the electronics industry. Simultaneous with this merger, we changed our ~~intellectual property~~name to ~~consumer electronics companies for a broad range~~eMagin Corporation. We are incorporated in the state of ~~applications, although revenues to date have not been material.~~Delaware.

InWe believe that we will maintain our leadership position in our base defense and industrial business by continuing to improve both product performance and manufacturing. Our technology roadmap will enable us to maintain our competitive advantage as our focus on high brightness aligns well with the ~~third quarter, we delivered display products to over 64 customers in 26 countries~~performance requirements of future military ground and ~~performed contract services for 7 customers. Revenues and gross profit~~aviation programs in the ~~quarter were affected by~~US and elsewhere. We also believe that a key growth opportunity for us is the consumer electronic OEM market. Our strategy for this segment is to secure channels to this market, including licensing of our direct patterning technology and partnering in the mass production ~~problems associated~~of microdisplays. We believe that our dPd technology is a key differentiator for enabling next generation AR/VR hardware for the consumer and enterprise segments because of its brightness and pixel density. Our goal remains to partner with ~~one machine that resulted~~industry leaders in ~~fewer displays being produced~~consumer electronics who can help us capitalize on our technology to meet the needs of end users from cost and ~~sold during the quarter~~performance standpoints.

In addition to our consumer initiatives, we made progress towards our goals of securing new U.S. military programs while broadening our presence in foreign military, commercial and ~~higher unit material costs. Those production issues have since been resolved.~~industrial markets. We continue to ~~anticipate~~participate in government discussions on microdisplay development for future defense aviation/mounted/ground programs and to position our displays as a ramp up over the next several quarters from the addition of new military programs awarded over the past year and from shipments not made during the third quarter. As a result of higher bookings towards the endkey component of the ~~third quarter~~future Soldier System 2030 technology suite for enhanced soldier performance and ~~continuing~~accelerated decision making. As the only US based manufacturer of OLED microdisplays, we are also working to secure government funding to ensure the advancement of our manufacturing capabilities to support defense programs that can benefit from incorporating our high brightness direct patterned OLED microdisplays.

Overall, interest in eMagin microdisplays continues to increase as evidenced during discussions and presentations with existing and potential customers at tradeshows. During 2018 we have or will be exhibiting at Shot Show, the largest event for the recreational hunting and shooting market, at Defense and Commercial Sensing Exposition (SPIE), Army Aviation Association of America (Quad A), Special Operations Force Industry Conference (SOFIC), Association of the United States Army (AUSA), Eurosatory-France, Land, Naval & Internal Homeland Security Systems Exhibition, and the Society for Information Display (SID).

In conjunction with our marketing activities, we are embarking upon an expansion into new, high potential markets. We are seeing an increase in interest and requests for quotation from a variety of international companies that are familiar with the ~~fourth quarter, we believe we will experience greater shipments~~superior performance of our microdisplays. We are focusing on the rapidly growing Indian defense/commercial market and, ~~higher revenues~~following our exposure at the DefExpo18 India show in the ~~fourth~~second quarter, began shipping samples for evaluation and testing and received a production quantity order in July 2018.

Regarding our technology development efforts, we continued to advance and enhance our dPd display technology. During 2017 and the first two quarters of ~~2017~~2018 we continued to improve the performance and appeal of our dpd displays by lowering power consumption by 20 percent and demonstrating a maximum brightness of more than 5,300 nits on a new advanced backplane 2K x 2K microdisplay. We believe that this high brightness OLED-on-silicon technology is gaining greater attention in the ~~quarter ended September 30, 2017.~~ AR/VR industry, which requires high brightness, and has contributed to our signing agreements with multiple Tier One consumer product and electronics companies.

~~We continue to make~~Operationally, we furthered our progress on our multi-year yield improvement initiative as we ~~strengthen~~increased production resources, ~~make~~made key managerial and process engineering hires, and ~~implement~~installed new, advanced production equipment. We believe this initiative will enable us to increase production capacity, lower unit costs and achieve greater operating efficiencies, positioning us to meet ~~expanding~~growing customer demand and ~~earning~~achieve higher gross profits. As part of our yield improvement initiative, we also made capital equipment acquisitions over the past several quarters which we are currently implementing and qualifying. We expect that these additions will reduce our dependency on critical equipment at key stages of the production process and provide greater operating flexibility which we believe will permit us to address the increasingly demanding needs of our customers without compromising throughput volumes or unit profitability.

~~Throughout 2017,~~Our efforts led to higher yields during the second quarter, which contributed to a higher gross margin on our product display revenues. Investments in engineering resources, equipment, and manufacturing process improvements made both internally and through government funding received during the quarter also contributed to sustained yield increases. Our four highest volume product types exceeded yield targets in the quarter and we ~~expanded~~believe are well positioned to achieve if not surpass yield targets in the ~~marketing~~third quarter. These improvements to our production yields and ~~commercialization~~our manufacturing processes contributed to higher production volume capacity during the quarter which we expect will enable us to accommodate the anticipated higher demand in subsequent quarters.

These processes and investments in production equipment are also improving delivery times and product quality. On-time-delivery has exceeded our internal targets for the first time in several quarters. The results of ~~our handheld~~quality and ~~wearable~~service audits conducted by multiple major customers have validated these improvements.

During the quarter ended June 30, 2018 the Company made a decision to exit the business associated with its two consumer night vision products, ~~beyond~~ the ~~direct-to-consumer market to include commercial markets such as first responders~~BlazeSpark and ~~field service. We believe that these commercial marketing efforts, along with our consumer marketing initiatives, will lead to a larger customer base for our products. During~~ the ~~first nine months~~BlazeTorch, the (“Consumer Night Vision”) business. The Company’s decision was based on lower than anticipated sales and an assessment performed during the quarter of ~~2017 we incurred expenses associated with~~ the ~~marketing~~anticipated level of ~~these products and utilized working capital to fund the buildup of inventory. Working capital expenditures, along with~~additional engineering, marketing and ~~promotional expenditures,~~financial resources necessary to modify the products for an expanded market. As a result, the Company concluded an impairment had occurred and wrote-down $2.7 million of related Consumer Night Vision inventory, which includes an accrual of $1.4 million of inventory purchased by a contract manufacturer in anticipation of future production, and $0.1 million of production tooling, which are ~~expected to continue during~~reflected in cost of revenues in the ~~fourth quarter, although at a lower level than in earlier quarters, as we continue to assess the sales potential~~accompanying Condensed Consolidated Statements of ~~these markets.~~Operations.

As our consumer initiatives progress, we are seeing growing demand for our products across the board, particularly under our U.S. military and aviation programs and with new and existing international customers. During the ~~third~~ quarter, we sold to 75 customers; including 3 new customers, and supplied product for the commencement of 53 new programs. The increased demand is leading to more orders and the requested acceleration of existing orders. As of December 31, 2017, we ~~made significant progress~~had a backlog of approximately $9.8 million in products ordered for delivery through December 31, 2018. As of June 30, 2018 our backlog of products ordered for delivery through June 30, 2019, was $10.3 million reflecting continued strength in bookings during the quarter. Overall, our backlog may vary from quarter to quarter depending upon the timing of when orders are received and shipment dates scheduled, although we are generally seeing continuing growth in our ~~negotiations with multiple major consumer electronics companies to enter into strategic partnerships to develop displays~~backlog over the past year. Backlog consists of nonbinding purchase orders and purchase agreements for ~~these companies’ next generation VR/AR applications. We are pursuing what we believe~~product scheduled to be shipped over the ~~best paths to commercializing our Direct Patterning technology and establishing ourselves as the industry leader in microdisplays for the consumer market.~~ subsequent twelve months.

~~Our overarching goal is to secure partnerships with industry leaders in consumer electronics who can help us capitalize on~~Among our ~~technology to meet~~military and commercial successes during the needs of end users from a cost and performance standpoint. Our partnership initiatives encompass scaling our product technology, entering into mass production agreements with manufacturing companies which possess capital resources and high volume production capability to enable us to manufacture inquarter were the ~~volumes required for the consumer market, and securing sales and distribution channels to end users.~~

~~In concert with these efforts, we achieved the following:~~following noteworthy accomplishments:

During the quarter, we began to experience an improvement in booking activity as we made progress towards our goals of securing new, and expanding existing U.S. and foreign military programs while expanding our presence in foreign military, commercial and industrial markets. We expect these efforts to result in greater bookings during the second half of 2017 as a whole than were achieved during the first half of 2017. In the third quarter we booked over 90 new orders totaling more than $6.5 million. Thirty of these orders were for new projects with existing and new customers and over 60 were follow-on/repeat orders with existing customers. Among the orders received were:

In addition, during the quarter we received confirmation from two defense prime contractors that we will be awarded contracts in the fourth quarter totaling over $5.2 million. These anticipated orders comprise:

Also during the third quarter, we increased our presence in the aviation market with accelerated activity in several key programs. The aviation market, while representing minimal revenues in previous years, is expected to become a major source of revenues for the Company.

In addition, our development work under the Office of the Secretary of Defense-sponsored Mantech program ~~progressed~~was substantially completed during the ~~third quarter. We continue to meet~~second quarter as we met all milestones for the ~~milestones under this program and expect the project to be substantially completed by year-end 2017.~~Office of Secretary of Defense‑sponsored program. We believe these efforts will accelerate prototype development in subsequent quarters and enhance the warfighting effectiveness of ground, dismounted and aviation systems.

We are continuing to ~~make progress in~~advance our ~~development of very~~industry-leading high brightness full-color microdisplays incorporating our proprietary ~~Direct Patterning~~dPd technology. ~~Our latest efforts to improve device performance by modifying~~Recent improvements in the ~~device’s architecture~~equipment and ~~the materials used resulted in a reduction in power consumption by about 20%. We have also begun to make progress to extend the functional lifetimes~~further optimization of ~~the displays while continuing to increase the brightness beyond 5,000 nits.~~

~~We believe enhancements to~~ the manufacturing processes have led to brightness levels that surpass the 5,000 nits threshold requirements for AR/VR applications for Tier One companies. We are currently targeting a brightness of 15,000 nits in full color, and recently measured brightness of 7,500 nits. These brightness levels also put us on track to satisfy the requirements of several pending military programs. Recently we developed proprietary architectural improvements and superior performing OLED materials that have demonstrated an improvement in our displays of more than 50% in efficiency and lifetime. We are ~~beginning~~also in the process of designing further enhancements to our dPd production equipment that will improve our production yields ~~with~~and expand the ~~initial goal~~lifetime of raising yields by over 50% from the current level. Equipment which is expected to simplify several process steps to improve yields and reduce cycle time was ordered in the third quarter. Delivery is expected in November 2017 with qualification and implementation anticipated to be completed by second quarter 2018.our dPd displays.

In the meantime, we are continuing to ship limited quantities of engineering samples to customers who are exploring applications that can utilize these displays and incorporate them into their existing and planned product lines to achieve superior performance.

~~To the best of our knowledge,~~We believe our 2K x 2K displays demonstrate the highest brightness and ~~smallest pixel pitch~~resolution in the global market today. We have designed these displays to incorporate the attributes that we believe consumer electronics companies seek for their next generation products ~~including~~such as variable persistence and global addressing. We ~~believe~~view the continued development and demonstration of the advantages of our ~~Direct Patterning~~dPd technology isas integral to driving our growth in the consumer AR/VR markets with consumer electronics companies and to accelerating our discussions with mass production partners.

~~During the third quarter, we continued to develop~~We are developing both small pixel and large area microdisplay architectures for wearable consumer applications. These efforts are being driven by consumer electronics companies and are aimed at leveraging our ~~Direct Patterning~~dPd technology for cost effective, large volume production systems.

~~Qualification~~During the second quarter of 2018, we completed the critical design review for a next generation AR/VR microdisplay. The completion of the first prototype, which will use our dPd technology, is on schedule for completion in early 2019.

In addition, a compact interface for our 2K x 2K ~~microdisplay~~display, which is progressing as planned with expected completion in the first quarter 2018. In concert with this effort, we are developing a compact interface for the 2K x 2K microdisplay that will facilitate the integrationcapable of ~~the display into optical solutions. This hardware is targeted to be~~driving 120 Hz frame rates, was completed and ~~introduced to the market~~initial quantities delivered during the second ~~quarter 2018.~~ quarter. The compact size and long interface cable makes this system ideally suited for head wearable applications for military and consumer applications and is compliant with the DisplayPort standard commonly found on modern laptop and desktop computers.

At ~~September~~June 30, ~~2017~~2018, we had ~~a total of 98~~105 employees, of whom 95102 were full-time employees, as compared to ~~a total of 97~~100 employees, of whom 9397 were full-time employees, at December 31, ~~2016.~~2017.

A detailed discussion of our business and operations may be found in Part I, “Business,” of our ~~2016~~2017 Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, and as filed with the Securities and Exchange Commission on March ~~28, 2017.~~29, 2018.

~~Revenue on product sales~~All of the Company’s revenues are earned from contracts with customers and are classified as either Product or Contract revenues. Contracts include written agreements and purchase orders, as well as arrangements that are implied by customary practices or law.

Product revenue is generated primarily from contracts to produce ship and deliver OLED microdisplays. eMagin’s performance obligations are satisfied, control of our products is transferred, and revenue is recognized at a single point in time when ~~persuasive evidence~~control transfers to our customer for product shipped. Our customary terms are FOB our factory and control is deemed to transfer upon shipment. Shipping and other transportation costs charged to customers are treated as fulfillment activities and are recorded in both revenue and cost of ~~an arrangement exists, such as when a purchase order or contract~~sales at the time control is ~~received from the customer, the price is fixed or determinable, title and risk of loss~~transferred to the ~~goods has transferred~~customer. As customers are invoiced at the time control transfers and ~~there~~the right to consideration is unconditional at that time, the Company does not maintain contract asset balances for product revenue. Additionally, the Company does not maintain contract liability balances for product revenues, as performance obligations are satisfied prior to customer payment for product. The Company offers a ~~reasonable assurance~~one-year product warranty, for replacement of ~~collection of the sales proceeds. We obtain written purchase authorizations~~product only, and does not allow returns. The Company offers industry standard payment terms that typically require payment from our customers ~~for a specified amount of product at a specified price and consider delivery~~from 30 to ~~have occurred at the time of shipment.~~60 days after title transfers.

~~Revenues~~The Company also recognizes revenues under the over time method from certain research and development (“R&D”) activities (contract revenues) under both firm fixed-price contracts and cost-type contracts. Progress and revenues from research and development activities relating to firm fixed-price contracts and cost-type contracts are generally recognized on ~~the percentage-of-completion~~an input method of accounting as costs are ~~incurred (cost-to-cost basis). Progress~~incurred. Under the input method, revenue is ~~generally~~recognized based on ~~a cost-to-cost approach however an alternative method may be used such as physical progress,~~efforts expended to date (e.g., the costs of resources consumed or labor hours worked, or ~~others depending on the type of contract. Physical progress is determined as a combination of input and output measures as deemed appropriate by the circumstances.~~machine hours used) relative to total efforts intended to be expended. Contract costs include all direct material, labor and subcontractor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates. These rates are subject to audit by the other party.

~~Revenues from sales or licenses of intellectual property is recognized when transferred~~ Any changes in estimate related to ~~the customer, provided the license~~ ~~has stand-alone value and the~~ contract provides the right to use the intellectual property as it exists at the point the license is granted, without further obligations by the Company to update the intellectual property after the license is transferred. If the license does not have standalone value, then the license is combined with other deliverables, such as R&D or manufacturing services into a single unit of account. Revenue from the single unit of account is recognized when earned, typically as the R&D or manufacturing servicesaccounting are ~~performed~~accounted for prospectively over the remaining life of the contract. Under the over time method, billings may not correlate directly to the revenue recognized. Based upon the terms of the specific contract, billings may be in excess of the revenue recognized, in which case the amounts are included in deferred revenues as a liability on the Condensed Consolidated Balance Sheets. Likewise, revenue recognized may exceed customer billings in which case the amounts are reported as unbilled receivables. Unbilled revenues are expected to be billed and collected within one year. The incidental costs related to obtaining product sales contracts are non-recoverable from customers; and accordingly, are expensed as incurred.

We evaluate our deferred tax assets and their potential realizability each quarter to determine if we should make any changes to the valuation allowance. As of ~~September~~June 30, ~~2017,~~2018, we determined that based on all available evidence, both positive and negative, including the Company’s latest forecasts and cumulative losses in recent years, it was more likely than not that none of our deferred tax assets would be realized and therefore, we continued to record a full valuation allowance.

Other critical accounting policies, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016,~~2017, relate to product warranty, use of estimates, fair value of financial instruments and stock-based compensation, and additional information on accounting for income taxes.

THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2018 COMPARED TO THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2016~~2017



	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2017		2016		Change		2017		2016		Change		2018		2017		Change		2018		2017		Change
	(in thousands)						(in thousands)						(in thousands)						(in thousands)
Product	$	4,014	$	3,536	$	478	$	13,050	$	13,612	$	(562)	$	6,216	$	4,655	$	1,561	$	12,079	$	9,036	$	3,043
Contract	$	266	$	769	$	(503)	$	2,559	$	2,227	$	332		850	$	605		245		1,854		2,293		(439)
License	$	—	$	—	$	—	$	—	$	1,000	$	(1,000)
Total revenue, net	$	4,280	$	4,305	$	(25)	$	15,609	$	16,839	$	(1,230)	$	7,066	$	5,260	$	1,806	$	13,933	$	11,329	$	2,604

Revenues for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 were ~~$4.3~~$7.1 million and ~~$15.6~~$13.9 million, respectively,, as compared to ~~$4.3~~$5.3 million and ~~$16.8~~$11.3 million, respectively, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~ 2017.

Product revenue is comprised primarily of sales of displays as well as sales of other hardware. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, product revenue increased by ~~$0.5~~$1.6 million and ~~decreased by $0.6~~$3.0 million, respectively, as compared to the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. The increase in display revenues in the ~~third~~second quarter of ~~2017 was primarily due to increased demand by international customers. The decreased revenue in~~2018 and the year to date period was primarily due to ~~lower demand~~growth from ~~maturing~~U.S. and foreign military programs and a larger proportion of sales of displays with ~~lower~~higher average unit prices. The 2017 product revenue infor the ~~nine~~three and six months’ ~~period~~periods was favorably impacted by ~~saled~~the sale of $0.3 million of newly developed ~~Direct Patterned~~ displays supported by R&D efforts.

Contract revenue is comprised of revenue from research and development (“R&D”), commercial contracts orand non-recurring engineering (“NRE”) contracts. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, contract revenue increased by $0.2 million and decreased by ~~$0.5~~$0.4 million, ~~and increased by $0.3 million,~~ respectively, as compared to the same periods last year. The increase in contract revenue for the three ~~and nine~~ months ended ~~September 30, 2016,~~June 2018 was primarily due to the acceleration of consumer development work, the addition of ~~commercial~~several military related contracts ~~with several major consumer electronics companies earlier~~and the receipt of U.S. Government funding for yield improvement projects. The decrease in ~~2017.~~

~~License~~contract revenue for the ~~nine~~six month period ended June 30, 2018 was primarily due to higher commercial contract revenues in the three months ended ~~September 30, 2016 was comprised of revenue from a $1.0 million non-exclusive intellectual property license~~March 31, 2017, partially offset by increases in military related contracts and the funding for ~~our virtual reality headset technology. We produced engineering samples of our 2K x 2K pixel full-color displays~~yield improvements in the ~~fourth quarter of 2016 and expect that the licensee will use our 2K x 2K pixel full-color displays in their headsets upon their successful development.~~2018 period.



	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2017		2016		Change		2017		2016			Change	2018		2017		Change		2018		2017			Change
	(in thousands)						(in thousands)						(in thousands)						(in thousands)
Product	$	3,802	$	2,545	$	1,257	$	10,918	$	9,639	$	1,279	$	3,971	$	3,658	$	313	$	8,330	$	7,116	$	1,214
Contract	$	200	$	478	$	(278)	$	1,346	$	1,248	$	98		299		353		(54)		827	$	1,146		(319)
License	$	—	$	—	$	—	$	—	$	—	$	—
Impairment of Consumer Night Vision inventory														2,690		—		2,690		2,690		—		2,690
Total cost of revenues	$	4,002	$	3,023	$	979	$	12,264	$	10,887	$	1,377	$	6,960	$	4,011	$	2,949	$	11,847	$	8,262	$	3,585

Total cost of revenues is comprised of costs of product and contract revenues. Cost of product revenue includes materials, labor and manufacturing overhead, warranty costs and depreciation related to our products. Total cost of revenues for the three and six months ended June 30, 2018 includes a $2.7 million impairment of Consumer Night Vision inventory recorded during the quarter ended June 30, 2018. Cost of contract revenue includes direct and allocated indirect costs associated with performance of deliverables under contracts. ~~Total~~Excluding the effects of the Consumer Night Vision impairment, total cost of revenues for the three and ~~nine~~six months periods ended ~~September~~June 30, ~~2017~~2018 increased by ~~$1.0~~$0.2 million and ~~$1.4~~$0.8 million, respectively, as compared to ~~three and nine months ended September 30, 2016. Total~~the prior year periods, primarily due to higher volumes sold. On a unit cost basis, costs decreased as our fixed production costs were absorbed over a higher number of displays produced.

Excluding the impact of the Consumer Night Vision impairment, total cost of revenues as a percentage of revenues was ~~94%~~60% and ~~79%~~66%, respectively, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017, respectively~~2018, as compared to ~~70%~~76% and ~~65%~~73%, respectively, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2016. Revenues for the nine months ended September 30, 2016 included $1.0 million of license revenue that had no associated cost of revenues.~~2017.

The following table outlines product ~~contract~~ and ~~license~~contract total gross profit and related gross margins for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (dollars in thousands):



	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
		($ in thousands)					($ in thousands)							($ in thousands)					($ in thousands)
Product revenues gross profit	$	212		$	991		$	2,132		$	3,973		$	2,245		$	997		$	3,749		$	1,920
Product revenues gross margin		5	%		28	%		16	%		29	%		36	%		21	%		31	%		21	%
Contract revenues gross profit	$	66		$	291		$	1,213		$	979		$	551		$	252		$	1,027		$	1,147
Contract revenues gross margin		25	%		38	%		47	%		44	%		65	%		42	%		55	%		50	%
License revenues gross profit	$	—		$	—			—			1,000
License revenues gross margin		—	%		—	%		—	%		6	%
Impairment of Consumer Night Vision inventory													$	(2,690)		$	—		$	(2,690)			—
Total gross profit	$	278		$	1,282		$	3,345		$	5,952		$	106		$	1,249		$	2,086		$	3,067
Total gross margin		7	%		30	%		21	%		35	%		2	%		24	%		15	%		27	%
Total gross margin excluding HMD impairment														40	%		24	%		34			27

Total gross profit is a function of revenues less cost of revenues. ~~The~~Gross profit for the three and six months ended June 30, 2018 includes an impairment charge of $2.7 million related to Consumer Night Vision inventory. Excluding the impairment charge, the total gross profit for the three and ~~nine months~~six month periods ended ~~September~~June 30, ~~2017 decreased $1.0~~2018 increased $1.2 million and ~~$2.6~~$1.8 million, respectively, as compared to the ~~three and nine months ended September 30, 2016~~prior year periods primarily reflecting ~~a decrease in~~increased product revenue gross ~~profit in~~profit. Excluding the ~~three and nine month periods. The~~impairment charge, the total gross margin of 7%40% and 34%, respectively, for the three and six months periods ended ~~September~~June 30, ~~2017 decreased~~2018 increased from the total gross margin of ~~30%~~24% and 27%, respectively, in the prior year ~~period,~~periods, primarily due to ~~decreases in~~increased product revenues, higher average selling prices, and favorable contract revenues gross ~~margin. The~~margins in the 2018 periods. Total gross margin, net of ~~21%~~the impairment charge, was 3% and 16% for the ~~nine~~three and six months periods ended ~~September~~June 30, 2017 as compared to 35% for the prior year period primarily reflects the favorable impact of the $1.0 million of license revenue in the first quarter of 2016 that had no associated costs of goods sold.2018, respectively.

~~The~~Excluding the Consumer Night Vision impairment charges, the product gross profit and gross margins for the three and six months ended ~~September~~June 30, ~~2017 decreased~~2018 also increased compared to the prior year period, lower average selling prices in the 2017 period and higher product costs in the 2017 period related to yield losses and lower production volumes. The product gross profit for the nine months ended September 30, 2017, decreased $1.8 million as comparedperiods due to the prior year period. Product gross margins of 16% for the nine months ended September 30, 2017 decreased from 29% in the prior year period due to lower average selling prices for certain product types in the current period and the favorable impactsimpact of higher production ~~volume~~volumes and yields resulting in ~~the first nine months of 2016.~~

lower costs per display. For the three ~~months~~and six month periods ended ~~September~~June 30, ~~2017,~~2018, contract revenue gross profit was ~~$0.1~~$0.6 million and $1.0 million, respectively, compared to $0.3 million ~~for three months ended September 30, 2016. Contract revenue gross profit of $1.2~~and $1.1 million, ~~and gross margin of 47%~~respectively, for the ~~nine months ended September 30, 2017 increased from $1.0 million and 44% in the comparable~~ prior year periods. Increased contract revenue gross profit in the ~~first nine~~three months ~~of 2017~~ended June 30, 2018 was due to athe addition of several military related contracts at favorable margins. The slight decrease in gross profit in the 2018 six month period reflected higher ~~proportion of~~ commercial contract ~~work performed~~revenue in the ~~current~~prior year period, ~~and to changes~~partially offset by the growth in government related contracts in the ~~nature of both the individual contracts and the work completed during each~~2018 period.



	Three Months Ended								Nine Months Ended								Three Months Ended								Six Months Ended
	September 30,								September 30,								June 30,								June 30,
	2017			2016			Change		2017			2016			Change		2018			2017			Change		2018			2017			Change
	($ in thousands)								($ in thousands)								($ in thousands)								($ in thousands)
Research and development expense	$	1,271		$	1,666		$	(395)	$	3,782		$	4,468		$	(686)	$	1,720		$	1,177		$	543	$	3,351		$	2,511		$	840
Percentage of net revenue		30	%		39	%				24	%		27	%				24	%		22	%				24	%		22	%
Selling, general and administrative expense	$	1,970		$	2,041		$	(71)	$	6,586		$	6,044		$	542	$	2,031		$	2,153		$	(122)	$	4,943		$	4,616		$	327
Percentage of net revenue		46	%		47	%				42	%		36	%				29	%		41	%				35	%		41	%
Total operating expenses	$	3,241		$	3,707		$	(466)	$	10,368		$	10,512		$	(144)	$	3,751		$	3,330		$	421	$	8,294		$	7,127		$	1,167
Percentage of net revenue		76	%		86	%				66	%		62	%				53	%		63	%				60	%		63	%

Research and Development (“R&D”). R&D expenses are company-funded and include salaries and related benefits, development materials and other costs specifically allocated to the development of new technologies, ~~and~~ microdisplay products and processes, OLED materials and subsystems. R&D related costs associated with fulfilling contracts are categorized as contract cost of revenues. R&D expenses ~~decreased~~of $1.7 million and $3.3 million, respectively, for the three and six month periods ended June 30, 2018 increased by $0.5 million and $0.8 million, respectively, which on a percentage basis ~~for the three months and nine months ended September 30, 2017, respectively~~is an increase from 22% to 24% of revenues compared ~~the~~to both prior year periods. R&D costs in the current year reflected ~~a decrease in consumer product R&D partially offset by the~~ work performed on the Company’s ~~Direct Patterning~~dPd technology including product development and process development associated with the manufacture of our direct patterned displays as well as resources expended on improving manufacturing processes. In addition, the ~~Direct Patterned displays.~~ prior year periods reflected a higher portion of R&D allocated to commercial contracts

Selling, General and Administrative (“SG&A). SG&A expenses consist principally of salaries and related benefits, professional services fees and marketing, general corporate, and administrative expenses. SG&A expenses for the three and ~~nine months~~six month periods ended ~~September~~June 30, ~~2017,~~2018, decreased $0.1 million and increased ~~$0.5~~$0.3 million, respectively, compared to the ~~comparable~~ prior year periods.

The ~~increase~~decrease in SG&A for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2018 over the prior year periods ~~was~~reflected a more normalized run rate versus higher spending in previous quarters due largely due to ~~higher spending on~~ professional services, legal, and travel expenses associated with our negotiations with prospective consumer electronics and volume manufacturing ~~partners,~~partners. The increase in SG&A for the six-month period ended June 30, 2018 also included an allocation of approximately $240 thousand of transaction fees incurred in the January 2018 offering which were associated with the fair value of the warrant liability and, ~~promotional expenses related to our night vision consumer product activities.~~ accordingly, expensed in SG&A.

Other ~~Income (Expense),~~Expense, net. Other ~~income (expense),~~expense, net consists ~~primarily~~ of changes in the fair value of warrant liability, interest income earned on cash balances and interest expense. ~~Other expense, net~~Expenses related to the change in fair value of warrant liability was $1.4 million and $0.9 million, respectively, for the three and ~~nine months~~six month periods ended ~~September~~June 30, ~~2017,~~2018. This non-cash expense is associated with the increase of ~~$29 thousand and $238 thousand, respectively, reflects~~ the ~~write off of $158 thousand of Stillwater~~liability related ~~debt issuance costs~~to registered warrants issued in May 2017 ~~upon~~and January 2018. We are required to revalue warrants classified on our balance sheet as a liability at the ~~termination~~end of ~~this facility.~~each reporting period and reflect a gain or loss from the change in fair value in the period in which the change occurred. We calculate the fair value of the warrants outstanding using the Black-Scholes model.

~~For the first nine months~~As of ~~2017,~~June 30, 2018, we had ~~a net loss~~cash and working capital of ~~$7.3~~$8.7 million and ~~used $8.1~~$11.3 million, respectively, and borrowing availability under the ABL facility of $3.7 million, with no borrowings outstanding. This is in ~~operating~~comparison with cash and ~~investing activities.~~working capital of $3.5 million and $8.6 million, respectively, and borrowings outstanding and borrowing availability under the facility of $3.7 million and $1.0 million, respectively, at December 31, 2017.

Cash flow used in operating activities during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 was ~~$6.9~~$2.5 million, attributable to net loss of ~~$7.3~~$7.1 million partially offset by non-cash expenses of $5.0 million and a net change in operating assets and liabilities of ~~$1.8 million and~~ ~~non-cash expenses of $2.2 million~~.$0.4 million. Cash flow used in operating activities during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 was ~~$5.7~~$3.3 million.

Cash used in investing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 was ~~$1.2~~$0.8 million related to equipment purchases primarily to improve manufacturing yields and production capacity. As of ~~September~~June 30, ~~2017,~~2018, we had outstanding commitments to purchase approximately ~~$0.2~~$1.8 million in capital expenditures, and expect to make additional capital expenditures during ~~2017~~2018 to improve our manufacturing and R&D capabilities. Cash used in investing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 was $1.0 million for equipment purchases.

Cash provided by financing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 was $8.5 million and included proceeds of ~~$4.8~~$12.2 million ~~included net repayments under our credit facility of $0.9 million partially offset by $69~~from a public and private offering, $104 thousand from the exercise of stock options and ~~proceeds~~warrants, partially offset by net repayments under our credit facility of ~~$5.8 million from a public offering. There were no~~$3.8 million. Cash provided by financing activities during the ~~prior year period.~~six months ended June 30, 2017 was $3.9 million.

If we are not able to reach our anticipated level of profitability and cash flows over the next twelve months, it may be necessary to take actions to maintain our current levels of operations ~~including;~~including: additional borrowings under our credit ~~facilities,~~facilities; raising capital though issuance of equity, debt or equity linked ~~securities, or to reduce~~securities; and reducing our current levels of operations and ~~implement~~implementing cost reductions or restructuring activities. As of September 30, 2017, we had cash and working capital of $2.0 million and $10.6 million, respectively, and borrowing availability under the ABL facility, net of borrowings of $0.9 million, of $3.7 million.

On ~~May 24, 2017,~~January 25, 2018 we ~~completed~~entered into an ~~underwritten offering of 3,300,000~~underwriting agreement to issue and sell 9,807,105 shares of ~~its common stock at~~Company Common Stock, together with warrants to purchase 3,922,842 shares of Common Stock with an initial exercise price of $1.55 per share (at a public offering price of ~~$2.00~~$1.35 per fixed combination consisting of one share of Common Stock and associated warrant to purchase four tenths of one share of Common Stock). These share and warrant amounts include the exercise of an overallotment option by the underwriter to purchase 1,279,187 additional shares of Common Stock and additional warrants to purchase 511,674 shares of Common Stock. The Common Stock and Warrants were registered on a Form S-1. The offering closed on January 29, 2018 and the Company received net proceeds after underwriting discounts and expenses of $11.9 million.

In a concurrent private placement, certain of our directors and officers purchased an aggregate of 203,708 shares of Common Stock, together with warrants to purchase up to ~~1,650,000~~81,487 shares of ~~common stock and realized net proceeds~~Common Stock at the public offering price per fixed combination. The sale of $5.8 million dollars after underwriting discounts and offering expenses. The shares and warrants were purchased by a single institutional investor and by Stillwater, LLC, an affiliate. The Warrants have an exercise price of $2.45 per common share and a term of five years.

~~The underlying~~these shares of common stock and warrants ~~issued in this offering completed~~was not registered under the ~~allotment of shares allowable for issuance pursuant~~Securities Act and is subject to a ~~shelf registration statement filed in 2014. In June 2017, we filed a replacement shelf registration statement that will provide us with~~180-day lock-up. The private placement closed on February 15, 2018, and the flexibility, subject to certain limitations as a result of our current unaffiliated market capitalization, to raise capital over the next three years from the offering of common stock, preferred stock, warrants, units and debt securities, or any combination of these securities, in one or more future offerings.

On August 18, 2016, we entered into letter agreements with certain of our warrant holders pursuant to which they agreed to exercise warrants to purchase a total of 2,216,500 shares of our common stock, at an exercise price of $2.05 per share, which they acquired in December 2015.

On August 24, 2016, in consideration for the exercise of the 2,216,500 warrant shares, we issued new common stock purchase warrants (the “New Warrants”) to purchase 2,947,949 shares of our common stock or 1.33 New Warrant share for each warrant share exercised, with an exercise price of $2.60 per share, the approximate market price of the Company’s shares at the date of the letter agreement. The terms of the warrants are substantially similar to the warrants issued in December 2015. Similar to the earlier warrants, they are not exercisable for nine months from the date of issuance; and have a term of five and a half years from the issuance date.

~~We raised approximately $4.3 million in~~Company received net proceeds ~~from the transaction, which was used for general corporate purposes.~~of $0.3 million.

On December 21, 2016, we entered into an asset based revolving credit facility with a lender that provides for up to a maximum amount of $5 million based on a borrowing base equivalent of 85% of eligible accounts receivable plus the lesser of $2 million or 50% of eligible inventory. The interest on the ABL Facility is equal to the Prime Rate plus 3% but may not be less than 6.5% with a minimum monthly interest payment of $2,000. We are obligated to pay the lender a monthly administrative fee of $1,000 and an annual facility fee equal to 1% of the maximum amount borrowable under the facility. The ABL Facility will automatically renew on December 31, 2019 for a one-year term unless written notice to terminate the Financing Agreement is provided by either party.

The ABL Facility is secured by a lien on all receivables, property and the proceeds thereof, credit insurance policies and other insurance relating to the collateral, books, records and other general intangibles, inventory and equipment, proceeds of the collateral and accounts, instruments, chattel paper, and documents. The ABL Facility contains customary representations and warranties, affirmative and negative covenants and events of default, including a provision that we maintain a minimum tangible net worth of $13 million and a minimum working capital balance of $4 million. As of ~~September~~June 30, ~~2017,~~2018, we had ~~0.9 million in~~no borrowings outstanding under the ~~Financing Agreement~~ABL Facility and had unused borrowing availability of $3.7 million. We were in compliance with all financial debt covenants.

On March 24, 2017, we entered into an unsecured debt financing arrangement with Stillwater Trust LLC, an investor who with affiliates collectively control approximately 46% of our outstanding common stock. Under the financing agreement, we may borrow, through June 30, 2018, up to $2 million for general working capital purposes and up to an additional $3 million should our lender not provide borrowing availability under its normal terms and conditions through its ABL facility. The agreement expires and borrowings become due upon the earlier of June 30, 2020; the completion of one or a series of equity financings which raise collectively $5 million or greater; or an event of default, as defined in the agreement. Amounts borrowed under the financing agreement, once repaid, cannot be reborrowed. In accordance with the terms of the agreement, this arrangement expired on May 24, 2017, upon the completion of an equity offering. Upon termination of this facility, the Company wrote off $158 thousand of related debt issuance costs, and recorded a charge to interest expense in the second quarter of 2017.

The amounts drawn on the line accrue interest at 6% per annum payable at maturity, and are subject to an upfront drawdown fee of 2% of the amount drawn and a quarterly interest surcharge of 2% paid upfront and due commencing on the 180-day anniversary of each draw regardless of whether the draw is still outstanding and then a 2% quarterly interest surcharge until the draws are repaid. In connection with the financing commitment, the investor received a $50,000 commitment fee and a warrant to purchase 100,000 shares of common stock at an exercise price of $2.25 per share, the closing market price of our common stock on the date the arrangement was executed. In the event we do not raise at least $5 million in proceeds from an equity offering within 180 days of the first draw on the facility, we will be required to file a registered rights offering with the Securities and Exchange Commission within 45 days of the 180-day period to all holders of securities of the Company. In connection with the facility, we, our lender and the investor entered into an intercreditor agreement.

Mr. Christopher Brody, a member of our board of directors, is also the President and Managing Director of Stillwater Holdings LLC and is the Vice President of Stillwater Trust LLC, which is our largest stockholder. The decision of Stillwater Trust LLC to enter into the financing arrangement was made independently of Mr. Brody and the financing was not required or suggested by Mr. Brody. The terms of the financing were determined solely by negotiation among us and Stillwater Trust LLC. Mr. Brody did not participate in the deliberations of our board or the special committee of our board formed to review the terms of the financing with respect to the approval of the financing and abstained from voting thereon.

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q.

Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

~~There were no~~Beginning January 1, 2018, we implemented ASC 606, “Revenue from Contracts with Customers.” Although the new revenue standard had an immaterial impact on our ongoing net income, we did implement changes to our processes related to revenue recognition and the control activities within them. These included the development of new policies based on the five-step model provided in ~~our internal controls over financial reporting during~~ the ~~fiscal quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.~~new revenue standard, new training, ongoing contract review requirements, and gathering of information provided for disclosures.

~~During 2015,~~We are currently not a party to any material legal proceedings. We have in the ~~Company received a letter~~past, and may from ~~an attorney representing a former employee claiming damages for age discrimination~~time to time in the future, become involved in legal proceedings arising from the normal course of business activities. The microdisplay industry is characterized by frequent claims and wrongful termination. In September 2016, this former employee commenced action against the Company in Superior Court for the State of Washington. In February 2017, the former employee’s counsel sent a discovery request to the Company. In October 2017, the parties reached a tentative settlement, subject to payment of an amount not material to the Company, documentationlitigation, including claims regarding patent and other intellectual property rights as well as improper hiring or termination practices. Irrespective of the ~~terms and~~validity of such claims, we could incur significant costs in the defense thereof or could suffer adverse effects on our operations ~~the expiration of a revocation period.~~.

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly Report on Form 10-Q and the risks discussed below, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, as filed with the Securities and Exchange Commission, which could materially affect our business, financial condition or future results.

The success of our AR/VR efforts is dependent upon widespread acceptance of VR/AR systems and products in the consumer and commercial marketplace

The success of our efforts in the AR/VR market will depend on the widespread acceptance of AR/VR systems and products in the consumer and commercial market. At present, it is difficult to assess or predict with any assurance the potential size, timing and viability of the consumer and commercial AR/VR market. If a substantial market for AR/VR systems and products fails to develop or if our AR/VR products do not achieve market acceptance, our business, operating results and financial condition will be materially and adversely affected.

Risks Related to the Company’s decision to exit Consumer Night Vision Products business.

Although the Company has recorded an impairment loss related to their decision to exit this business, there is a risk that additional losses may be incurred upon the final disposition or sale of this business.

During the second quarter of 2018, we determined to exit the Consumer Night Vision Products business. Our exit from this business means that various agreements and purchase orders in place for defined quantities of the Company’s night vision products will no longer be fulfilled and, as a result, we may incur significant losses. While the Company believes it has adequately accrued for the losses that may be incurred, there is the risk that additional losses may be incurred above the amounts accrued for as of June 30, 2018. Any additional losses could adversely impact our operating results and cash flows, and our stock price could decline.

While we believe we have fully reserved for the losses that may be incurred in the disposition of the Night Vision products business, there can be no assurances that we will be able to complete the exit of this business on terms that will be acceptable to us. If the disposition of our Night Vision products business is not completed as we anticipate, our ongoing business could be negatively impacted by the diversion of resources and management attention from our ongoing business and other strategic matters.

~~None~~In a private placement, concurrent to a registered public offering of 9,807,105 share of Company Common Stock and 3,922,842 Warrants, certain of our directors and officers purchased an aggregate of 203,708 shares of Common Stock, together with warrants to purchase up to 81,487 shares of Common Stock at the public offering price of $1.35 per fixed combination consisting of one share of Common Stock and associated Warrant to purchase four tenths of one share of Common Stock. The Warrants have an initial exercise price of $1.55. The sale of these shares of common stock and warrants was not registered under the Securities Act and is subject to a 180-day lock-up. The private placement closed on February 15, 2018, and the Company received net proceeds of $0.3 million, which were invested in a government money market fund and will be used for general corporate purposes.

On November 8, 2017, we entered into Change in Control Agreements (the “Change in Control Agreements”) with four of our executive officers, Steve Costello, Amalkumar Ghosh, Olivier Prache and Jeffrey P. Lucas (each an “Executive”). The Agreements provide that if, within the twelve-month period following a Change in Control of the Company (as defined in the Change in Control Agreements), the Executive suffers a Terminating Event (as defined below and in the Change in Control Agreements), he will be entitled to receive a lump sum cash payment in an amount equal to the Executive’s annual base salary in effect immediately prior to the Terminating Event (or the Executive’s annual base salary in effect immediately prior to the Change in Control, if higher), payable in a lump sum on the termination date, provided that the Executive executes and does not revoke a separation agreement and release in favor of us. In addition, if the Executive was participating in our group health plan immediately prior to termination and elects COBRA health continuation, then we will pay the Executive a monthly cash payment for 12 months or the Executive’s COBRA health continuation period, whichever ends earlier, in an amount equal to the monthly employer contribution that we would have made to provide health insurance to the Executive if he had remained employed by us.None.

A “Terminating Event” shall be deemed to have occurred under the Agreements if the Executive (i) is terminated by us other than for Cause (as defined in the Change in Control Agreements), death or Disability (as defined in the Change in Control Agreements) or (ii) terminates his employment with the Company for Good Reason (as defined in the Agreements).

The Change in Control Agreements became effective as of November 8, 2017 (the “Effective Date”) and shall terminate upon the earliest of (a) the termination of the Executive’s employment for any reason prior to a Change in Control, (b) the termination of the Executive’s employment with the Company after a Change in Control for any reason other than the occurrence of a Terminating Event or (c) the date which is twelve months and a day after a Change in Control if the Executive is still employed by the Company.

The foregoing description is a summary of the Change in Control Agreements and should be read in conjunction with the full text of the Form of Change in Control Agreement which is attached to this Quarterly Report on Form 10-Q as Exhibit 10.2 and is incorporated herein by reference.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Estimated Fair Value
	(unaudited)
Balance as of January 1, 2018	$	784
Fair value of warrants issued during period		2,906
Change in fair value of warrant liability, net		924
Balance as of June 30, 2018	$	4,614


3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to an appendix to the Company’s Definitive Proxy Statement filed on September 21, 2006).
3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation (incorporated by reference to an appendix to the Company’s Definitive Proxy Statement filed on October 26, 2010).
3.3	Bylaws of the Company (incorporated by reference to exhibit 99.3 to the Company’s Definitive Proxy Statement filed on June 14, 2001).
4.1	Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 of the Registrant’s current report on Form 8-K filed on December 23, 2008).
4.2	Form of Letter Agreement (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 24, 2016).
4.3	Form of common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s current report on Form 8-K filed on December 18, 2015).
4.4	Form of Common Stock Purchase Warrant issued to the Warrant Holders in the Transaction (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 24, 2016).
4.5	Common Stock Purchase Warrant issued on March 24, 2017 to the holder of an unsecured line of ~~credit.~~credit (incorporated by reference to exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed on November 9, 2017). ~~(1)~~
4.6	Form of Common Stock Purchase Warrant issued to the Warrant Holders in conjunction with an issuance of common shares on May 19, 2017 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 24, 2017).
10.1	Amended and Restated Employment Agreement dated July 1, 2016, by and between the Company and Andrew G. Sculley, Jr (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on July 7, 2016).
10.2	Form of Change in Control Agreement for Certain Officers, approved for use on November 8, ~~2017.~~2017 (incorporated by reference to exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed on November 9, 2017).
31.1	Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
31.2	Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
32.1	Certification by Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
32.2	Certification by Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)

101.INS	XBRL Instance Document (1)
101.SCH	XBRL Taxonomy Extension Schema Document (1)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (1)

(1) Filed herewith.
(2) Furnished herewith.



	eMAGIN CORPORATION

Date: ~~November~~August 9, ~~2017~~2018	By:	/s/ Andrew G. Sculley
		Andrew G. Sculley
		Chief Executive Officer
		Principal Executive Officer



Date: ~~November~~August 9, ~~2017~~2018	By:	/s/ Jeffrey P. Lucas
		Jeffrey P. Lucas
		Chief Financial Officer
		Principal Accounting and Financial Officer