form10q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
|
(Mark
One)
|
R
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the quarterly period ended September 30, 2007
|
|
or
|
|
|
£
|
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.)
|
10500
NE 8th Street,
Suite 1400, Bellevue, Washington 98004
(Address
of principal executive offices)
(425)
749-3600
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the
Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value
Per Share
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 R No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer £ Accelerated
filer £ Non-accelerated
filer R
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act) Yes £ No
R
The
number of shares of common stock outstanding as of October 31, 2007 was
12,620,900.
eMagin
Corporation
Form
10-Q
For
the Quarter ended September 30, 2007
|
|
|
|
|
Page
|
PART
I FINANCIAL INFORMATION
|
|
Item
1
|
Condensed
Consolidated Financial Statements
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2007 (unaudited)
and
December 31, 2006
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the Three and Nine months
ended
September 30, 2007 and 2006 (unaudited)
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Changes in Shareholders’ Capital Deficit for
the Nine months ended September 30, 2007 (unaudited)
|
5
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine months ended September
30, 2007 and 2006 (unaudited)
|
6
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7
|
|
|
|
Item
2
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
|
|
|
Item
3
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
19
|
|
|
|
Item
4
|
Controls
and
Procedures
|
19
|
|
|
PART
II OTHER INFORMATION
|
|
Item
1
|
Legal
Proceedings
|
21
|
|
|
|
Item
1A
|
Risk
Factors
|
21
|
|
|
|
Item
2
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
26
|
|
|
|
Item
3
|
Defaults
Upon Senior
Securities
|
27
|
|
|
|
Item
4
|
Submission
of Matters to a Vote of Security
Holders
|
27
|
|
|
|
Item
5
|
Other
Information
|
27
|
|
|
|
Item
6
|
Exhibits
|
27
|
|
|
SIGNATURES
|
28
|
|
|
CERTIFICATIONS
|
|
ITEM
1. Condensed Consolidated Financial Statements
eMAGIN
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share data)
|
|
September
30,
|
|
|
|
|
|
|
2007
(unaudited)
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
792
|
|
|
$ |
1,415
|
|
Investments
– held to maturity
|
|
|
138
|
|
|
|
171
|
|
Accounts
receivable, net
|
|
|
2,698
|
|
|
|
908
|
|
Inventory
|
|
|
1,951
|
|
|
|
2,485
|
|
Prepaid
expenses and other current assets
|
|
|
801
|
|
|
|
656
|
|
Total
current assets
|
|
|
6,380
|
|
|
|
5,635
|
|
Equipment,
furniture and leasehold improvements, net
|
|
|
365
|
|
|
|
666
|
|
Intangible
assets, net
|
|
|
52
|
|
|
|
55
|
|
Other
assets
|
|
|
231
|
|
|
|
233
|
|
Deferred
financing costs, net
|
|
|
40
|
|
|
|
416
|
|
Total
assets
|
|
$ |
7,068
|
|
|
$ |
7,005
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ CAPITAL DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,188
|
|
|
$ |
1,192
|
|
Accrued
compensation
|
|
|
1,349
|
|
|
|
959
|
|
Other
accrued expenses
|
|
|
881
|
|
|
|
749
|
|
Advance
payments
|
|
|
396
|
|
|
|
444
|
|
Deferred
revenue
|
|
|
254
|
|
|
|
126
|
|
Current
portion of capitalized lease obligations
|
|
|
—
|
|
|
|
6
|
|
Current
portion of debt
|
|
|
657
|
|
|
|
1,217
|
|
Derivative
liability - warrants
|
|
|
—
|
|
|
|
1,195
|
|
Other
current liabilities
|
|
|
68
|
|
|
|
52
|
|
Total
current liabilities
|
|
|
4,793
|
|
|
|
5,940
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
5,931
|
|
|
|
2,229
|
|
Total
liabilities
|
|
|
10,724
|
|
|
|
8,169
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
capital deficit:
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value: authorized 10,000,000 shares; no shares issued
and
outstanding
|
|
|
—
|
|
|
|
—
|
|
Series
A Senior Secured Convertible Preferred stock, stated value $1,000
per
share, $.001 per value: 3,198 shares designated, and none
issued.
|
|
|
|
|
|
|
|
|
Common
stock, $.001 par value: authorized 200,000,000 shares, issued and
outstanding, 12,224,556 shares as of September 30, 2007 and
10,341,029 shares as of December 31, 2006
|
|
|
12
|
|
|
|
10
|
|
Additional
paid-in capital
|
|
|
194,473
|
|
|
|
179,651
|
|
Accumulated
deficit
|
|
|
(198,141 |
) |
|
|
(180,825 |
) |
Total
shareholders’ capital deficit
|
|
|
(3,656 |
) |
|
|
(1,164 |
) |
Total
liabilities and shareholders’ capital deficit
|
|
$ |
7,068
|
|
|
$ |
7,005
|
|
|
|
|
|
|
|
|
|
|
See
notes
to Condensed Consolidated Financial Statements.
eMAGIN
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except share and per share data)
(unaudited)
|
|
Three
Months Ended September 30,
|
|
|
Nine
months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
revenue
|
|
$ |
4,318
|
|
|
$ |
2,242
|
|
|
$ |
11,985
|
|
|
$ |
5,487
|
|
Contract
revenue
|
|
|
753
|
|
|
|
50
|
|
|
|
927
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue, net
|
|
|
5,071
|
|
|
|
2,292
|
|
|
|
12,912
|
|
|
|
5,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
3,059
|
|
|
|
2,940
|
|
|
|
9,120
|
|
|
|
8,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
|
2,012
|
|
|
|
(648 |
) |
|
|
3,792
|
|
|
|
(3,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
564
|
|
|
|
965
|
|
|
|
2,304
|
|
|
|
3,507
|
|
Selling,
general and administrative
|
|
|
1,434
|
|
|
|
1,838
|
|
|
|
5,198
|
|
|
|
6,674
|
|
Total
operating expenses
|
|
|
1,998
|
|
|
|
2,803
|
|
|
|
7,502
|
|
|
|
10,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
14
|
|
|
|
(3,451 |
) |
|
|
(3,710 |
) |
|
|
(13,508 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(592 |
) |
|
|
(509 |
) |
|
|
(2,766 |
) |
|
|
(509 |
) |
Loss
on extinguishment of debt
|
|
|
(10,749 |
) |
|
|
—
|
|
|
|
(10,749 |
) |
|
|
—
|
|
Gain
(loss) on warrant derivative liability
|
|
|
(1,496 |
) |
|
|
177
|
|
|
|
(853 |
) |
|
|
177
|
|
Other
income, net
|
|
|
172
|
|
|
|
14
|
|
|
|
762
|
|
|
|
73
|
|
Total
other (expense) income
|
|
|
(12,665 |
) |
|
|
(318 |
) |
|
|
(13,606 |
) |
|
|
(259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(12,651 |
) |
|
$ |
(3,769 |
) |
|
$ |
(17,316 |
) |
|
$ |
(13,767 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share, basic and diluted
|
|
$ |
(1.06 |
) |
|
$ |
(0.37 |
) |
|
$ |
(1.53 |
) |
|
$ |
(1.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
11,934,705
|
|
|
|
10,077,260
|
|
|
|
11,300,757
|
|
|
|
10,030,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to Condensed Consolidated Financial Statements.
eMAGIN
CORPORATION
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ CAPITAL
DEFICIT
(In
thousands)
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
10,341
|
|
|
$ |
10
|
|
|
$ |
179,651
|
|
|
$ |
(180,825 |
) |
|
$ |
(1,164 |
) |
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,172
|
|
|
|
—
|
|
|
|
1,172
|
|
Debt
conversion to equity
|
|
|
797
|
|
|
|
1
|
|
|
|
309
|
|
|
|
—
|
|
|
|
310
|
|
Issuance
of common stock for services
|
|
|
1,076
|
|
|
|
1
|
|
|
|
952
|
|
|
|
—
|
|
|
|
953
|
|
Exercise
of common stock warrants
|
|
|
10
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
Expiration
of derivative liability- warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
2,653
|
|
|
|
—
|
|
|
|
2,653
|
|
Beneficial
conversion premium
|
|
|
—
|
|
|
|
—
|
|
|
|
5,078
|
|
|
|
—
|
|
|
|
5,078
|
|
Fair
value of warrants issued
|
|
|
—
|
|
|
|
—
|
|
|
|
4,655
|
|
|
|
—
|
|
|
|
4,655
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(17,316 |
) |
|
|
(17,316 |
) |
Balance,
September 30, 2007 (unaudited)
|
|
|
12,224
|
|
|
$ |
12
|
|
|
$ |
194,473
|
|
|
$ |
(198,141 |
) |
|
$ |
(3,656 |
) |
See
notes
to Condensed Consolidated Financial Statements.
eMAGIN
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Nine
months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(17,316 |
) |
|
$ |
(13,767 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
313
|
|
|
|
792
|
|
Amortization
of deferred financing fees
|
|
|
266
|
|
|
|
—
|
|
Reduction
of provision for sales returns and doubtful accounts
|
|
|
(35 |
) |
|
|
(18 |
) |
Stock-based
compensation
|
|
|
1,172
|
|
|
|
2,270
|
|
Issuance
of common stock for services
|
|
|
953
|
|
|
|
375
|
|
Amortization
of discount on notes payable
|
|
|
1,848
|
|
|
|
382
|
|
Gain
on warrant derivative liability
|
|
|
853
|
|
|
|
(177 |
) |
Loss
on extinguishment of debt
|
|
|
10749
|
|
|
|
—
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,755 |
) |
|
|
(339 |
) |
Inventory
|
|
|
534
|
|
|
|
899
|
|
Prepaid
expenses and other current assets
|
|
|
(145 |
) |
|
|
(8 |
) |
Deferred
revenue
|
|
|
128
|
|
|
|
20
|
|
Accounts
payable, accrued compensation, other accrued expenses, and advanced
payments
|
|
|
750
|
|
|
|
(899 |
) |
Other
current liabilities
|
|
|
15
|
|
|
|
101
|
|
Net
cash used in operating activities
|
|
|
(1,670 |
) |
|
|
(10,369 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(9 |
) |
|
|
(204 |
) |
Proceeds
from or (purchase of) investments – held to maturity
|
|
|
33
|
|
|
|
(4 |
) |
Purchase
of intangibles and other assets
|
|
|
—
|
|
|
|
(2 |
) |
Net
cash provided by (used in) investing activities
|
|
|
24
|
|
|
|
(210 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
3
|
|
|
|
10
|
|
Proceeds
from long-term debt and line of credit
|
|
|
1,108
|
|
|
|
5,379
|
|
Payments
related to deferred financing costs
|
|
|
(40 |
) |
|
|
—
|
|
Payments
of long-term debt and capital leases
|
|
|
(48 |
) |
|
|
(130 |
) |
Net
cash provided by financing activities
|
|
|
1,023
|
|
|
|
5,259
|
|
Net
decrease in cash and cash equivalents
|
|
|
(623 |
) |
|
|
(5,320 |
) |
Cash
and cash equivalents beginning of period
|
|
|
1,415
|
|
|
|
6,727
|
|
Cash
and cash equivalents end of period
|
|
$ |
792
|
|
|
$ |
1,407
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
281
|
|
|
$ |
127
|
|
Cash
paid for taxes
|
|
$ |
67
|
|
|
$ |
35
|
|
|
|
|
|
|
|
|
|
|
During
the nine months ended September 30, 2007, the Company:
|
|
|
|
|
|
|
|
|
|
Entered
into an intellectual property agreement with Kodak where Kodak
was
assigned the rights to a specific patent and as part of the consideration
waived the royalty payments for the first six months of 2007 and
reduced
the royalty payment to 50% for the third quarter. $723 thousand was
recorded as income from the licensing of intangible
assets;
|
|
Issued
approximately 797 thousand shares for the conversion of Notes and
interest
totaling approximately $310 thousand;
and
|
●
|
Entered
into amended Note Purchase Agreement with investors and issued
warrants
that are exercisable at $1.03 per share into approximately 5.4
million
shares of common stock.
|
See
notes
to Condensed Consolidated Financial Statements.
eMAGIN
CORPORATION
(Unaudited)
Note
1: Description of the Business and Summary of Significant Account
Policies
The
Business
eMagin
Corporation is a developer and manufacturer of optical systems and microdisplays
for use in the electronics industry. eMagin also develops and markets
microdisplay systems and optics technology for commercial, industrial and
military applications.
Basis
of Presentation
In
the
opinion of management, the accompanying unaudited condensed consolidated
financial statements of eMagin Corporation and its subsidiary reflects all
adjustments, including normal recurring accruals, necessary for a fair
presentation. Certain information and footnote disclosure normally
included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to instruction, 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,
2006. The results of operations for the period ended September 30,
2007 are not necessarily indicative of the results to be expected for the full
year.
On
November 3, 2006, the Company effected a one-for-ten (1-for-10) reverse stock
split of its issued and outstanding common stock. All common
and per share amounts in the accompanying financial statements have been
adjusted to reflect the 1-for-10 reverse stock split.
The
condensed consolidated financial
statements have been prepared assuming that the Company will continue as a
going
concern. The Company has had recurring losses from operations which it
believes will continue through the foreseeable future. The Company’s cash
requirements over the next twelve months are greater than the Company’s cash,
cash equivalents, and investments at September 30, 2007. The Company
has a shareholders’ deficit at September 30, 2007. These factors raise
substantial doubt regarding the Company’s ability to continue as a going
concern. The condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. To address the liquidity
issue, the
Company entered into an asset based loan agreement in August 2007 establishing
a $2.5 million revolving
line of credit.
See Note 7
for additional information.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during
the
reporting period. Actual results could differ from those estimates. These
estimates and assumptions relate to recording net revenue, collectibility of
accounts receivable, useful lives and impairment of tangible and intangible
assets, accruals, derivative liability, income taxes, inventory realization
and
other factors. Management has exercised reasonable judgment in deriving these
estimates. Consequently, a change in conditions could affect these
estimates.
Revenue
Recognition
Revenue
is recognized when products are shipped to customers, net of allowances for
anticipated returns. The Company’s revenue-earning
activities generally involve delivering products, and revenues
are considered to be earned when the Company has completed the process
by which it is entitled to such revenues.
Revenue is recognized when persuasive evidence of
an arrangement exists, delivery has occurred, selling price is
fixed or determinable and collection is reasonably assured. The
Company defers revenue recognition on products sold directly to the consumer
with a fifteen day right of return. Revenue is recognized upon the
expiration of the right of return.
The
Company also earns revenues from certain R&D activities under
both firm fixed-price contracts and cost-type
contracts, including some cost-plus-fee contracts.
Revenues relating to firm fixed-price contracts are
generally recognized on the percentage-of-completion method
of accounting as costs are incurred (cost-to-cost basis).
Revenues on cost-plus-fee contracts include costs incurred plus a
portion of estimated fees or profits based on the relationship of costs incurred
to total estimated costs. Contract costs include all direct material and
labor 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.
Stock-based
Compensation
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payment” (“SFAS 123R”), which requires the Company to recognize
expense related to the fair value of the Company’s share-based compensation
issued to employees and directors. SFAS 123R requires companies to estimate
the
fair value of share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods
in
the Company’s condensed consolidated statement of operations. The Company uses
the straight-line method for recognizing compensation expense. An estimate
for
forfeitures is included in compensation expense for awards under SFAS
123R. See Note 8 for a further discussion on stock-based
compensation.
Note
2: Recently Issued Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
157”). SFAS 157 provides guidance for using fair value to measure
assets and liabilities. It also responds to investors’ requests for
expanded information about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and
the
effect of fair value measurements on earnings. SFAS 157 applies
whenever other standards require (or permit) assets or liabilities to be
measured at fair value, and does not expand the use of fair value in any new
circumstances. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and is required to be adopted
by the Company in the first quarter of 2008. The Company is
evaluating the effect that the adoption of SFAS 157 will have on its
consolidated results of operations and statement of financial
condition.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial
Liabilities: (“SFAS159”). SFAS159 allows entities the
option to measure eligible financial instruments at fair value as of specified
dates. Such election, which may be applied on an instrument by instrument basis,
is typically irrevocable once elected. SFAS 159 is effective for fiscal years
beginning after November 15, 2007, and early application is allowed under
certain circumstances. The Company is currently evaluating the impact SFAS
159
will have on its consolidated results of operations and statement of financial
condition.
Note
3: Receivables
The
majority of the Company’s commercial accounts receivable are due from Original
Equipment Manufacturers ("OEM’s”). Credit is extended based on evaluation of a
customer’s financial condition and, generally, collateral is not required.
Accounts receivable are payable in U.S. dollars, are due within 30-90 days
and
are stated at amounts due from customers, net of an allowance for doubtful
accounts. Any account outstanding longer than the contractual payment terms
is
considered past due.
The
Company determines the allowance for doubtful accounts
by considering a number of factors, including the length of time the
trade accounts receivable are past due, eMagin's previous loss history, the
customer's current ability to pay its obligation, and the condition of
the general economy and the industry as a whole. The Company will
record a specific reserve for individual accounts when the Company becomes
aware
of a customer's inability to meet its financial obligations, such as in the
case
of bankruptcy filings or deterioration in the customer's operating results
or
financial position. If circumstances related to customers change, the
Company would further adjust estimates of the recoverability of
receivables.
Receivables
consisted of the following (in thousands):
|
|
September
30,
2007
(unaudited)
|
|
|
December
31, 2006
|
|
Accounts
receivable
|
|
$ |
3,106
|
|
|
$ |
1,351
|
|
Less
allowance for doubtful accounts
|
|
|
(408 |
) |
|
|
(443 |
) |
Net
receivables
|
|
$ |
2,698
|
|
|
$ |
908
|
|
Note
4: Research and Development Costs
Research
and development costs are expensed as incurred.
Note
5: Net Loss per Common Share
In
accordance with SFAS No. 128, net loss per common share amounts ("basic EPS")
was computed by dividing net loss by the weighted average number
of common shares outstanding and excluding any
potential dilution. Net loss per common share assuming dilution
("diluted EPS") was computed by reflecting potential dilution from the
exercise of stock options and warrants. Common stock equivalent
shares are excluded from the computation if their effect is
antidilutive. As of September 30, 2007 and 2006, there were stock
options, warrants and convertible notes outstanding to acquire 17,440,096 and
7,197,471 shares of our common stock, respectively. These shares were
excluded from the computation of diluted loss per share because their
effect would be antidilutive.
Note
6: Inventories
Inventory
is stated at the lower of cost or market. Cost is determined using the first-in
first-out method. The Company reviews the value of its inventory and
reduces the inventory value to its net realizable value based upon current
market prices and contracts for future sales. The components of inventories
are
as follows (in thousands):
|
|
September
30,
2007
(unaudited)
|
|
|
December
31, 2006
|
|
Raw
materials
|
|
$ |
1,119
|
|
|
$ |
1,146
|
|
Work
in process
|
|
|
357
|
|
|
|
558
|
|
Finished
goods
|
|
|
475
|
|
|
|
781
|
|
Total
inventory
|
|
$ |
1,951
|
|
|
$ |
2,485
|
|
Note
7: Debt
Debt
is
as follows (in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Current
portion of long-term debt:
|
|
|
|
|
|
|
Capitalized
lease obligations
|
|
$ |
—
|
|
|
$ |
6
|
|
Other
debt
|
|
|
49
|
|
|
|
58
|
|
Line
of credit
|
|
|
608
|
|
|
|
|
|
6%
Senior Secured Convertible Notes
|
|
|
—
|
|
|
|
2,880
|
|
Less: Unamortized
discount on notes payable
|
|
|
—
|
|
|
|
(1,721 |
) |
Current
portion of long-term debt, net
|
|
|
657
|
|
|
|
1,223
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
Other
debt
|
|
|
69
|
|
|
|
104
|
|
6%
Senior Secured Convertible Notes
|
|
|
—
|
|
|
|
2,890
|
|
Less: Unamortized
discount on notes payable
|
|
|
—
|
|
|
|
(765 |
) |
8%
Amended Senior Secured Convertible Notes
|
|
|
5,962
|
|
|
|
—
|
|
Less: Unamortized
discount on notes payable
|
|
|
(100 |
) |
|
|
—
|
|
Long-term
debt, net
|
|
|
5,931
|
|
|
|
2,229
|
|
Total
debt, net
|
|
$ |
6,588
|
|
|
$ |
3,452
|
|
On
July
23, 2007, an investor elected to convert approximately $252 thousand of the
6%
Senior Secured Convertible Note (“Original Note”) representing $250 thousand of
the principal amount of the Note due on July 23, 2007 and approximately $2
thousand of accrued and unpaid interest. The investor received 720,476 shares
of
Common Stock at the conversion price of $0.35. The Company recognized
$250 thousand of interest expense for the three months ended September 30,
2007
of which $229 thousand was related to the acceleration of the unamortized
discount associated with the converted note. The remaining
unamortized discount is being amortized to interest expense using the
straight-line method as it approximates the effective interest method over
the
term of the Notes.
On
July
23, 2007, the Company entered into Amended Agreements with the note holders
of
the Original Notes issued July 21, 2006 and March 28, 2007 and agreed to issue
each holder an 8% Amended Senior Secured Convertible Note (“Amended Note”) in
the principal amount equal to the principal amount outstanding as of July 23,
2007 which was in total approximately $6.0 million. The significant changes
to
the Amended Notes include the following:
·
|
The
due dates have been changed from July 23, 2007 and January 21, 2008
to
December 21, 2008;
|
·
|
The
annual interest has been changed from 6% to
8%;
|
·
|
The
Amended Notes are convertible into 8,407,612 shares of the Company’s
common stock. The conversion price for $5.8 million of
principal is at a conversion price of $0.75, originally $2.60 and
the
conversion price for $250,000 of principal remains the same at
$0.35;
|
·
|
The
Agreement adjusts the exercise price of the amended Warrants from
$3.60 to
$1.03 per share for 1,553,468 shares of common stock and requires
the
issuance of warrants for an additional 3,831,859 shares of common
stock at
$1.03 per share with an expiration date of July 21,
2011. The warrants are subject to anti-dilution
adjustment rights;
|
·
|
50%
of the Amended Notes can be converted into the Company’s newly designated
Series A Senior Secured Convertible Preferred Stock which is convertible
into common stock at the same rate as the Amended
Notes;
|
·
|
The
liquidated damages of 1% per month will no longer accrue and the
deferred
balance at July 23, 2007 is forgiven;
and
|
·
|
There
is no minimum cash or cash equivalents balance
requirement.
|
Under
the
guidance of EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of
Debt Instruments”, the Company determined the change in the present value of the
expected cash flows between the Amended Notes and the Original Notes issued
July
21, 2006 was greater than 10%; therefore (a) for financial reporting purposes,
the modifications to the Original Notes issued July 21, 2006 were treated as
an
extinguishment of debt and (b) on July 23, 2007, the Company recorded
a loss on extinguishment of debt of approximately $10.7 million reflecting
the
difference between (i) the recorded amount of debt, net of related discounts,
of
approximately $4.8 million and (ii) the fair value of the new debt instrument
of
approximately $10.7 plus the change in the fair value of the
warrants on July 23, 2007, the date of the modification, of
approximately $4.7 million. The Company has also recorded a
beneficial conversion of approximately $5.1 million on the Amended Notes
adjusting the Amended Notes to their face value of approximately $5.8
million. The Original Note issued on March 28, 2007 and amended on
July 23, 2007 was not treated as an extinguishment but a
modification.
On
August
16, 2007, an investor elected to convert approximately $58 thousand of the
Amended Note. The investor received 76,923 shares of Common Stock at the
conversion price of $0.75.
On
August
7, 2007, the Company entered into a loan agreement with
Moriah Capital, L.P. (“Moriah) and established a revolving
line of credit (the “Loan”) of $2.5 million. The Company is permitted
to borrow an amount not to exceed 90% of its eligible accounts receivable and
50% of its eligible inventory capped at $600 thousand. As part of the
transaction, the Company issued 162,500 shares of unregistered common stock
valued at $195 thousand and paid a servicing fee of $82,500 to Moriah which
will
be amortized to interest expense over the life of the agreement. In
the three and nine months ended September 30, 2007, approximately $46 thousand
was amortized to interest expense. In conjunction with entering into
this loan and issuing unregistered common stock, the Company granted Moriah
registration rights. The Loan can be converted to shares of the
Company’s common stock pursuant to the terms of the Loan Conversion
agreement. The Loan matures on August 8, 2008 however the Company has
the option of extending it an additional year.
For
the
three and nine months ended September 30, 2007, interest expense consisted
of
interest paid or accrued on outstanding debt of $195 thousand and $651 thousand,
respectively.
Note
8: Stock-based Compensation
Stock
based compensation is accounted for in accordance with the provisions of SFAS
No. 123R. Under SFAS 123R, the fair value of stock awards 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 six month periods ended September
30, 2007 and 2006 (in thousands):
|
|
Three
Months Ended September 30,
|
|
|
Nine
months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Cost
of revenue
|
|
$ |
43
|
|
|
$ |
112
|
|
|
$ |
173
|
|
|
$ |
370
|
|
Research
and development
|
|
|
82
|
|
|
|
119
|
|
|
|
282
|
|
|
|
378
|
|
Selling,
general and administrative
|
|
|
148
|
|
|
|
459
|
|
|
|
717
|
|
|
|
1,522
|
|
Total
stock compensation expense
|
|
$ |
273
|
|
|
$ |
690
|
|
|
$ |
1,172
|
|
|
$ |
2,270
|
|
At
September 30, 2007, total unrecognized non-cash compensation cost related to
stock options was approximately $2.0 million, net of
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 2.9 years.
The
Company recognizes compensation expense for options granted to non-employees
in
accordance with the provisions of Emerging Issues Task Force (“EITF”) consensus
Issue 96-18, “Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services,” which requires using a fair value options pricing model and
re-measuring such stock options to the current fair market value at each
reporting period as the underlying options vest and services are
rendered.
For
the
nine month period ended September 30, 2007 and 2006, the following key
assumptions were used in the Black-Scholes option pricing model to determine
the
fair value of stock options granted:
|
|
For
the Nine months Ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Dividend
yield
|
|
|
0%
|
|
|
|
0%
|
|
Risk
free interest rates
|
|
|
4.23%
|
|
|
|
4.59%
|
|
Expected volatility
|
|
|
106%
|
|
|
|
126%
|
|
Expected
term (in years)
|
|
|
5
|
|
|
|
5
|
|
We
have
not declared or paid any dividends and do not currently expect to do so in
the
near future. The risk-free interest rate used in the Black-Scholes
option pricing model is based on the implied yield currently available 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 most recent five year period. The
expected term of options represents the period that our stock-based awards
are
expected to be outstanding and was determined based on historical experience
and
vesting schedules of similar awards.
Note
9: Shareholders’ Equity
The
Company has designated but not issued 3,198 shares of the Company’s preferred
stock as Series A Senior Secured Convertible Preferred Stock (“the Preferred
Stock”) at a stated value of $1,000 per share. The Preferred Stock is
entitled to cumulative dividends which accrue at a rate of 8% per annum, payable
on December 21, 2008. Each share of the Preferred Stock has voting
rights equal to (1) in any case in which the Preferred Stock votes
together with the Company's Common Stock or any other class or series of stock
of the Company, the number of shares of Common Stock issuable upon conversion
of
such shares of Preferred Stock at such time (determined without regard to the
shares of Common Stock so issuable upon such conversion in respect of accrued
and unpaid dividends on such share of Preferred Stock) and (2) in any case
not
covered by the immediately preceding clause one vote per share of Preferred
Stock. The Preferred Stock has a mandatory redemption at December 21,
2008.
On
July
23, 2007, the Company entered into Agreements with the note holders and agreed
to issue each holder an Amended Note in the principal amount equal to the
principal amount outstanding as of July 23, 2007 which was in total
approximately $6.0 million. The Amended Notes are convertible into 8,407,612
shares of the Company’s common stock. The conversion price for $5.8
million of principal is at a conversion price of $0.75 and the conversion price
for $250 thousand of principal remains the same at $0.35. The
Agreement adjusts the exercise price of the amended Warrants from $3.60 to
$1.03
per share for 1,553,468 shares of common stock and requires the issuance of
warrants for an additional 3,831,859 shares of common stock at $1.03 per share
with an expiration date of July 21, 2011. The warrants are
subject to anti-dilution adjustment rights. 50% of the Amended Notes
can be converted into the Company’s newly designated Series A Senior Secured
Convertible Preferred Stock which is convertible into common stock at the same
rate as the Amended Notes.
As
a
result of the issuance of the Amended Notes the outstanding 650,000 Series
F
Common Stock Purchase Warrants that were issued to certain accredited and/or
institutional investors pursuant to the Securities Purchase Agreement dated
October 25, 2004, were re-priced from $7.12 to $4.39 in
accordance with the anti-dilution provisions of the original
agreement. The repricing of the warrants has no effect on the
financial statements.
The
Company had recorded the fair value of the warrants associated with the Note
as
a liability as the warrant agreement required a potential net-cash settlement
in
the first year of the warrant agreement if the registration statement is not
effective as required by EITF 00-19 “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF
00-19”). The liability was adjusted to fair value at each reporting
period. As of July 23, 2007, the potential net-cash settlement had
expired. As a result, the fair value of the warrant liability on July
23, 2007, approximately $2.7 million, was reversed. For the three and
nine months ended September 30, 2007, the Company recorded losses of
approximately $1.5 million and approximately $0.8 million from the change in
the
fair value of the warrant derivative liability. The change in the fair value
of
the warrant liability was recorded in the Consolidated Statement of Operations
as other income (expense).
On
July
23, 2007, an investor converted $250 thousand of the principal amount of the
Original Note due on July 23, 2007 and approximately $2 thousand of accrued
and
unpaid interest totaling $252 thousand and received 720,476 shares of Common
Stock at the conversion price of $0.35. On August 16, 2007, an
investor elected to convert approximately $58 thousand of the Amended Note.
The
investor received 76,923 shares of Common Stock at the conversion price of
$0.75.
On
August
7, 2007, the Company entered into a loan agreement with
Moriah Capital, L.P. (“Moriah) and established a revolving
line of credit (the “Loan”) of $2.5 million. As part of the
transaction, the Company issued 162,500 shares of unregistered common stock
valued at $195 thousand and paid a servicing fee of $82,500 to Moriah which
will
be amortized to interest expense over the life of the agreement. For
the three and nine months ended September 30, 2007 approximately $46 thousand
was amortized to interest expense. In conjunction with entering into
this loan and issuing unregistered common stock, the Company granted Moriah
registration rights. The Loan can be converted to shares of the
Company’s common stock pursuant to the terms of the Loan Conversion
agreement. The Loan matures on August 8, 2008 however the Company has
the option of extending it an additional year.
A
registration rights agreement was entered into in connection with the Loan
which
requires the Company to file a registration statement for the resale of the
common stock issued. The Company must use its best efforts to have
the registration statement declared effective by the end of a specified grace
period and also maintain the effectiveness of the
registration
statement until all shares of common stock have been sold or may be sold without
volume restrictions pursuant to Rule 144(k) of the Securities
Act. The registration statement has been filed with the Securities
and Exchange Commission.
As
a
result of the issuance of the Loan, the outstanding 650,000 Series F Common
Stock Purchase Warrants that were issued to certain accredited and/or
institutional investors pursuant to the Securities Purchase Agreement dated
October 25, 2004, were re-priced from $4.39 to $4.09 in accordance with the
anti-dilution provision of the original agreement. The repricing of
the warrants has no effect on the financial statements.
For
the
three and nine months ended September 30, 2007, there were no stock options
exercised and the Company received approximately $3 thousand in proceeds for
warrants exercised as compared to the three and nine months ended September
30,
2006 where the Company received approximately $10 thousand for the exercise
of 5
thousand options and no warrants were exercised. For the three and
nine months ended September 30, 2007, the Company also issued approximately
163
thousand and 1.1 million shares of common stock, respectively, for payment
of
approximately $195 thousand and $953 thousand, respectively, for services
rendered and to be rendered in the future. For the three and nine
months ended September 30, 2006, the Company issued approximately 63 thousand
and 108 thousand shares of common stock, respectively, for payment of
approximately $209 thousand and $401 thousand, respectively, for services
rendered and to be rendered in the future. As such, the Company
recorded the fair value of the services rendered in prepaid
expenses and selling, general and administrative expenses in the
accompanying unaudited condensed consolidated statement of operations
for the three and nine months ended September 30, 2007 and 2006,
respectively.
Note
10: Income Taxes
The
Company adopted the provisions of FIN 48 on January 1, 2007. The Company
continues to fully reserve its tax benefits which are offset by a valuation
allowance due to the uncertainty that the deferred tax assets will be realized.
We will continue to evaluate the realizability of our domestic net deferred
tax
assets and may record additional benefits in future earnings if we determine
the
realization of these assets is more likely than not. As at
January 1, 2007 and September 30, 2007, the Company did not have any
unrecognized tax positions.
The
Company files Federal and State corporate tax returns. All tax years since
inception are open to tax examination by the taxing authorities for possible
adjustments to the net operating losses but not for assessment. The Statute
of
Limitations for assessment of tax is generally three years for Federal and
four
years for State tax returns. The years currently open for Federal income tax
assessment include calendar years 2003 through 2006 and calendar years 2002
through 2006 for State tax assessment purposes. The Company is not currently
under examination by any jurisdictions for any of the open years
listed.
The
Company is in the process of preparing its Section 382 study to determine the
extent to which its utilization of its net operating loss (NOL) carryovers
may
be limited by the change in ownership rules of the Internal Revenue Code, and
has not determined the impact that such study will have on its NOL
carryforward.
The
implementation of FIN 48 has not resulted in any adjustment to the Company’s
beginning tax position or tax position for the nine month period ended September
30, 2007.
Note
11: Commitments and Contingencies
Royalty
Payments
The Company, in accordance with
a royalty agreement with Eastman Kodak, is obligated to make
minimum annual royalty payments of $125 thousand which commenced on January
1, 2001. Under this agreement, the Company must pay to Eastman Kodak a certain
percentage of net sales with respect to certain products, which
percentages are defined in the agreement. The percentages are on a sliding
scale
depending on the amount of sales generated. Any minimum royalties
paid will be credited against the amounts due based on the percentage of
sales. The royalty agreement terminates upon the expiration of the issued
patent which is the last to expire.
Effective
May 30, 2007, Kodak and eMagin entered into an intellectual property agreement
where eMagin has assigned Kodak the rights, title, and interest to a Company
owned patent currently not being used by the Company and in consideration,
Kodak
has waived the royalties due under existing licensing agreements for the first
six months of 2007, and reduced the royalty payments by 50% for the second
half
of 2007 and for the entire calendar year of 2008. In addition, the minimum
royalty payment is delayed until December 1st for the
years 2007
and 2008. The Company recorded approximately $163 thousand and $723
thousand for the three and nine months ended September 30, 2007, respectively,
as income from the license of intangible assets.
Royalty
expense was approximately $327 thousand and $887 thousand, respectively, for
the
three and nine months ended September 30, 2007 and approximately $149 thousand
and $340 thousand, respectively, for the three and nine months ended September
30, 2006, respectively.
Contractual
Obligations
The Company leases
office facilities and office, lab and factory equipment under operating leases
expiring through 2009. Certain leases provide for payments of monthly
operating expenses. The Company currently has lease commitments for space in
Hopewell Junction, New York and Bellevue, Washington. Rent expense
was approximately $332 thousand and $1.0 million, respectively, for the three
and nine months ended September 30, 2007 and 2006.
Note
12: Legal Proceedings
In
June,
2007, a former employee filed a Charge of Discrimination with the EEOC, alleging
that the former employee was subjected to gender discrimination and retaliation
in response to her complaint. eMagin filed a position statement with the EEOC
on
June 11, 2007 denying the allegations and requesting that the EEOC issue a
lack
of probable cause finding and dismiss the charge. On July 24, 2007 the EEOC
reviewed the matter and dismissed the charges. On October 12, 2007 the
former employee filed a civil action in the Southern District of New York Court
raising allegations identical to those in the EEOC claim. The complaint seeks
damages for lost wages, emotional distress and punitive damages and attorneys'
fees in unspecified amounts. eMagin will file its response by November 26,
2007.
The likelihood of success of this litigation matter has not yet been determined.
Accordingly the Company cannot determine at this time if the claim is
material.
On
November 9, 2007, the Board of Directors approved a new plan for
compensation of the non-Executive Board of Directors which is effective December
1, 2007. All non-Executive Directors will receive an annual cash
retainer of $10 thousand. The first payment will be December 1,
2007. All subsequent years, 25% of the annual amount will be paid 15 days
before the completion of each quarter. The non-Executive Chairman
will receive an annual cash retainer of $60 thousand payable over twelve months
commencing January 1, 2008. In addition, each Director will receive a
fee for each meeting attended as follows: $1 thousand for each
in-person Board meeting and $0.5 thousand for each teleconference Board meeting
and each Committee meeting, in-person (provided it is held on a separate day
from a scheduled in-person Board meeting) and teleconference. Meeting fees
will
be paid 15 days before the completion of each quarter.
The
Non-Executive Directors will receive an annual 25,000 fully vested non-ISO
stock
options issued at the market price on the date of issuance. The first
issuance will be December 1 and all subsequent years, January 1. New Board
members will receive 15 thousand non-ISO stock options upon
joining. In addition, the non-executive Directors have been
granted fully vested stock options equivalent to the number of stock options
presently held by each non-Executive Director at a date to be
determined. The stock options will be priced at the
closing market price on the date granted. The existing stock options
will remain at the stated strike price.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Statement
of Forward-Looking Information
In
this
quarterly report, references to "eMagin Corporation," "eMagin," "Virtual
Vision," "the Company," "we," "us," and "our" refer to eMagin Corporation and
its wholly owned subsidiary, Virtual Vision, Inc.
Except
for the historical information contained herein, some of the statements in
this
Report contain forward-looking statements that involve risks and
uncertainties. These statements are found in the sections entitled
"Management's Discussion and Analysis or Plan of Operations" and "Risk
Factors." They include statements concerning: our business strategy;
expectations of market and customer response; liquidity and capital
expenditures; future sources of revenues; expansion of our proposed product
line; and trends in industry activity generally. In some cases, you
can identify forward-looking statements by words such as "may," "will,"
"should," "expect," "plan," "could," "anticipate," "intend," "believe,"
"estimate," "predict," "potential," "goal," or "continue" or similar
terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including, but not limited
to, the risks outlined under "Risk Factors," that may cause our or our
industry's 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 such forward-looking
statements. For example, assumptions that could cause actual results
to vary materially from future results include, but are not limited to: our
ability to successfully develop and market our products to customers; our
ability to generate customer demand for our products in our target markets;
the
development of our target markets and market opportunities; our ability to
manufacture suitable products at competitive cost; market pricing for our
products and for competing products; the extent of increasing competition;
technological developments in our target markets and the development of
alternate, competing technologies in them; and sales of shares by existing
shareholders. Although we believe that the expectations reflected in
the forward looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. Unless we
are required to do so under federal securities laws or other applicable laws,
we
do not intend to update or revise any forward-looking statements.
Overview
We
design, develop, manufacture, and
market virtual imaging products which utilize OLEDs, or organic light emitting
diodes, OLED-on-silicon microdisplays and related information technology
solutions. We integrate OLED technology with silicon chips to produce
high-resolution microdisplays smaller than one-inch diagonally which, when
viewed through a magnifier, create virtual images that appear comparable in
size
to that of a computer monitor or a large-screen television. Our
products enable our original equipment manufacturer, or OEM, customers to
develop and market improved or new electronic products. We believe
that virtual imaging will become an important way for increasingly mobile people
to have quick access to high-resolution data, work, and experience new more
immersive forms of communications and entertainment.
Our
first
commercial product, the SVGA+ (Super Video Graphics Array of 800x600 plus 52
added columns of data) OLED microdisplay, was initially offered for sampling
in
2001, and our first SVGA-3D (Super Video Graphics Array plus built-in
stereovision capability) OLED microdisplay was shipped in early
2002. We are in the process of completing development of 2 additional
OLED microdisplays, namely the SVGA 3DS (SVGA 3D shrink, a smaller format SVGA
display with a new cell architecture with embedded features) and an SXGA (1280
x
1024).
In
January 2005, we announced the world's first personal display system to combine
OLED technology with head-tracking and 3D stereovision, the Z800 3DVisor(tm),
which was first shipped in mid-2005. This product received a CES
Design and Innovations Award for the electronic gaming category and also
received the coveted Best of Innovation Awards for the entire display
category. The product was also recognized as a Digital Living Class
of 2005 Innovators.
We
license our core OLED technology from Eastman Kodak and we have developed our
own technology to create high performance OLED-on-silicon microdisplays and
related optical systems. We believe our technology licensing
agreement with Eastman Kodak, coupled with our own intellectual property
portfolio, gives us a leadership position in OLED and OLED-on-silicon
microdisplay technology. We believe we are the only company to sell
full-color active matrix small molecule OLED-on-silicon
microdisplays.
Company
History
From
inception through January 1, 2003, we were a developmental stage
company. We have transitioned to manufacturing our products and
intend to significantly increase our marketing, sales, and
research and development efforts, and expand our operating
infrastructure. Most of our operating
expenses are fixed in the near term. If we are unable
to generate significant revenues, our net losses in any
given period could be greater than expected.
CRITICAL
ACCOUNTING POLICIES
The
Securities and
Exchange Commission ("SEC") defines "critical accounting
policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods.
Not all of the accounting policies require
management to make difficult, subjective or complex judgments or
estimates. However, the following policies could be deemed to be
critical within the SEC definition.
Revenue
Recognition
Revenue
on product sales is 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. We record a reserve for estimated sales returns, which is reflected
as
a reduction of revenue at the time of revenue
recognition. Products sold directly to consumers have a fifteen
day right of return. Revenue on consumer products is deferred until
the right of return has expired.
Revenues
from research and development activities relating to firm fixed-price contracts
are generally recognized on the percentage-of-completion method of accounting
as
costs are incurred (cost-to-cost basis). Revenues from research and development
activities relating to cost-plus-fee contracts include costs incurred plus
a
portion of estimated fees or profits based on the relationship of costs incurred
to total estimated costs. Contract costs include all direct material and labor
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.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during
the
reporting period. Actual results could differ from those estimates. These
estimates and assumptions relate to recording net revenue, collectibility of
accounts receivable, useful lives and impairment of tangible and intangible
assets, accruals, derivative liability, income taxes, inventory realization
and
other factors. Management has exercised reasonable judgment in deriving these
estimates. Consequently, a change in conditions could affect these
estimates.
Fair
Value of Financial Instruments
The
Company's cash, cash equivalents, investments, accounts receivable and accounts
payable are stated at cost which approximates fair value due to the short-term
nature of these instruments.
Stock-based
Compensation
We
maintain several stock equity incentive plans. The 2005 Employee
Stock Purchase Plan (the “ESPP”) provides our employees with the opportunity to
purchase common stock through payroll deductions. Employees purchase stock
semi-annually at a price that is 85% of the fair market value at certain
plan-defined dates. As of September 30, 2007, the plan had not been
implemented.
The
2003
Stock Option Plan (the”2003 Plan”) provides for grants of shares of common stock
and options to purchase shares of common stock to employees, officers, directors
and consultants. Under the 2003 plan, an ISO grant is granted
at the market value of our common stock at the date of the grant and a non-ISO
is granted at a price not to be less than 85% of the market value of the common
stock. These options have a term of up to 10 years and vest over a
schedule determined by the Board of Directors, generally over a five year
period. The amended 2003 Plan provides for an annual increase of 3%
of the diluted shares outstanding on January 1 of each year for a period of
9
years which commenced January 1, 2005.
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payment”, which requires the Company to recognize expense related
to the fair value of the Company’s share-based compensation issued to employees
and directors. SFAS 123R requires companies to estimate the fair value of
share-based payment awards on the date of grant using an option-pricing model.
The value of the portion of the award that is ultimately expected to vest is
recognized as expense over the requisite service periods in the Company’s
condensed consolidated statement of operations. The Company uses the
straight-line method for recognizing compensation expense. An estimate for
forfeitures is included in compensation expense for awards under SFAS
123R.
NEW
ACCOUNTING PRONOUNCEMENTS
See
Note
2 of the Condensed Consolidated Financial Statements in Item 1 for
a description of recent accounting pronouncements, including the expected
dates of adoption and estimated effects on results of operations and financial
condition.
RESULTS
OF OPERATIONS
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE AND NINE MONTHS
ENDED
SEPTEMBER 30, 2006
Revenues
Revenues
for the three and nine months ended September 30, 2007 were approximately
$5.1 million and $12.9 million, respectively, as compared to approximately
$2.3
million and $5.6 million for the three and nine months ended September 30,
2006,
an increase of approximately 121% and 130%, respectively. Higher
revenue for the three and nine month periods was primarily due to increased
microdisplay demand and increased availability of finished displays due to
manufacturing improvements.
Cost
of Goods Sold
Cost
of
goods sold includes direct and indirect costs associated with
production. Cost of goods sold for the three and nine months ended
September 30, 2007 was approximately $3.1 million and $9.1 million,
respectively, as compared to $2.9 million and $8.9 million, respectively, for
the three and nine months ended September 30, 2006, a slight increase of $0.2
million.
The
gross margin for the three and nine months ended September 30, 2007 was
approximately $2.0 million and $3.8 million, respectively, as compared to a
gross loss of approximately ($0.6) million and ($3.3) million, respectively,
for
the three and nine months ended September 30, 2006. As a percentage of revenue
this translates to a gross margin of 40% and 29% for the three and nine months
ended September 30, 2007 as compared to a gross loss of (28%) and (59%)for
the
three and nine months ended September 30, 2006. The gross margin
improvement was attributed to fuller utilization of our fixed production
overhead due to higher unit volume.
Operating
Expenses
Research
and Development. Research and development expenses include salaries,
development materials and other costs specifically allocated to the development
of new microdisplay products, OLED materials and subsystems. Research
and development expenses for the three and nine months ended September
30, 2007 were approximately $0.6 million and $2.3 million, respectively, as
compared to $1.0 million and $3.5 million, respectively, for the three and
nine months ended September 30, 2006, a decrease of approximately $0.4 million
and $1.2 million, respectively. The decrease was due to
the re-deployment of research and development personnel to production
contract services which are included in cost of goods sold.
Selling,
General and Administrative. Selling, general and administrative
expenses consist principally of salaries and fees for professional
services, legal fees incurred in connection with patent filings
and related matters, as well as other marketing and administrative
expenses. Selling, general and administrative expenses for the
three and nine months ended September 30, 2007 were approximately $1.4 million
and $5.2 million, respectively, as compared to approximately $1.8
million and $6.7 million, respectively, for the three and nine months ended
September 30, 2006. The decrease of approximately $0.4 and $1.5 million,
respectively, for the three and nine months ended September 30, 2007 was
primarily related to a reduction of marketing, tradeshow and personnel costs
as
compared to the three and nine months ended September 30, 2006.
Other
Income (Expense), net. Other income (expense), net consists primarily of
interest income earned on investments, interest expense related to the secured
debt, loss from the change in the derivative liability, loss on the
extinguishment of debt and other income from the licensing of intangible
assets. For the three and nine months ended September 30, 2007,
interest income was approximately $9 and $32 thousand compared to approximately
$14 and $74 thousand for the three and nine months ended September 30,
2006. The decrease in interest income was primarily a result of
lower cash balances available for investment.
For
the
three and nine months ended September 30, 2007, interest expense was
approximately $592 thousand and $2.8 million, respectively, as compared to
$509
thousand for the three and nine months ended September 30,
2006. The breakdown of the interest expense for the three and
nine month periods in 2007 is as follows: interest expense associated
with debt of approximately $195 thousand and $652 thousand, respectively; the
amortization of the deferred costs associated with the notes payable of
approximately $0 and $265 thousand, respectively; and the amortization of the
debt discount associated with the debt of approximately $397 thousand and $1.96
million, respectively.
For
the
three and nine months ended September 30, 2007, the change in the derivative
liability was a loss of approximately $1.5 million and $0.9 million,
respectively, as compared to $177 thousand for the three and nine months ended
September 30, 2006.
The
loss
on extinguishment of debt was $10.7 million for the three and nine months ended
September 30, 2007 as compared to $0 for the three and nine months ended
September 30, 2006. See Note 7: Debt for additional
information.
Other
income for the three and nine months ended September 30, 2007 was approximately
$172 thousand and $762 thousand, respectively, as compared to approximately
$5
thousand and $59 thousand, respectively. The increase in other income
for the three and six month periods ended September 30, 2007 was income from
a
gain on the license of intangible assets. See Note
11: Commitments and Contingencies – Royalty Payments for additional
information.
Liquidity
and Capital Resources
As
of
September 30, 2007, we had approximately $0.9 million of cash and investments
as
compared to $1.6 million as of December 31, 2006. The decrease of
approximately $0.7 million was due primarily to cash used for operating
activities.
Cash
flow
used in operating activities during the nine months ended September 30, 2007
was
approximately $1.7 million as compared to cash used of approximately $10.4
million during the nine months ended September 30, 2006. The decrease
was mainly attributable to a reduction in net losses.
Cash
provided by investing activities during the nine months ended September 30,
2007
was approximately $24 thousand as compared to approximately $210 thousand used
in investing activities during the nine months ended September 30, 2006. The
decrease in the cash used in investing activities was attributable to lower
equipment purchases.
Cash
provided by financing activities during the nine months ended September 30,
2007
was approximately $1.0 million and was comprised of approximately $3 thousand
of
proceeds from exercise of warrants, approximately $460 thousand in net proceeds
from debt issuance, and approximately $608 from the line of credit and
offset by payments on debt of $88 thousand. The cash provided by
financing activities during the nine months ended September 30, 2006 primarily
consisted of $5.3 million, net, from the sale of senior secured
debentures.
Our
condensed consolidated financial statements as of September 30, 2007 have been
prepared under the assumption that we will continue as a going concern for
the
year ending December 31, 2007. Our independent registered public accounting
firm
had issued a report dated March 27, 2007 in connection with the audit of the
financial statements for the year ended December 31, 2006, that included an
explanatory paragraph expressing substantial doubt as to our ability to continue
as a going concern. Our ability to continue as a going concern ultimately is
dependent on our ability to generate a profit which is likely dependant
upon our ability to obtain additional equity or debt financing, attain
further operating efficiencies and, ultimately, to achieve profitable
operations. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
To
address these liquidity issues we have finalized an agreement with our note
holders that defers the note re-payments until December 21, 2008. See
Note 7: Debt for additional information. We have entered
into an intellectual property agreement with Kodak and assigned Kodak the
rights, title and interest to a Company owned patent not being used by the
Company and in consideration, Kodak has waived the royalties due under existing
licensing agreements for the first six months of 2007, and reduced the royalty
payments by 50% for the second half of 2007 and for the entire year of
2008. In addition, the minimum royalty payment is deferred
until December 1st for the
years 2007
and 2008. We have entered into an asset based loan agreement
establishing a $2.5 million revolving line of credit. However to
fund operating or investing cash requirements, we still may need to raise
additional funds in the next twelve months.
Off-Balance
Sheet Arrangements
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.
ITEM
3. Quantitative and Qualitative Disclosures About Market
Risk
Market
Rate Risk
We
are
exposed to market risk related to changes in interest rates and foreign currency
exchanges rates.
Interest
Rate Risk
We
hold
our assets in cash and cash equivalents. We do not hold derivative
financial instruments or equity securities.
Foreign
Currency Exchange Rate Risk
Our
revenue and expenses are denominated in U.S. dollars. We have
conducted some transactions in foreign currencies and expect to continue to
do
so; we do not anticipate that foreign exchange gains or losses will be
significant. We have not engaged in foreign currency hedging to
date.
Our
international business is subject to risks typical of international activity,
including, but not limited to, differing economic conditions; change in
political climates; differing tax structures; and other regulations and
restrictions. Accordingly, our future results could be impacted by
changes in these or other factors.
ITEM
4. Controls and Procedures
a) Evaluation
of Disclosure Controls and Procedures. Based on an evaluation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended) required by
paragraph (b) of Rule 13a-15 or Rule 15d-15, as of September 30,
2007, our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures were effective in ensuring that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Commission’s rules and forms. Our Chief
Executive Officer and Chief Financial Officer also concluded that, as of
September 30, 2007, our disclosure controls and procedures were effective in
ensuring that information required to be disclosed by us in the reports that
we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure.
(b) Changes
in Internal Controls. During the quarter ended September 30,
2007, there were no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of Rule
13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
ITEM
1. Legal Proceedings
In
June,
2007, a former employee filed a Charge of Discrimination with the EEOC, alleging
that the former employee was subjected to gender discrimination and retaliation
in response to her complaint. eMagin filed a position statement with the EEOC
on
June 11, 2007 denying the allegations and requesting that the EEOC issue a
lack
of probable cause finding and dismiss the charge. On July 24, 2007 the EEOC
reviewed the matter and dismissed the charges. On October 12, 2007, the
former employee filed a civil action in the Southern District of New York Court
raising allegations identical to those in the EEOC claim. The complaint seeks
damages for lost wages, emotional distress and punitive damages and attorneys'
fees in unspecified amounts. eMagin will file its response by November 26,
2007.
The likelihood of success of this litigation matter has not yet been determined.
Accordingly the Company cannot determine at this time if the claim is
material.
ITEM
1A. Risk Factors
You
should carefully consider the following risk factors and the other information
included herein as well as the information included in other reports and filings
made with the SEC before investing in our common stock. If any of the following
risks actually occurs, our business, financial condition or results of
operations could be harmed. The trading price of our common stock could decline
due to any of these risks, and you may lose part or all of your
investment.
RISKS
RELATED TO OUR FINANCIAL RESULTS
We
have a history of losses since our inception and may incur losses for the
foreseeable future.
Our
accumulated losses are approximately $198 million as of September 30,
2007. We have not yet achieved profitability and we can give no
assurances that we will achieve profitability within the foreseeable future
as
we fund operating and capital expenditures in areas such as establishment and
expansion of markets, sales and marketing, operating equipment and research
and
development. We cannot assure investors that we will ever achieve or sustain
profitability or that our operating losses will not increase in the
future.
We
may not be able to execute our business plan and may not generate cash from
operations.
As
we
have reported, our business is currently experiencing significant revenue growth
during the nine months ended September 30, 2007. We anticipate that our cash
requirements to fund these requirements as well as other operating or investing
cash requirements over the next twelve months may be greater than our current
cash on hand and borrowing availability under our revolving credit
facility. In the event that cash flow from operations is less than
anticipated and we are unable to secure additional funding to cover our
expenses, in order to preserve cash, we would be required to reduce expenditures
and effect reductions in our corporate infrastructure, either of which could
have a material adverse effect on our ability to continue our current level
of
operations. No assurance can be given that additional financing will be
available, or if available, will be on acceptable terms.
Our
independent registered public accounting firm has expressed doubt about our
ability to continue as a going concern, which may hinder our ability to obtain
future financing.
Our
condensed consolidated financial statements as of September 30, 2007 have been
prepared under the assumption that we will continue as a going concern for
the
year ending December 31, 2007. Our independent registered public accounting
firm
had issued a report dated March 27, 2007 in connection with the audit of the
financial statements for the year ended December 31, 2006, that included an
explanatory paragraph expressing substantial doubt as to our ability to continue
as a going concern. Our ability to continue as a going concern ultimately is
dependent on our ability to generate a profit which is likely dependant
upon our ability to obtain additional equity or debt financing, attain
further operating efficiencies and, ultimately, to achieve profitable
operations. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
RISKS
RELATED TO MANUFACTURING
The
manufacture of OLED-on-silicon is new and OLED microdisplays
have not been produced in significant quantities.
If
we are
unable to produce our products in sufficient quantity, we will be unable to
maintain and attract new customers. In addition, we cannot assure you that
once
we commence volume production we will attain yields at high throughput that
will
result in profitable gross margins or that we will not experience manufacturing
problems which could result in delays in delivery of orders or product
introductions.
We
are dependent on a single manufacturing line.
We
currently manufacture our products on a single manufacturing line. If we
experience any significant disruption in the operation of our manufacturing
facility or a serious failure of a critical piece of equipment, we may be unable
to supply microdisplays to our customers. For this reason, some OEMs may also
be
reluctant to commit a broad line of products to our microdisplays without a
second production facility in place. However, we try to maintain product
inventory to fill the requirements under such circumstances. Interruptions
in
our manufacturing could be caused by manufacturing equipment problems, the
introduction of new equipment into the manufacturing process or delays in the
delivery of new manufacturing equipment. Lead-time for delivery of manufacturing
equipment can be extensive. No assurance can be given that we will not lose
potential sales or be unable to meet production orders due to production
interruptions in our manufacturing line. In order to meet the requirements
of
certain OEMs for multiple manufacturing sites, we will have to expend capital
to
secure additional sites and may not be able to manage multiple sites
successfully.
We
could experience manufacturing interruptions, delays, or inefficiencies if
we
are unable to timely and reliably procure components from single-sourced
suppliers.
We
maintain several single-source supplier relationships, either because
alternative sources are not available or the relationship is advantageous due
to
performance, quality, support, delivery, capacity, or price
considerations. If the supply of a critical single-source material or
component is delayed or curtailed, we may not be able to ship the related
product in desired quantities and in a timely manner. Even where
alternative sources of supply are available, qualification of the alternative
suppliers and establishment of reliable supplies could result in delays and
a
possible loss of sales, which could harm operating results.
We
expect to depend on semiconductor contract manufacturers to supply our silicon
integrated circuits and other suppliers of key components, materials and
services.
We
do not
manufacture the silicon integrated circuits on which we incorporate our OLED
technology. Instead, we expect to provide the design layouts to semiconductor
contract manufacturers who will manufacture the integrated circuits on silicon
wafers. We also expect to depend on suppliers of a variety of other components
and services, including circuit boards, graphic integrated circuits, passive
components, materials and chemicals, and equipment support. Our inability to
obtain sufficient quantities of high quality silicon integrated circuits or
other necessary components, materials or services on a timely basis could result
in manufacturing delays, increased costs and ultimately in reduced or delayed
sales or lost orders which could materially and adversely affect our operating
results.
RISKS
RELATED TO OUR INTELLECTUAL PROPERTY
We
rely on our license agreement with Eastman Kodak for the development of our
products.
We
rely
on our license agreement with Eastman Kodak for the development of our products,
and the termination of this license, Eastman Kodak's licensing of its OLED
technology to others for microdisplay applications, or the sublicensing by
Eastman Kodak of our OLED technology to third parties, could have a material
adverse impact on our business.
Our
principal products under development utilize OLED technology that we license
from Eastman Kodak. We rely upon Eastman Kodak to protect and enforce key
patents held by Eastman Kodak, relating to OLED display technology. Eastman
Kodak's patents expire at various times in the future. Our license with Eastman
Kodak could terminate if we fail to perform any material term or covenant under
the license agreement. Since our license from Eastman Kodak is non-exclusive,
Eastman Kodak could also elect to become a competitor itself or to license
OLED
technology for microdisplay applications to others who have the potential to
compete with us. The occurrence of any of these events could have a material
adverse impact on our business.
We
may not be successful in protecting our intellectual property and proprietary
rights.
We
rely
on a combination of patents, trade secret protection, licensing agreements
and
other arrangements to establish and protect our proprietary technologies. If
we
fail to successfully enforce our intellectual property rights, our competitive
position could suffer, which could harm our operating results. Patents may
not
be issued for our current patent applications, third parties may challenge,
invalidate or circumvent any patent issued to us, unauthorized parties could
obtain and use information that we regard as proprietary despite our efforts
to
protect our proprietary rights, rights granted under patents issued to us may
not afford us any competitive advantage, others may independently develop
similar technology or design around our patents, our technology may be available
to licensees of Eastman Kodak, and protection of our intellectual property
rights may be limited in certain foreign countries. We may be required to expend
significant resources to monitor and police our intellectual property rights.
Any future infringement or other claims or prosecutions related to our
intellectual property could have a material adverse effect on our business.
Any
such claims, with or without merit, could be time consuming to defend, result
in
costly litigation, divert management's attention and resources, or require
us to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us, if
at
all. Protection of intellectual property has historically been a large yearly
expense for eMagin. We have not been in a financial position to properly protect
all of our intellectual property, and may not be in a position to properly
protect our position or stay ahead of competition in new research and the
protecting of the resulting intellectual property.
RISKS
RELATED TO THE MICRODISPLAY INDUSTRY
The
commercial success of the microdisplay industry depends on the widespread market
acceptance of microdisplay systems products.
The
market for microdisplays is emerging. Our success will depend on consumer
acceptance of microdisplays as well as the success of the commercialization
of
the microdisplay market. As an OEM supplier, our customer's products must also
be well accepted. At present, it is difficult to assess or predict with any
assurance the potential size, timing and viability of market opportunities
for
our technology in this market. The viewfinder microdisplay market sector is
well
established with entrenched competitors with whom we must compete.
The
microdisplay systems business is intensely
competitive.
We
do
business in intensely competitive markets that are characterized by rapid
technological change, changes in market requirements and competition from both
other suppliers and our potential OEM customers. Such markets are typically
characterized by price erosion. This intense competition could result in pricing
pressures, lower sales, reduced margins, and lower market share. Our ability
to
compete successfully will depend on a number of factors, both within and outside
our control. We expect these factors to include the following:
·
|
our
success in designing, manufacturing and delivering expected new products,
including those implementing new technologies on a timely
basis;
|
·
|
our
ability to address the needs of our customers and the quality of
our
customer services;
|
·
|
the
quality, performance, reliability, features, ease of use and pricing
of
our products;
|
·
|
successful
expansion of our manufacturing
capabilities;
|
·
|
our
efficiency of production, and ability to manufacture and ship products
on
time;
|
·
|
the
rate at which original equipment manufacturing customers incorporate
our
product solutions into their own
products;
|
·
|
the
market acceptance of our customers' products;
and
|
·
|
product
or technology introductions by our
competitors.
|
Our
competitive position could be damaged if one or more potential OEM customers
decide to manufacture their own microdisplays, using OLED or alternate
technologies. In addition, our customers may be reluctant to rely on a
relatively small company such as eMagin for a critical component. We cannot
assure you that we will be able to compete successfully against current and
future competition, and the failure to do so would have a materially adverse
effect upon our business, operating results and financial
condition.
The
display industry is cyclical.
The
display industry is characterized by fabrication facilities that require large
capital expenditures and long lead times for supplies and the subsequent
processing time, leading to frequent mismatches between supply and demand.
The
OLED microdisplay sector may experience overcapacity if and when all of the
facilities presently in the planning stage come on line leading to a difficult
market in which to sell our products.
Competing
products may get to market sooner than ours.
Our
competitors are investing substantial resources in the development and
manufacture of microdisplay systems using alternative technologies such as
reflective liquid crystal displays (LCDs), LCD-on-Silicon ("LCOS")
microdisplays, active matrix electroluminescence and scanning image systems,
and
transmissive active matrix LCDs. Our competitive position could be damaged
if
one or more of our competitors’ products get to the market sooner than our
products. We cannot assure you that our product will get to market ahead of
our
competitors or that we will be able to compete successfully against current
and
future competition. The failure to do so would have a materially
adverse effect upon our business, operating results and financial
condition.
Our
competitors have many advantages over us.
As
the
microdisplay market develops, we expect to experience intense competition from
numerous domestic and foreign companies including well-established corporations
possessing worldwide manufacturing and production facilities, greater name
recognition, larger retail bases and significantly greater financial, technical,
and marketing resources than us, as well as from emerging companies attempting
to obtain a share of the various markets in which our microdisplay products
have
the potential to compete. We cannot assure you that we will be able to compete
successfully against current and future competition, and the failure to do
so
would have a materially adverse effect upon our business, operating results
and
financial condition.
Our
products are subject to lengthy OEM development
periods.
We
plan
to sell most of our microdisplays to OEMs who will incorporate them into
products they sell. OEMs determine during their product development phase
whether they will incorporate our products. The time elapsed between initial
sampling of our products by OEMs, the custom design of our products to meet
specific OEM product requirements, and the ultimate incorporation of our
products into OEM consumer products is significant. If our products fail to
meet
our OEM customers' cost, performance or technical requirements or if unexpected
technical challenges arise in the integration of our products into OEM consumer
products, our operating results could be significantly and adversely affected.
Long delays in achieving customer qualification and incorporation of our
products could adversely affect our business.
Our
products will likely experience rapidly declining unit
prices.
In
the
markets in which we expect to compete, prices of established products tend
to
decline significantly over time. In order to maintain our profit margins over
the long term, we believe that we will need to continuously develop product
enhancements and new technologies that will either slow price declines of our
products or reduce the cost of producing and delivering our products. While
we
anticipate many opportunities to reduce production costs over time, there can
be
no assurance that these cost reduction plans will be successful nor is there
any
assurance that our costs can be reduced as quickly as any reduction in unit
prices. We may also attempt to offset the anticipated decrease in our average
selling price by introducing new products, increasing our sales volumes or
adjusting our product mix. If we fail to do so, our results of operations would
be materially and adversely affected.
RISKS
RELATED TO OUR BUSINESS
Our
success depends on attracting and retaining highly skilled and qualified
technical and consulting personnel.
We
must
hire highly skilled technical personnel as employees and as independent
contractors in order to develop our products. The competition for skilled
technical employees is intense and we may not be able to retain or recruit
such
personnel. We must compete with companies that possess greater financial and
other resources than we do, and that may be more attractive to potential
employees and contractors. To be competitive, we may have to increase the
compensation, bonuses, stock options and other fringe benefits offered to
employees in order to attract and retain such personnel. The costs of retaining
or attracting new personnel may have a materially adverse affect on our business
and our operating results. In addition, difficulties in hiring and retaining
technical personnel could delay the implementation of our business
plan.
Our
success depends in a large part on the continuing service of key
personnel.
Changes
in management could have an adverse effect on our business. We are dependent
upon the active participation of several key management personnel and will
also
need to recruit additional management in order to expand according to our
business plan. The failure to attract and retain additional management or
personnel could have a material adverse effect on our operating results and
financial performance.
Our
business depends on new products and technologies.
The
market for our products is characterized by rapid changes in product, design
and
manufacturing process technologies. Our success depends to a large extent on
our
ability to develop and manufacture new products and technologies to match the
varying requirements of different customers in order to establish a competitive
position and become profitable. Furthermore, we must adopt our products and
processes to technological changes and emerging industry standards and practices
on a cost-effective and timely basis. Our failure to accomplish any of the
above
could harm our business and operating results.
We
generally do not have long-term contracts with our
customers.
Our
business has primarily operated on the basis of short-term purchase
orders. We are now receiving longer term purchase agreements, such as
those which comprise our approximately $7.4 million backlog, and procurement
contracts, but we cannot guarantee that we will continue to do so. Our current
purchase agreements can be cancelled or revised without penalty, depending
on
the circumstances. We plan production on the basis of internally generated
forecasts of demand, which makes it difficult to accurately forecast revenues.
If we fail to accurately forecast operating results, our business may suffer
and
the value of your investment in eMagin may decline.
Our
business strategy may fail if we cannot continue to form strategic relationships
with companies that manufacture and use products that could incorporate our
OLED-on-silicon technology.
Our
prospects will be significantly affected by our ability to develop strategic
alliances with OEMs for incorporation of our OLED-on-silicon technology into
their products. While we intend to continue to establish strategic relationships
with manufacturers of electronic consumer products, personal computers,
chipmakers, lens makers, equipment makers, material suppliers and/or systems
assemblers, there is no assurance that we will be able to continue to establish
and maintain strategic relationships on commercially acceptable terms, or that
the alliances we do enter in to will realize their objectives. Failure to do
so
would have a material adverse effect on our business.
Our
business depends to some extent on international
transactions.
We
purchase needed materials from companies located abroad and may be adversely
affected by political and currency risk, as well as the additional costs of
doing business with a foreign entity. Some customers in other countries have
longer receivable periods or warranty periods. In addition, many of the OEMs
that are the most likely long-term purchasers of our microdisplays are located
abroad exposing us to additional political and currency risk. We may find it
necessary to locate manufacturing facilities abroad to be closer to our
customers which could expose us to various risks, including management of a
multi-national organization, the complexities of complying with foreign laws
and
customs, political instability and the complexities of taxation in multiple
jurisdictions.
Our
business may expose us to product liability claims.
Our
business may expose us to potential product liability claims. Although no such
claims have been brought against us to date, and to our knowledge no such claim
is threatened or likely, we may face liability to product users for damages
resulting from the faulty design or manufacture of our products. While we plan
to maintain product liability insurance coverage, there can be no assurance
that
product liability claims will not exceed coverage limits, fall outside the
scope
of such coverage, or that such insurance will continue to be available at
commercially reasonable rates, if at all.
Our
business is subject to environmental regulations and possible liability arising
from potential employee claims of exposure to harmful substances used in the
development and manufacture of our products.
We
are
subject to various governmental regulations related to toxic, volatile,
experimental and other hazardous chemicals used in our design and manufacturing
process. Our failure to comply with these regulations could result in the
imposition of fines or in the suspension or cessation of our operations.
Compliance with these regulations could require us to acquire costly equipment
or to incur other significant expenses. We develop, evaluate and utilize new
chemical compounds in the
manufacture
of our products. While we attempt to ensure that our employees are protected
from exposure to hazardous materials, we cannot assure you that potentially
harmful exposure will not occur or that we will not be liable to employees
as a
result.
RISKS
RELATED TO OUR STOCK
The
substantial number of shares that are or will be eligible for sale could cause
our common stock price to decline even if eMagin is
successful.
Sales
of
significant amounts of common stock in the public market, or the perception
that
such sales may occur, could materially affect the market price of our common
stock. These sales might also make it more difficult for us to sell equity
or
equity-related securities in the future at a time and price that we deem
appropriate. As of September 30, 2007, we have outstanding (i) options to
purchase 768,898 shares, (ii) warrants to purchase 8,340,509 shares of common
stock and (iii) notes to convert to 8,330,689 shares.
We
have a staggered board of directors and other anti-takeover provisions, which
could inhibit potential investors or delay or prevent a change of control that
may favor you.
Our
Board
of Directors is divided into three classes and our Board members are elected
for
terms that are staggered. This could discourage the efforts by others to obtain
control of eMagin. Some of the provisions of our certificate of incorporation,
our bylaws and Delaware law could, together or separately, discourage potential
acquisition proposals or delay or prevent a change in control. In particular,
our board of directors is authorized to issue up to 10,000,000 shares of
preferred stock (less any outstanding shares of preferred stock) with rights
and
privileges that might be senior to our common stock, without the consent of
the
holders of the common stock.
ITEM
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
On
March
28, 2007, the Company entered into a Note Purchase Agreement for the sale of
$500 thousand of senior secured debentures (the “Note”) and warrants to purchase
approximately 1.0 million shares of common stock, par value $.001 per
share. The investor purchased the Note with a conversion price of
$0.35 per share that may convert into approximately 1.4 million shares of common
stock and issued warrants exercisable at $0.48 per share for approximately
1.0
million shares of common stock expiring in July 2011. On April 9,
2007, the Company closed the transaction and received approximately $460
thousand, net of offering costs of approximately $40 thousand which are being
amortized over the life of the Note. On July 23, 2007, the investor converted
$250,000 of the principal amount of the Note which was due on July 23, 2007
and
$2,166.50 of accrued and unpaid interest totaling $252,166.50 and received
720,476 shares of Common Stock at the conversion price of $0.35.
On
July
23, 2007, we entered into Amendment Agreements (the “Agreements”) with the
holders of the Notes issued July 21, 2006 and March 28, 2007 (each a “Holder”
and collectively, the “Holders”) and agreed to issue each Holder an amended and
restated Note (the “Amended Notes”) in the principal amount equal to the
principal amount outstanding as of July 23, 2007.
The
changes to the Amended Notes include the following:
·
|
|
The
due date for the outstanding Notes (totaling after conversions an
aggregate of $6,020,000) has been extended to December 21,
2008;
|
·
|
|
The
Amended Notes are convertible into (i) 8,407,612 shares of the Company’s
common stock. The conversion price for $5,770,000 of principal was
revised
from $2.60 to $0.75 per share. The conversion price of $0.35 per
share for
$250,000 of principal was
unchanged;
|
·
|
|
$3,010,000
of the Notes can convert into (ii) 3,010 shares of the Company’s newly
formed Series A Convertible Preferred Stock (the “Preferred”) at a
conversion price of $1,000 per share. The Preferred is convertible
into
common stock at the same price allowable by the Amended Notes,
subject to adjustment as provided for in the Certificate of
Designations;
|
·
|
|
The
Amended Notes adjust the exercise price from $3.60 to $1.03 per share
for
1,553,468 Warrants and require the issuance of 3,831,859 Warrants
exercisable at $1.03 per share pursuant to which the holders may
acquire
common stock, until July 21, 2011;
and
|
·
|
|
As
of July 23, 2007 the interest rate was raised from 6% to
8%.
|
On
August
7, 2007, the Company entered into a loan agreement with
Moriah Capital, L.P. (“Moriah) and established a revolving
line of credit (the “Loan”) of $2.5 million. As part of the
transaction, the Company issued 162,500 shares of common stock, par value of
$.001 per share, with an aggregate market value of $195,000.
ITEM
3. Defaults Upon Senior Securities
ITEM
4. Submission of Matters to a Vote of Security
Holders
None.
ITEM
5. Other Information
None.
ITEM
6. Exhibits
EXHIBIT
NUMBER
DESCRIPTION
31.1
|
Certification
by Chief Executive Officer pursuant to Sarbanes Oxley Section 302*
|
31.2
|
Certification
by Chief Financial Officer pursuant to Sarbanes Oxley Section
302*
|
32.1
|
Certification
by Chief Executive Officer pursuant to 18 U.S.C. Section 1350*
|
32.2
|
Certification
by Chief Financial Officer pursuant to 18 U.S.C. Section
1350*
|
*Filed
herewith.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on this 19th day of November 2007.
|
eMAGIN
CORPORATION |
|
|
|
|
|
|
By:
|
/s/ K.C.
Park |
|
|
|
K.C.
Park |
|
|
|
Interim
Chief Executive
Officer |
|
|
|
Principal
Executive
Officer |
|
|
|
|
|
|
|
|
|
By:
|
/s/ John
Atherly |
|
|
|
John
Atherly |
|
|
|
Chief
Financial Officer |
|
|
|
Principal
Accounting and Financial Officer |
|
28