form10k.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31, 2007
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or
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£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
file number 001-15751
eMAGIN
CORPORATION
(Exact
name of registrant as specified in its charter)
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Delaware
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56-1764501
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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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 is a well-known seasoned issuer as defined
in Rule 405 of the Securities Act. Yes £ No
R
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes £ No
R
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. £
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
As of
June 30, 2007, the aggregate market value of the issued and outstanding common
stock held by non-affiliates of the registrant, based upon the closing price of
the common stock as quoted on the National Association of Securities Dealers
Inc. OTC Bulletin Board of $0.66 was approximately $5.1
million. For purposes of the above statement only, all
directors, executive officers and 10% shareholders are assumed to be
affiliates. This determination of affiliate status is not necessarily
a conclusive determination for any other purpose.
Number of
shares of common stock outstanding as of March 14, 2008 was
12,620,900.
DOCUMENTS
INCORPORATED BY REFERENCE – None
FORM
10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007
INDEX
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Page
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PART
I
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Item
1
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Business
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4
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Item
1A
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Risk
Factors
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16
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Item
1B
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Unresolved
Staff
Comments
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21
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Item
2
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Properties
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21
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Item
3
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Legal
Proceedings
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21
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Item
4
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Submission
of Matters to a Vote of Security
Holders
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21
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PART
II
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Item
5
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Market
for Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
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22
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Item
6
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Selected
Financial
Data
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23
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Item
7
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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25
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Item
7A
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Quantitative
and Qualitative Disclosures About Market
Risk
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30
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Item
8
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Financial
Statements and Supplementary
Data
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31
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Item
9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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56
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Item
9A
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Controls
and
Procedures
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56
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Item
9B
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Other
Information
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57
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PART
III
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Item
10
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Directors,
Executive Officers, and Corporate
Governance
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58
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Item
11
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Executive
Compensation
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61
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Item
12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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68
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Item
13
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Certain
Relationships and Related
Transactions
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70
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Item
14
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Principal
Accountant Fees and
Services
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71
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PART
IV
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Item
15
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Exhibits
and Financial Statement
Schedules
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71
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Signatures
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STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
In this
annual 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 "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operation," 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.
PART
I
Introduction
eMagin
Corporation designs, develops, manufactures, and markets 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 picture
elements 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.
These products have received award recognition including: SID Display of the
Year and Electronic
Products Magazine Product of the Year.
These products are being applied or considered for near-eye and headset
applications in products such as entertainment and gaming headsets, handheld
Internet and telecommunication appliances, viewfinders, and wearable computers
to be manufactured by OEM customers for military, medical, industrial, and
consumer applications. We market our products globally.
In 2006
we introduced our OLED-XL technology, which provides longer luminance half life
and enhanced efficiency of eMagin's SVGA+ and SVGA-3D product lines. 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 picture
elements).
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 was recognized as a Digital
Living Class of 2005 Innovators, and received the Consumer Electronics
Association’s coveted Consumer Electronics Show (CES) 2006 Best of Innovation
Awards for the entire display category as well as a Design and Innovations Award
for the electronic gaming category. In February 2007 the Z800 3DVisor, as
integrated in Chatten Associates’ head-aimed remote viewer, was recognized as
one of Advanced Imaging's Solutions of the Year.
We
believe that our OLED-on-silicon microdisplays offer a number of advantages over
current liquid crystal microdisplays, including greatly increased system level
power efficiency, less weight and wider viewing angles. Using our active matrix
OLED technology, many computer and video electronic system functions can be
built directly into the OLED-on-silicon microdisplay, resulting in compact
systems with expected lower overall system costs relative to alternative
microdisplay technologies. We have developed our own technology to create high
performance OLED-on-silicon microdisplays and related optical systems and we
have licensed certain fundamental OLED and display technology from Eastman
Kodak.
As the
first to exploit OLED technology for microdisplays, and with the support of our
partners and the development of our intellectual property, we believe that we
enjoy a significant advantage in the commercialization of this display
technology for virtual imaging. We believe we are the only company to sell
full-color active matrix small molecule OLED-on-silicon
microdisplays.
eMagin
Corporation was created through the merger of Fashion Dynamics Corporation
("FDC"), which was organized on January 23, 1996 under the laws of the State of
Nevada and FED Corporation ("FED"), a developer and manufacturer of optical
systems and microdisplays for use in the electronics industry. FDC had no active
business operations other than to acquire an interest in a business. On March
16, 2000, FDC acquired FED. Simultaneous with this merger, we changed our name
to eMagin Corporation. Following the merger, the business conducted by eMagin is
the business conducted by FED prior to the merger.
Our
website is located at www.emagin.com and
our e-commerce site is www.3dvisor.com. We
make available on our website, free of charge, our annual report on Forms 10K,
our proxy statement, our quarterly reports on Forms 10Q, our current reports on
Form 8K, and all amendments to such reports filed under the Securities and
Exchange Act, earnings press releases, and other business-related press
releases. We also post on our website the charters of our Audit, Compensation,
Governance and Nominating committees, our Codes of Ethics and any amendments of
or waiver to those codes of ethics, and other corporate governance materials
recommended by the Securities and Exchange Commission as they
occur.
Industry
Overview
A study
by NanoMarkets (February 2007) predicts the overall OLED market will approach
$10.9 billion in 2010 and grow to $15.5 billion by 2014. These markets include
various sizes devices for a range of applications from cell phone size to
viewfinder displays to televisions to lighting. Displays in general are sold as
independent products (such as TV monitors) or as components of other systems
(such as laptop computers). Our products target one segment of the display
industry, the near-eye, personal display, which is viewed through a lens rather
than directly, in comparison to desktop computer screens which are known as
direct view displays. As an off-shoot of our work in microdisplays, we are also
participating in government-funded development studies for OLED-based
lighting.
Personal
displays, that is, near-eye systems based on microdisplays and optics, include
video headsets, camcorders, viewfinders and other portable devices.
Microdisplays are typically of such high resolution that they can be practically
viewed only with magnifying optics. Although microdisplays are typically
physically smaller than a postage stamp, they can provide a magnified viewing
area similar to that of a full-size computer screen. For example, when magnified
through a lens, a high-resolution 0.6-inch diagonal display can appear
comparable to a 19- to 21-inch computer screen at about 2 feet from the viewer
or a 60-inch TV screen at about 6 feet. The wearable display market,
according to DisplaySearch, is expected to grow to at least $153 million in
2010. McLaughlin Consulting, in a report published December 2006, projects that,
with effective marketing, the Personal Viewer market could reach nearly $1
billion in 2010.
We
believe that the most significant driver of the longer term near-eye virtual
imaging microdisplay market is growing consumer demand for mobile access to
larger volumes of information and entertainment in smaller packages. This desire
for mobility has resulted in the development of near-eye microdisplay products
in two general categories: (i) an established market for electronic viewers
incorporated in products such as viewfinders for digital cameras and video
cameras which may potentially also be developed as personal viewers for cell
phones and (ii) an emerging market for headset-application platforms which
include accessories for mobile devices such as notebook and sub-notebook
computers, portable DVD systems, electronic games, and other entertainment, and
wearable computers.
Until
now, near-eye virtual imaging microdisplay technologies have not simultaneously
met all of the requirements for high resolution, full color, low power
consumption, brightness, lifetime, size and cost which are required for
successful commercialization in OEM consumer products. We believe that our new
OLED-on-silicon microdisplay product line meets these requirements better than
alternative products and will help to enable virtual imaging to emerge as an
important display industry segment.
Our
Approach: OLED-on-Silicon Microdisplays and Optics
There are
two basic classes of organic light emitting diode, or OLED, technology, dubbed
single molecule or small molecule (monomer) and polymer. Our microdisplays are
currently based upon active matrix molecular OLED technology, which we call
OLED-on-silicon because we build the displays directly on silicon chips. Our
OLED-on-silicon technology uniquely permits millions of individual low-voltage
light sources to be built on low-cost, silicon computer chips to produce single
color, white or full-color display arrays. OLED-on-silicon microdisplays offer a
number of advantages over current liquid crystal microdisplays, including
increased brightness, lower power requirements, less weight and wider viewing
angles. Using our OLED technology, many computer and video electronic system
functions can be built directly into the silicon chip, under the OLED film,
resulting in very compact, integrated systems with lowered overall system costs
relative to alternative technologies.
We have
developed our own proprietary and patented technology to create high performance
OLED-on-silicon microdisplays and related optical systems, and we license
fundamental OLED technology from Eastman Kodak. (See "Intellectual Property" and
"Strategic Relationships"). We expect that the integration of our
OLED-on-silicon microdisplays into mobile electronic products will result in
lower overall system costs to our OEM customers.
We
believe that our OLED-on-silicon microdisplays will initiate a new generation of
virtual imaging products that could have a profound impact on many industries.
Headsets providing virtual screens surrounding the user in a sphere of data
become a practical reality with our displays and a low cost head tracker.
Because our microdisplays generate and emit light, they have a wider viewing
angle than competing liquid crystal microdisplays, and because they have the
same high brightness at all forward viewing angles, our microdisplays permit a
large field-of-view and superior optical image.
The wider
viewing angle of our display results in the following superior optical
characteristics in comparison with LCDs and other near-eye display
technologies:
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the
user does not need to accurately position the head-wearable display to the
eye;
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the
image will change minimally with eye movement and appear more natural;
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the
display can be placed further from the eye and not cut off part of the
image.
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In
addition, our OLED-on-silicon microdisplays offer faster response times and use
much less power than competitive liquid crystal microdisplay systems. Our
subsystem-level power consumption is so low that two SVGA, full color, full
speed motion video computer displays can easily be run in stereovision off the
power from a single USB port on a portable computer. Battery life is extended
and weight is greatly reduced in systems using our products.
Our SVGA+
OLED microdisplay stores all the color and luminance value information at each
of the more than 1.5 million picture elements, or pixels, between refresh cycles
in the display array, eliminating the flicker or color breakup seen by most
other high-resolution microdisplay technologies. Even power efficient frame
rates as low as 30 Hz can usually be used effectively. Power consumption at the
system level is expected to be the lowest of any full-color, full-video SVGA
resolution range, large view microdisplay on the market. The OLED's ability to
emit light at wide angles allows customers to create large field of view
(approx. 40 degrees), wide image capture range images from very compact,
low-cost, one-piece optical systems. The display contains the majority of the
electronics required for connection to the RGB (red, green, blue signal) port of
a portable computer imbedded in its silicon chip backplane, thereby eliminating
many other components required by other display technologies such as
digital-analog converters, application-specific integrated circuits (ASICs),
light sources, multiple optical elements, and other components. We believe that
these features will enable our new class of microdisplay to potentially be the
most compact, highest image quality, and lowest cost solution for high
resolution near-eye applications, once they are in full production.
We have
also developed advanced lens technology which permits our OLED-on-silicon
microdisplays to provide large field of view images that can be viewed for
extended periods with reduced eye-fatigue. Molded plastic prism lenses have been
developed to help our OEM customers obtain better quality, large area virtual
images using our displays at relatively low cost in comparison to alternate
approaches.
Our
Products
Our first
commercial microdisplay products are based on our "SVGA series" OLED
microdisplays. We offer products utilizing both our proprietary “OLED” or
“OLED-XL” technologies, applied to the same integrated circuit base. We offer
our products to OEMs and other large volume buyers as both separate components,
integrated bundles coupled with our own optics, or full systems. We also offer
engineering support to enable customers to quickly integrate our products into
their own product development programs.
(1) OLED
Microdisplay Component Products
SVGA+ OLED
Microdisplay (Super Video Graphics Array of 800x600 plus 52 added columns of
data). Our 0.62 inch diagonal SVGA+ OLED microdisplays have a
resolution of 852x600 triad pixels (1.53 million picture elements). The product
was dubbed "SVGA+" because it has 52 more display columns than a standard SVGA
display, permitting users to run either (1) standard SVGA (800 x 600 pixels) to
interface to the analog output of many portable computers or (2) 852 x 480,
using all the data available from a DVD player in a 16:9 wide screen
entertainment format. The display also has an internal NTSC monochrome video
decoder for low power night vision systems.
SVGA-3D OLED
Microdisplay (Super Video Graphics Array plus built-in stereovision
capability). Our 0.59 inch diagonal SVGA-3D OLED microdisplays
have a resolution of 800x600 triad pixels (1.44 million picture elements). A
built-in circuit provides compatibility with single channel frame sequential
stereoscopic vision without additional external components.
Microdisplays
Under Development. We are developing two additional display
products, a smaller format (SVGA-3DS) version of our SVGA display, which will
have 800 x 600 triad pixels and be 0.44 inch diagonal and an 0.77 inch SXGA OLED
microdisplay with resolution of 1280x 1024 triad pixels. These new products
offer both analog and digital signal inputs in a compact display with greater
power efficiency. With the world’s finest pitch (11.1 microns) and a high level
of integrated functionality, the SVGA-3DS provides a simple path to system
integration in a small format. The SXGA split chip architecture offers
unprecedented power consumption savings for this display format in addition to a
highly flexible system interface configuration.
Lens and Design
Reference Kits.
We offer a WF05 prism optic, with mounting brackets or combined with OLED
microdisplays to form an optic-display module. We provide Design Reference Kits,
which include a microdisplay and associated electronics to help OEMs evaluate
our microdisplay products and to assist their efforts to build and test new
products incorporating our microdisplays.
Integrated
Modules. We provide near-eye virtual imaging modules that incorporate our
OLED-on-silicon microdisplays with our lenses and electronic interfaces for
integration into OEM products. We have shipped customized modules to several
customers, some of which have incorporated our products into their own
commercial products.
(2)
Personal Display Systems (Head-Wearable and Headset Systems)
Our Z800
3DVisors(tm) give users the ability to work with their hands while
simultaneously viewing information or video on the display. The Z800 3DVisor
enables more versatile portable computing, using a 0.59-inch diagonal
microdisplay (SVGA-3D capable of delivering an image that appears comparable to
that of a 19-inch monitor at 22 to 24 inches from the eye, or a 105 inch movie
screen at 12 foot distance. Our systems are currently being used for personal
entertainment, electronic gaming, and military training and simulation, among
other applications. We believe that personal display systems will fill the
increasing demand for instant data accessibility and privacy in mobile
workplaces. We sell the personal display systems to OEM systems and equipment
customers, through distributors, and through our e-commerce website,
www.3dvisor.com.
Our
Market Opportunity - Personal Display Systems Platforms, including Head-wearable
Displays
The
growth potential of our selected target market segments have been investigated
using information gathered from key industry market research firms, including
DisplaySearch, Frost and Sullivan, Fuji-Chimera, International Data Corporation,
Nikkei, SEMI, Stanford Resources-iSuppli and others. Such data was obtained
using published reports and data obtained at industry symposia. We have also
relied substantially on market projections obtained privately from industry
leaders, industry analysts, and current and potential customers.
The
virtual-imaging markets we are targeting include industrial, medical, military,
arcade games, 3-D CAD/Virtual Reality, and wearable computers. Within each of
these market sectors, we believe that our microdisplays, when combined with
compact optic lenses, will become a key component for a number of mobile
electronic products. Applications we are targeting the following:
Head-wearable
displays incorporate microdisplays mounted in or on eyeglasses, goggles, simple
headbands, helmets, or hardhats, and are often referred to as head-mounted
displays (HMDs) or headsets. Head-wearable displays may block out surroundings
for a fully immersive experience, or be designed as "see-through" or
"see-around" to the user's surroundings. They may contain one (monocular) or two
(binocular) displays. Some of the increased current interest is due to
accelerating the timetable to adapt such systems to military applications such
as night vision and fire and rescue applications. These have military,
commercial, and consumer applications.
Military
Military
demand for head-wearable displays is currently being met with microdisplay
technologies that we believe to be inferior to our OLED-on-silicon products. The
new generation of soldiers will be highly mobile, and will often need to carry
highly computerized communications and surveillance equipment. To enable
interaction with the digital battlespace, rugged, yet lightweight and energy
efficient technology is required. Currently available microdisplay technologies
do not meet the requirements for low power, hands-free, day and night-viewable
displays. As a COTS (commercial off the shelf) component, OLED microdisplays
demonstrate performance characteristics important to military and other
demanding commercial and industrial applications including high brightness and
resolution, wide dimming range, wider temperature operating ranges, shock and
vibration resistance and insensitivity to high G-forces. The image does not
suffer from flicker or color breakup in vibrating environments, and the
microdisplay's wide viewing angle allows ease of viewing for long periods of
time. The OLED's very low power consumption reduces battery weight and increases
allowed mission length. Properly implemented, we believe that head-mounted
systems incorporating our microdisplays will increase effectiveness by allowing
hands-free operation and increasing situational awareness with enough brightness
to be used in daylight, yet controllable for nighttime light security. The
OLED's inherent wide temperature range is especially of interest for military
applications because the display can turn on instantly at temperatures far below
freezing and can operate at very high temperatures in desert
conditions.
Our OLED
microdisplays have been selected for a range of defense-security applications,
including a situational awareness HMD for the US Army Land Warrior programs, a
handheld thermal imager for border patrol and training, and simulation virtual
monitors for Quantum 3D. The Land Warrior, a baseline program in the Army's
drive to digitize the battlefield, is an integrated digital system that
incorporates computerized communication, navigation, targeting and protection
systems for use by the twenty-first century infantry soldier. Rockwell Collins,
the principal contractor for the US Army's Land Warrior HMD system, and eMagin
applied their respective expertise in HMD and imaging technology to develop
rugged, yet lightweight and energy efficient products meeting the requirements
of tomorrow's soldier. Our display is also used in Rockwell Collins’
commercially available ProView S035 Monocular HMD. Night Vision Equipment
Corporation's HelmetIR-50(TM), a lightweight, military helmet mounted thermal
imager, which provides hands-free operation and allows viewers to see through
total darkness, battlefield obscurants, and even foliage, is the first
OLED-equipped product to be listed on the US Government's GSA schedule.
Virtually Better Inc. has incorporated our Z800 3DVisor into its “Virtual Iraq”
treatment for post-traumatic stress disorders. In addition, our
displays have been commercialized, or planned to be commercialized, by military
systems integrators including DRS, Elbit, Insight Technologies, Nivisys,
Qioptiq, Saab, Sagem, and Thales, , among others. We cannot assure that
Government projects will remain on schedule, or that they will be fully
implemented. Similar systems are of interest for other military applications as
well as for related operations such as urban security, fire and
rescue.
Commercial,
Industrial, and Medical
We
believe that a wide variety of commercial and industrial markets offer
significant opportunities due to increasing demand for instant data
accessibility in mobile workplaces. Some examples of microdisplay applications
include: immediate access to inventory such as parts, tools and equipment
availability; instant accessibility to maintenance or construction manuals;
routine quality assurance inspection; endoscopic surgery; and real-time viewing
of images and data for a variety of applications. As one potential example, a
user wearing a HMD while using test equipment, such as oscilloscopes, can view
technical data while simultaneously probing printed circuit boards. Commercial
products in these sectors include Sage Technologies, Ltd.'s Helmet Vue (TM)
Thermal Imaging System and Liteye's 500. VRmagic GmbH, a leading developer of
virtual reality simulators, is using our OLED microdisplays in their EYESI(TM)
Virtual Reality Surgical Simulator, which provides real-time simulation of
ophthalmic surgery, high performance biomechanical tissue simulation, precision
tracking, and realistic stereo imaging. Sensics has incorporated our OLED
displays in their immersive SkyVizor (TM) virtual reality headset to serve as
the "eyes" of the Robonaut, a humanoid robot being developed by NASA and
Department of Defense agencies. The Robonaut system can work side by side with
humans, or alone in high-risk situations. Telepresence uses virtual reality
display technology to visually immerse the operator into the robot's workspace,
facilitating operation and interaction with the Robonaut, and potentially
reducing the number of dangerous space walks required of real
astronauts. Another recent example is Saab Avitronics, which has
chosen eMagin microdisplays for its news Multi-Purpose Virtual Image Display
(VID) which comprises high-performance magnifying optics and the OLED, sealed in
an aluminum casing.
Consumer
Once our
displays are manufactured in high volumes at reduced costs, we believe that our
head-wearable display products may enhance the following consumer
products:
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Entertainment
and gaming video headset systems, which permit individuals to view
television, including HDTV, video CDs, DVDs and video games on virtual
large screens or stereovision in private without disturbing others. We
believe that these new headset game systems can provide a game or
telepresence experience not otherwise practical using conventional direct
view display technology. The advent of video iPods and the rapidly
increasing amount of downloadable content have accelerated the movement
toward portable video technology. At the same time, the desire for larger
screen sizes while retaining the iPod portability has been referenced in
many publications. Virtual imaging uniquely provides a large, high
resolution view in a small portable package, and we believe that our OLED
on silicon technology is a best fit to help open this
market.
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Notebook
computers, which can use head-wearable devices to reduce power
requirements as well as expand the apparent screen size and increase
privacy. Current notebook computers do not use microdisplays. Our products
can apply not only to new models of notebook computers, but also as
aftermarket attachments to older notebooks still in use. The display can
be easily used as a second monitor on notebook computers for ease of
editing multiple documents to provide multiple screens or for data privacy
while traveling. It can also be used to provide larger screen capability
for viewing spreadsheets or complex computer aided design (CAD) files. We
expect to market our head-wearable displays to be used as plug-in
peripherals to be compatible with most notebook computers. We believe that
the SVGA-3D microdisplay is well suited for most portable PC headsets. Our
microdisplays can be operated using the USB power source of most portable
computers. This eliminates added power supplies, batteries, and rechargers
and reduces system complexity and
cost.
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Handheld
personal computers, whose small, direct view screens are often
limitations, but which are now capable of running software applications
that would benefit from a larger display. Microdisplays can be built into
handheld computers to display more information content on virtual screens
without forfeiting portability or adding the cost a larger direct view
screen. Microdisplays are not currently used in this market. We believe
that GPS viewers and other novel products are likely to develop as our
displays become more available.
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The
combination of power efficiency, high resolution, low systems cost, brightness
and compact size offered by our OLED-on-silicon microdisplays has not been made
available to makers and integrators of existing entertainment and gaming video
headset systems, notebook computers and handheld computers. We believe that our
microdisplays have the potential to propel the growth of new products and
applications such as lightweight wearable computer systems.
Our
Strategy
Our
strategy is to establish and maintain a leadership position as a worldwide
supplier of microdisplays and virtual imaging technology solutions for
applications in high growth segments of the electronics industry by capitalizing
on our leadership in both OLED-on-silicon technology and microdisplay lens
technology. We aim to provide microdisplay and complimentary accessories to
enable OEM customers to develop and manufacture new and enhanced electronic
products. Some key elements of
our
strategy to achieve these objectives include the following:
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Leverage
our superior technology to establish a leading market position. As the
first to exploit OLED-on-silicon microdisplays, we believe that we enjoy a
significant advantage in bringing this technology to
market.
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Optimize
manufacturing efficiencies by outsourcing while protecting proprietary
processes. We outsource certain portions of microdisplay production, such
as chip fabrication, to minimize both our costs and time to market. We
intend to retain the OLED application and OLED sealing processes in-house.
We believe that these areas are where we have a core competency and
manufacturing expertise. We also believe that by keeping these processes
under tight control we can better protect our proprietary technology and
process know-how. This strategy will also enhance our ability to continue
to optimize and customize processes and devices to meet customer needs. By
performing the processes in-house we can continue to directly make
improvements in the processes, which will improve device performance. We
also retain the ability to customize certain aspects such as color
balance, which is known as chromaticity, as well as specialized boards or
interfaces, and to adjust other parameters at the customer's request. In
the area of lenses and head-wearable displays, we intend to focus on
design and development, while working with third parties for the
manufacture and distribution of finished products. We intend to prototype
new optical systems, provide customization of optical systems, and
manufacture limited volumes, but we intend to outsource high volume
manufacturing operations. There are numerous companies that provide these
outsource services.
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Build
and maintain strong internal design capabilities. As more circuitry is
added to OLED-on-silicon devices, the cost of the end product using the
display can be decreased; therefore integrated circuit design capability
will become increasingly important to us. To meet these requirements, we
utilize in-house design capabilities supplemented by outsourced design
services. Building and maintaining this capacity will allow us to reduce
engineering costs, accelerate the design process and enhance design
accuracy to respond to our customers' needs as new markets develop. In
addition, we intend to maintain a product design staff capable of rapidly
developing prototype products for our customers and strategic partners.
Contracting third party design support to meet demand and for specialized
design skills will also remain a part of our overall long term
strategy.
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Our
Strategic Relationships
Strategic
relationships have been an important part of our research and development
efforts to date and are an integral part of our plans for commercial product
launch. We have forged strategic relationships with major OEMs and strategic
suppliers. We believe that strategic relationships allow us to better determine
the demands of the marketplace and, as a result, allow us to focus our future
research and development activities to better meet our customer's requirements.
Moreover, we expect to provide microdisplays and Microviewers(TM) to some of
these partners, thereby taking advantage of established distribution channels
for our products.
Eastman
Kodak is a technology partner in OLED development, OLED materials, and a
potential future customer for both specialty market display systems and consumer
market microdisplays. We license Eastman Kodak's OLED and optics technology
portfolio. We have a nonexclusive; perpetual, worldwide license to use Eastman
Kodak patented OLED technology and associated intellectual property in the
development, use, manufacture, import and sale of microdisplays. The license
covers emissive active matrix microdisplays with a diagonal size of less than 2
inches for all OLED display technology previously developed by Kodak. An annual
minimum royalty is paid at the beginning of each calendar year and is fully
creditable against the royalties we are obligated to pay based on net sales
throughout the year. Eastman Kodak and eMagin have engaged in numerous
discussions regarding potential product applications for eMagin's microdisplays
by Eastman Kodak.
We are
working cooperatively with the US Army, US Navy, and with several military
system integrators to further characterize operation of our displays in rugged
military environments. We have a Cooperative Research and Development Agreement
(CRADA) with the US Army Night Vision Electronic Sensors Directorate (NVESD) to
characterize performance of our displays. We are currently partnering with the
University of Michigan to develop advanced display process via a
government-sponsored research program. We intend to continue to establish
additional strategic relationships in the future.
We are a
member of the United States Display Consortium (USDC), a cooperative effort
between industry and government whose charter is to develop an infrastructure to
support North American flat panel display manufacturing. It has more than 100
members, as well as support from the Department of Defense. The USDC’s role is
to provide a common platform for flat panel display manufacturers, developers,
users and the manufacturing equipment and supplier base.
Our
Technology Platforms
OLED-on-Silicon
Technology
Scientists
working at Eastman Kodak invented OLEDs in the early 1980s. OLEDs are thin films
of stable organic materials that emit light of various colors when a voltage is
impressed across them. OLEDs are emissive devices, which mean they create their
own light, as opposed to liquid crystal displays, which require a separate light
source. As a result, OLED devices use less power and can be capable of higher
brightness and fuller color than liquid crystal microdisplays. Because the light
they emit is Lambertian, which means that it appears equally bright from most
forward directions, a moderate movement in the eye does not change the image
brightness or color as it does in existing technologies. OLED films may be
coated on computer chips, permitting millions of individual low-voltage light
sources to be built on silicon integrated circuits to produce single color,
white or full-color display arrays. Many computer and video electronic system
functions can be built directly into a silicon integrated circuit as part of the
OLED display, resulting in an ultra-compact system. We believe these features,
together with the well-established silicon integrated circuit fabrication
technology of the semiconductor industry, make our OLED-on-silicon microdisplays
attractive for numerous applications.
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. Eastman Kodak provides OLED technology
and we provide additional technology advancements that have enabled us to coat
the silicon integrated circuits with OLEDs.
We have
developed numerous and significant enhancements to OLED technology as well as
key silicon circuit designs to effectively incorporate the OLED film on a
silicon integrated circuit. For example, we have developed a unique,
top-emitting structure for our OLED-on-silicon devices that enables OLED
displays to be built on opaque silicon integrated circuits rather than only on
glass. Our OLED devices can emit full visible spectrum light that can be
isolated with color filters to create full color images. Our microdisplay
prototypes have a brightness that can be greater than that of a typical notebook
computer and can have a potential useful life of over 50,000 operating hours, in
certain applications. New materials and device improvements in development offer
future potential for even better performance for brightness, efficiency, and
lifespan. Additionally, we have invested considerable work over several years to
develop unique electronics control and drive designs for OLED-on-silicon
microdisplays.
In
addition to our OLED-on-silicon technology, we have developed compact optic and
lens enhancements which, when coupled with the microdisplay, provide the high
quality large screen appearance that we believe a large proportion of the
marketplace demands.
Advantages
of OLED Technology
We
believe that our OLED-on-silicon technology provides significant advantages over
existing solutions in our targeted microdisplay markets. We believe these key
advantages will include:
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Low
manufacturing cost;
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Low
cost system solutions;
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Wide
angle light emission resulting in large apparent screen
size;
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Low
power consumption for improved battery life and longer system
life;
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High
brightness for improved viewing;
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High-speed
performance resulting in clear video
images;
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Wide
operating temperature range; and
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Good
environmental stability (vibration and
humidity).
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Low manufacturing
cost. Many OLED-on-silicon microdisplays can be built on an
8-inch silicon wafer using existing automated OLED and color filter processing
tools. The level of automation used lowers labor costs. Only a minute amount of
OLED material is used in each OLED-on-silicon microdisplay so that material
costs, other than the integrated circuit itself, are small. The number of
displays per silicon wafer may be higher on OLEDs than on liquid crystal
displays, or LCDs, because OLEDs do not require a space-wasting perimeter seal
band. Expensive transparent wafers with CMOS silicon laminated onto quartz are
not required for OLED microdisplays, as standard CMOS chips may be used as
backplanes.
Low cost systems
solutions. In general, an OEM using OLED-on-silicon
microdisplays will not need to purchase and incorporate lighting assemblies,
color converter related Applications Specific Integrated Circuits, or ASICs, or
beam splitter lenses as is the case in liquid crystal microdisplays, which also
require illumination. Many important display-related system functions can be
incorporated into an OLED-on-silicon microdisplay, reducing the size and cost of
the system. Non-polarized light from OLEDs permit lenses for many
OLED-on-silicon applications that are made of a single piece of molded plastic,
which reduces size, weight and assembly cost when compared to the multipiece
lens systems used for liquid crystal microdisplays. System cost relative to
liquid crystal and liquid crystal on silicon, or LCOS, competitive products is
thus reduced. Because our displays are power efficient, they typically require
less power at the system level than other display technologies at a given
display size and brightness.
Wide-angle light
emission simplifies optics for large apparent screen
size. OLEDs emit light at most forward directions from each
pixel. This permits the display to be placed close to the lens in compact
optical systems. It also provides the added benefit of less angular dependence
on the image quality relative to pupil and eye position when showing a large
field of view, unlike reflective LCOS microdisplays. This results in less eye
fatigue and makes it relatively easy to low power consumption for improved
battery life and longer system life. OLEDs emit light rather than transmitting
it, so no power-consuming backlight or front light, as required for liquid
crystal displays, is required. OLEDs can be energy efficient because of their
high efficiency light generation. Furthermore, OLEDs conserve power by powering
only those pixels that are on while liquid crystal on silicon requires light at
all pixels all the time. Most optical systems used for our OLEDs are highly
efficient, permitting over 80% of the light to reach the eye, whereas reflective
technologies such as liquid crystal on silicon require multiple beam splitters
to get light to the display, and then into the optical system. This results in
typically less than 25% light throughput efficiency in reflective microdisplay
systems. Most important, we do not need a power-hungry video frame buffer, as
required in liquid crystal frame-sequential color systems. Battery life can
therefore be extended.
High brightness
for improved viewing. This feature can be of great value to
military applications, where there is a need to see the computer image overlaid
onto brightly lit real-life backgrounds such as desert sand, water reflections
or sunlit clouds. The OLED can be operated over a large luminance range without
loss of gray level control, permitting the displays to be used in a range of
dark environments to very bright ambient applications. Since military simulation
and situation awareness applications, including night vision, typically require
large fields of view, the OLED's Lambertian optical characteristics make it an
excellent choice.
High-speed
performance resulting in clear video image. OLEDs switch much
more rapidly than liquid crystals or most cathode ray tubes, or CRTs. This
results in smear-free video rate imagery and provides improved image quality for
DVD playback applications. This eliminates visible image smear and makes
practicable three-dimensional stereo imaging using a split frame rate. This
advantage of our OLED-on-silicon is very important for 3-D stereovision gaming
applications.
Flicker-free and
no color breakup. Because the OLED-on-silicon stores
brightness and color information at each pixel, the display can be run with no
noticeable flicker and no color sequential breakup, even at low refresh rates. A
lower refresh rate not only helps reduce power, but it also facilitates system
integration. Color sequential breakup occurs in systems such as liquid crystal
on silicon and some liquid crystal display microdisplays when red, green and
blue frames are sequentially imaged in time for the eye to combine. Since the
different color screens occur at different times, movement of the eye due to
vibration or just fast pupil movement can create color bands at each dark-light
edge, making the image unpleasant to view and making text difficult to read. For
example, the liquid crystal on silicon display needs to run at least three times
the "normal" frame rate or speed to produce color sequential images, which
wastes power and makes for a difficult technological challenge as display
resolutions increase.
Wide operating
temperature range. Our OLEDs offer much less temperature
sensitivity at both high and low temperatures than LCDs. LCDs are sluggish or
non-operative much below freezing unless heaters are added and lose contrast
above 50 degrees Celsius, while our OLEDs turn on instantly and can operate
between -55 degrees Celsius and 130 degrees Celsius. We specify a smaller
temperature range on most consumer products to accommodate lower cost packaging.
This is an important characteristic for many portable products that may be used
outdoors in many varying environmental conditions. It is especially important
for military customers. Insensitivity to vibration, shock, and pressure are also
important environmental control attributes.
Complementary lens and system
technologies. We have developed a wide range of technologies
which complement our core OLED and lens technologies and which will enhance our
competitive position in the microdisplay and head-wearable display markets.
These include:
Lens technology. High
quality, large view lenses with a wide range for eye positioning are essential
for using our displays in near-eye systems. We have developed advanced lens
technology for microdisplays and personal head-wearable display systems and hold
key patents in these areas. Our lens technology permits our OLED-on-silicon
microdisplays to provide large field of view images that can be viewed for
extended periods with reduced eye-fatigue. We have engaged a firm to manufacture
our lenses in order to provide them in larger quantities to our customers and
are using them in our own personal display systems.
We
believe that the key advantages of our lens technology include:
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Can
be very low cost, with minimal assembly. A one piece, molded plastic optic
attached to the microdisplay has been introduced and may potentially serve
consumer end-product markets. Since our process is plastic molding, our
per unit production costs are low;
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Allows
a compact and lightweight lens system that can greatly magnify a
microdisplay to produce a large field of view. For example, our WF05 prism
lens, in combination with our SVGA OLED microdisplay, provides a virtual
view equivalent to that of a 105-inch diagonal display viewed at 12
feet;
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Can
use single-piece molded microdisplay lenses to permit high light
throughput making the display image brighter or permitting the use of less
power for an acceptable brightness;
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Can
be designed to provide focusing to enable users with various eyesight
qualities to view images clearly;
and
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Can
optionally provide focal plane adjustment for simultaneous focusing of
computer images and real world objects. For example, this characteristic
is beneficial for word processing or spreadsheet applications where a
person is typing data in from reference material. This feature can make it
easier for people with moderately poor accommodation to use a
head-wearable display as a portable computer-viewing
accessory.
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Personal display system
technology. We have developed ergonomic technologies that make
head-wearable displays easier to use in a wide variety of applications. For
example, the use of our patented rotatable Eyeblocker(TM) provides a sharp image
without requiring most users to squint. The Eyeblocker can also be moved to
create an effective see-through appearance. To our knowledge, we have made the
lightest weight, high-resolution head-wearable display with an over 35 degree
diagonal field of view ever publicly demonstrated. We have also incorporated low
cost, small size, high speed headtrackers to further enhance game and
telepresence applications.
Sales
and Marketing
We
primarily provide display components for OEMs to incorporate into their branded
products and sell through their own well-established distribution channels. In
addition, we market head-wearable displays directly to various vertical market
channels, such as medical, industrial, and government customers. A typical buyer
is a manufacturer of a product requiring a specific resolution of visual display
or viewfinder for insertion into a product such as a portable DVD headset, a
PC-gaming headset, or an instrument.
We market
our services in North America, Asia, and Europe primarily through direct
technical sales from our headquarters. Regular purchase orders are processed by
our customer service coordinators and technical questions related to product
purchases or product applications are processed by our technical support team.
As a market-driven company, we assess customer needs both quantitatively and
qualitatively, through market research and direct communications. Because our
microdisplays are the main functional component that defines many of our
customers' end products, we work closely with potential customers to define our
products to optimize the final design, typically on a senior
engineer-to-engineer basis. Our personal display systems are sold through select
value-added resellers and on-line through PC Mall, Google Checkout, and our
e-commerce site, www.3dvisor.com.
We
identify companies with end products and applications for which we believe that
our products will provide a system level solution and for which our products can
be a key differentiator. We target both market leaders and select early adopter
companies; their acceptance validates our technology and approach in the market.
We believe successful marketing will require relationships with recognized
consumer brand companies.
Near term
sales efforts for OLED microdisplays have been focused on our military,
industrial, and medical customers. We have received production orders and design
wins for both the SVGA+ and SVGA 3D displays. To date, we have shipped products
and evaluation kits to more than 200 OEM customers. An OEM design cycle
typically requires between 6 and 36 months, depending on the uniqueness of the
market and the complexity of the end product. New product development may
require several design iterations prior to commercialization. Some of our
initial customers have completed their initial evaluation cycle and we continue
to receive follow-on orders and notification of product purchase decisions. (See
"Our Market Opportunity: Military; Commercial, Industrial, and Medical; and
Consumer")
Customers
Customers
for our products include both large multinational and smaller OEMs. We maintain
relationships with OEMs in a diverse range of industries encompassing the
military, industrial, medical, and consumer market sectors. During 2007, 51% of
our net revenue was to firms based in the United States and 49% was to
international firms as compared to 59% domestic revenue and 41% international
revenue during 2006. In 2007, we had 10 customers that accounted for
more than 54% of our total revenue as compared to 5 customers that accounted for
more than 68% of our total revenue in 2006. In 2007, we did not have any
customers that accounted for more than 10% of our total revenue as compared to
2006, when we had one customer that accounted for 13% of our total
revenues.
Backlog
As of
March 14, 2008, we had a backlog of approximately $7.3 million for purchases
through December 31, 2008. This backlog consists of purchase orders and purchase
agreements but does not include expected revenue from R&D contracts or
expected NRE (non-recurring engineering) programs under
development.
The
majority of our backlog consists of purchase agreements for delivery over the
next 12 months. Most purchase orders are subject to rescheduling or cancellation
by the customer with no or limited penalties. Because of the possibility of
customer changes in delivery schedules or cancellations and potential delays in
product shipments, our backlog as of a particular date may not be indicative of
net sales for any succeeding period. Some customers have experienced delays in
their expected product launch schedules due to their own product development
delays not directly related to our microdisplays, such as development of custom
optics or other aspects of their end product, or by delays in government
programs contracted to them.
Research
and Development
Near-to-the-eye
virtual imaging and OLED technology are relatively new technologies that have
considerable room for substantial improvements in luminance, life, power
efficiency, voltage swing, design compactness, field of view, optical range of
visibility, headtracking options, wireless control and many other parameters. We
anticipate that achieving reductions in manufacturing costs will require new
technology developments. We also anticipate that improving the performance,
capability and cost of our products will provide an important competitive
advantage in our fast moving, high technology marketplace. Past and current
research activities include development of improved OLED and display device
structures, developing and/or evaluating new materials (including the synthesis
of new organic molecules), manufacturing equipment and process development,
electronics design methodologies and new circuits and the development of new
lenses and related systems. In 2007, we spent approximately $2.9 million on
research and development. In 2007 we continued to research more efficient
materials and processes. We also completed the primary designs of our new
smaller display, the SVGA 3DS, as well as the design of the SXGA.
External
relationships play an important role in our research and development efforts.
Suppliers, equipment vendors, government organizations, contract research
groups, external design companies, customer and corporate partners, consortia,
and university relationships all enhance the overall research and development
effort and bring us new ideas (See "Strategic Relationships").
U.S.
Government-Funded Research
We have
entered into several U.S. government contracts to fund a portion of our efforts
to develop next-generation OLED technologies for a variety of applications.
These include, among others, Small Business Innovation Research (SBIR) Phase II
program contracts for continued research and development and the fabrication of
prototypes. On contracts for which we are the prime contractor, we subcontract
portions of the work to various entities and institutions, including the
University of Michigan. Our recent government contracts include the
following:
OLED Performance and Reliability
Improvement for Active Matrix OLED Microdisplays. Armed forces as well as
other security related agencies are relying increasingly on the benefits of OLED
technology in active matrix microdisplays. Applications range from night vision
thermal imaging to tactical awareness and communication systems to
weapons-mounted sights, among others. As the systems capabilities are expanded,
the need for higher brightness and ability to display static imagery such as
maps and drawings is growing, placing higher demands on the OLED technology. In
2007 eMagin was awarded a contract managed by the Night Vision Electronic
Sensors Directorate (NVESD) with funding by the Department of Defense
Appropriations Bill. The objective of the program is to improve on the present
performance of the microdisplay-based OLED technology from lifetime, efficiency
and reliability standpoints. For 2007, we received approximately $360
thousand of the $1.12 million program. The FY 2008 Department of Defense
Appropriations Bill has provided for continuation of a second phase of the
program
Organic Light Emitting Diode (OLED)
Display Technology for Military Aircraft. In 2007 we continued our
efforts to develop a robust thin film encapsulation technique for OLED displays
under a Small Business Technology Transfer (STTR) program from the US Navy.
University of Michigan, Ann Arbor, MI is the university partner for this STTR.
Many new schemes to encapsulate OLED devices with thin film techniques were
developed, evaluated and tested under accelerated environmental condition. The
contract expired on February 29, 2008. For 2007 we received
approximately $328 thousand in funding under this
program.
Ultra High Resolution Display for
Army Medicine.
In 2007 we formally initiated efforts on a multiple year program under contract
with the US Army TATRC (Telemedicine and Advanced Technologies Research Center)
with funding provided by the FY 2006 and 2007 Department of Defense
Appropriations Bills. The culmination of this multiple year effort will provide
an ultra-high resolution, wide field of view display system suitable for
dual-use application within Army medicine, U.S. military simulation and
training, and commercial uses. We received approximately $698 thousand in
funding during 2007 under this contract and expect to receive approximately $2
million during 2008.
High Dynamic Range Microdisplay
Feasibility Study. The US Army/RDECOM/NVESD and eMagin Corporation have
established a CRADA (Cooperative Research and Development Agreement) with the
goal of evaluating and characterizing new and existing AMOLED microdisplay
configurations with an emphasis on the usable lifetime of the displays. This
work is aimed at developing AMOLED microdisplays capable of being fielded in a
wide range of US Army applications. The effort is for a 3 month period and is a
feasibility study aimed at evaluating several concepts leading to a higher
dynamic range without changing the existing pixel driver design of the
microdisplays. If successful, a second phase can be considered addressing a
complete high dynamic range OLED microdisplay. The total program cost for the 3
month program is approximately $236 thousand. The program started on March
14, 2008.
Manufacturing
Facilities
We are
located at IBM's Microelectronics Division facility, known as the Hudson Valley
Research Park, located about 70 miles north of New York City in Hopewell
Junction, New York. We lease approximately 33,000 square feet of space which
houses our own equipment for OLED microdisplay fabrication and research and
development, includes a 16,300 square foot class 10 clean room space, additional
lower level clean room space, assembly space and administrative
offices.
Facilities
services provided by IBM include our clean room, pure gases, high purity
de-ionized water, compressed air, chilled water systems, and waste disposal
support. This infrastructure provided by our lease with IBM provides us with
many of the resources of a larger corporation without the added overhead costs.
It further allows us to focus our resources more efficiently on our product
development and manufacturing goals.
We lease
additional non-clean room facilities for chemical mixing, cleaning, chemical
systems, and glass/silicon cutting. OLED chemicals can be purified in our
facility with our own equipment, permitting the company to evaluate new
chemicals in pilot production that are not yet available in suitable purity for
OLED applications on the market.
Our
display fabrication process starts with the silicon wafer, which is manufactured
by a semiconductor foundry using conventional CMOS process. After a device is
designed by a combination of internal and external designers with customer
participation, we outsource wafer fabrication.
Our
manufacturing process for OLED-on-silicon microdisplays has three main
components: organic film deposition, organic film encapsulation (also known as
sealing), and color filter processing. All steps are performed in
semi-automated, hands-free environment suitable for high volume throughput. An
automated cluster tool provides all OLED deposition steps in a highly controlled
environment that is the centerpiece of our OLED fabrication. After wafer
processing, each part is inspected using an automated inspection system, prior
to shipment. We have electrical and optical instrumentation required to
characterize the performance of our displays including photometric and color
coordinate analysis. We are also equipped for integrated circuit and electronics
design and display testing.
We also
lease a facility in Bellevue, Washington where we operate our system development
effort and business development activities. The facilities are well suited for
designing and building limited volume prototypes and small quantity industrial
or government products. Cables and electronic interfaces have recently been
produced to permit our OEM customers to more rapidly create products and shorten
their time-to-market. We plan to outsource medium to high volume subsystem
production to low cost plastics, lenses, and assembly manufacturers. We are
currently using domestic and international outside manufacturers and we are
investigating new outsource opportunities.
We
believe that manufacturing efficiency is an important factor for success in the
consumer markets. We believe that high yield and maximum utilization of our
equipment set will be key for profitability. The equipment required for initial
profitable production is in place. Some equipment will be added when our
production volume increases or as needed.
Intellectual
Property
We have
developed a significant intellectual property portfolio of patents, trade
secrets and know-how, supported by our license from Eastman Kodak and our
current patent portfolio.
Our
license from Eastman Kodak gives us the right to use in miniature displays a
portfolio in organic light emitting diode and optics technology, some of which
are fundamental. Our agreement with Eastman Kodak provides for perpetual access
to the OLED technology for our OLED-on-silicon applications, provided we remain
active in the field and meet our contractual requirements to Eastman Kodak. We
also generate intellectual property as a result of our internal research and
development activities.
Our
patents and patent applications cover a wide range of materials, device
structures, processes, and fabrication techniques, such as methods of
fabricating full color OLEDs. We believe that our patent applications relating
to up-emitting structures on opaque substrates such as silicon wafers, which are
critical for OLED microdisplays, and applications relating to the hermetic
sealing of such structures are particularly important.
Our
patents are concentrated in the following areas:
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OLED
Materials, Structures, and
Processes;
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Display
Color Processing and Sealing;
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Active
Matrix Circuit Methodologies and
Designs;
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Field
Emission and General Display
Technologies;
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Lenses
and Tracking (Eye and Head);
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Ergonomics
and Industrial Design; and
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Wearable
Computer Interface Methodology
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We also
rely on proprietary processes, trade secrets, and know-how related to OLED
technologies and materials which are not patented. To protect this information
and know-how from unauthorized use or disclosure,, we require all employees, and
where appropriate, contractors, consultants, advisors and collaborators to enter
into confidentiality and non-competition agreements, . There can be no
assurance, however, that these agreements will provide meaningful protection for
our trade secrets, know-how or other proprietary information in the event of any
unauthorized use, misappropriation or disclosure of such trade secrets, know-how
or other proprietary information.
We
believe that our intellectual property portfolio, coupled with our strategic
relationships and accumulated experience in the OLED field, gives us an
advantage over potential competitors.
Competition
The industry in which we
operate is highly competitive. We may face competition from legacy technologies
such as CRTs as well as from alternative flat panel display technologies. We
believe that our key competition will come from liquid crystal on silicon
microdisplays, or LCOS, also known as reflective liquid crystal displays and
small transmissive LCDs. While we believe that OLED-on-silicon has the
capability to provide higher quality image quality images, greater
environmental ruggedness, reduced electronics cost and complexity, and improved
power efficiency advantages over either type of liquid crystal based
microdisplays, there is no assurance that these benefits will be fully realized
or that liquid crystal manufacturers will not suitably improve these parameters
to reduce these potential advantages of OLEDs.
Most companies pursuing
liquid crystal on silicon technology, such as Syntax/Brillian
Corporation, among others, have primarily focused on projection
microdisplays, which do not compete directly with us.
In most near-to-the-eye imaging markets, we face more serious
competition from developers of transmissive liquid crystal displays, such as
those developed by Kopin, or possibly laser scanning systems, such as those
developed by Microvision Corporation. Large amounts of investment in a
intrinsically weaker technology can potentially overcome advantages of one
technology over another.
To our knowledge, the only
other company that has publicly stated plans to develop OLED microdisplays for
near-eye applications is MicroEmissive Displays (MED) in Britain. MED has
raised substantial funds and created a newer facility than ours. This
competition has not been significant to date, but could become more serious if
they enter our markets with directly relevant display designs and resolve
their manufacturing and reliability-lifetime issues.
We may also compete with
potential licensees of Universal Display Corporation, Eastman Kodak, or
Sumitomo Corporation and other companies, each of which potentially can license
OLED technology portfolios. Even though we could also potentially license
technology from these developers, potential competitors could also obtain such
licenses and may do so at more favorable royalty rates or allocate more
resources to the competitive effort than we could obtain. However, should they
decide to embark on developing microdisplays on silicon, we believe that our
progress to date in this area gives us a substantial head
start.
Employees
As of
March 14, 2008, we had a total of 65 full time and part time staff. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.
Subsequent
Events
On
January 30, 2008 the Moriah Agreement (as defined below) was
amended and restated (a) to provide Borrowing Base eligibility for
Foreign Accounts at 70 percent of the accounts receivable balance so long as the
individual account has not experienced a past due history during the previous
two years, (b) to amend the note agreement to eliminate the optional conversion
of principal up to $2.0 million of principal into common stock at a price of
$1.50 per share in lieu of issuance of a warrant to purchase 750,000 shares of
the Company’s commons stock at a price of $1.50 per share with an expiration
date of January 29, 2013, and (c) to amend the Company’s share registration
obligation to complete the filing of a registration statement within thirty days
of the execution of the amendment.
On March
25, 2008 the Moriah Agreement was again amended (the “Moriah Amendment”) to
provide certain waivers, as described below, and a further extension of the
period during which the Company is obligated to file a registration statement
including shares issued or to be issued in connection with the Moriah
Agreement. The Moriah Agreement, as amended, has specific terms to
which the Company must comply including (a) maintaining a lockbox account into
which payments from related accounts receivable must be deposited, (b) periodic
certifications as to borrowing base amounts equaling or exceeding net balances
outstanding under the Line of Credit, and (c) a requirement that a registration
statement with respect to shares held or to be issued to the lender be filed
within thirty days of January 30, 2008. A delay in establishing the
required lockbox account created a technical default under the Line of Credit
agreement. Similarly, the production and subsequent discovery of
defective displays resulted in an inadvertent overstatement of inventory during
December 2007, January 2008 and early February 2008 that created a technical
default under the agreement. Finally, the Company was not able to
complete the registration of shares within the thirty day timeframe mandated in
the amended agreement. Pursuant to the March Amendment, Moriah
waived: (a) the lockbox account requirement through March 14, 2008,
(b) compliance with the borrowing base requirement in so far as it related
exclusively to the defective displays inadvertently included in inventory and
(c) also extended the period for filing a registration statement for certain
shares issued or to be issued to the lender until April 29, 2008.
On April
2, 2008, the Company completed a private placement of its common stock with
several institutional investors for gross proceeds of $1,650,000. The
transaction involved the sale of 1,586,539 shares of common stock at $1.04 per
share, or the 5-day average closing price of the Company’s common stock on the
trading days immediately preceding the closing date. The Company also
issued to the investors 793,273 warrants to buy our common stock at a price of
$1.30 per share. Pursuant to the transaction, the Company is
obligated to file a registration statement for the shares issued as well as
shares underlying the warrants by May 17, 2008.
ITEM
1A. RISK FACTORS
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 $199 million as of December 31, 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 including markets development, sales and
marketing, manufacturing equipment, acquisitions, 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 expected to experience significant revenue growth
during the year ended December 31, 2008. We anticipate that our cash
requirements to fund 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.
We
may be subject to fines, sanctions, and/or penalties of an indeterminable nature
as a result of potential violations of federal securities laws.
In July
2006, we entered into a Note Purchase Agreement with Stillwater LLC, which
provided for the purchase and sale of a 6% senior secured convertible note in
principal amount of up to $500,000 (the “Stillwater Note”) and a warrant to
purchase 70% percent of the number of shares issuable upon conversion of the
Stillwater Note, at our sole discretion by delivery of a notice to Stillwater on
December 14, 2006. We then filed a registration statement on Form S-3
to register the resale by Stillwater of up to 41,088,445 shares of our common
stock. In July 2007, we amended the agreements with
Stillwater. Amending the Stillwater agreements without first
withdrawing the Registration Statement on Form S-3 may be inconsistent with
Section 5 of the Securities Act of 1933, as amended, and we may be subject to
fines, sanctions and/or penalties of an indeterminable nature as a result of
potential violations of federal securities laws. If we are assessed
fines and penalties our business will be materially affected.
The
issuance of shares of common stock in connection with the conversion of the
Notes may have not have been in compliance with certain state and federal
securities laws and any damages that we may have to pay as a result of such
issuance could have a material adverse effect on our revenues, profits, results
of operations, financial condition and future prospects.
Our
independent registered public accounting firm has expressed substantial doubt
about our ability to continue as a going concern, which may hinder our ability
to obtain future financing.
Our
consolidated financial statements as of December 31, 2007 have been prepared
under the assumption that we will continue as a going concern for the year
ending December 31, 2008. Our independent registered public accounting firm has
issued a report dated April 9, 2008 that included an explanatory paragraph
expressing substantial doubt as to our ability to continue as a going concern
without additional capital or financing becoming available. Our ability to
continue as a going concern ultimately depends on our ability to generate a
profit which is likely dependent 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 because 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. On April 30, 2007, the
U.S. Supreme Court, in KSR
International Co. vs. Teleflex, Inc., mandated a more expansive and
flexible approach towards a determination as to whether a patent is obvious and
invalid, which may make it more difficult for patent holders to secure or
maintain existing patents. 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:
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our
success in designing, manufacturing and delivering expected new products,
including those implementing new technologies on a timely
basis;
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our
ability to address the needs of our customers and the quality of our
customer services;
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the
quality, performance, reliability, features, ease of use and pricing of
our products;
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successful
expansion of our manufacturing
capabilities;
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our
efficiency of production, and ability to manufacture and ship products on
time;
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the
rate at which original equipment manufacturing customers incorporate our
product solutions into their own
products;
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the
market acceptance of our customers' products;
and
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product
or technology introductions by our
competitors.
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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 may be
cyclical.
Our
business strategy is dependent on OEM manufacturers building and selling
products that incorporate our OLED displays as components into those products.
Industry-wide fluctuations and downturns in the demand for flat panel displays
could cause significant harm to our business. 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 often with a duration of
between one and three years. 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, that we will
have the resources to fund the expenditures necessary to implement certain
cost-saving measures, or 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 attracting
and retaining 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.
The
ineffectiveness of our internal control over financial reporting could result in
a loss of investor confidence in our financial reports and have an adverse
effect on our stock price.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), and the rules
and regulations promulgated by the SEC to implement Section 404, we are required
to include in our Form 10-K an annual report by our management regarding the
effectiveness of our internal control over financial reporting. The
report includes, among other things, an assessment of the effectiveness of our
internal control over financial reporting as of the end of our fiscal
year. This assessment must include disclosure of any material
weaknesses in our internal control over financial reporting identified by
management.
As of
December 31, 2007, our internal control over financial reporting was ineffective
due to the presence of material weaknesses, as more fully described in Item 9A
of this Form 10-K. This could result in a loss of investor confidence
in the accuracy and completeness of our financial reports, which may have an
adverse effect on our stock price.
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 $7.3 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 foreign entities. Some customers in other countries have
longer receivable periods or warranty periods. In addition, many of the foreign
OEMs that are the most likely long-term purchasers of our microdisplays expose
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 March 14, 2008, we have outstanding (i) options to purchase
904,323 shares and (ii) warrants to purchase 9,090,509 shares of common
stock.
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
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
Our
corporate offices are located in Bellevue, Washington. Our Washington
location includes administrative, finance, operations, research and development
and sales and marketing functions and consists of leased space of approximately
19,000 square feet. The lease expires in 2009. Our
manufacturing facility is located in Hopewell Junction, New York, where we lease
approximately 33,000 square feet from IBM. The NY facility houses our
equipment for OLED microdisplay fabrication, assembly operations, research and
development, and administrative functions. The lease expires in
2009. We believe our facilities are adequate for our current and
near-term needs. See Note 12 to our Consolidated Financial Statement
for more information about our lease commitments.
On
December 6, 2005, New York State Urban Development Corporation commenced action
against eMagin in the Supreme Court of the State of New York, County of New York
against eMagin, asserting breach of contract and seeking to recover a $150,000
grant which was made to eMagin based on goals set forth in the agreement for
recruitment of employees. On July 13, 2006, eMagin agreed to a
settlement with the New York State Urban Development Corporation to repay
$112,200 of the $150,000 grant. The settlement requires that repayments be made
on a monthly basis in the amount of $3,116.67 per month commencing August 1,
2006 and ending on July 1, 2009.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our
common stock is traded on the OTC Bulletin Board under the symbol
"EMAN". The following table sets forth the range of high and low
prices per share of our common stock for each period indicated.
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2006
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2007
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High
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Low
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High
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Low
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|
|
|
|
|
|
|
First
quarter
|
|
$ |
7.10 |
|
|
$ |
4.60 |
|
|
$ |
1.08 |
|
|
$ |
0.26 |
|
|
Second
quarter
|
|
$ |
5.70 |
|
|
$ |
2.50 |
|
|
$ |
0.85 |
|
|
$ |
0.42 |
|
|
Third
quarter
|
|
$ |
3.80 |
|
|
$ |
1.80 |
|
|
$ |
1.64 |
|
|
$ |
0.65 |
|
|
Fourth
quarter
|
|
$ |
2.50 |
|
|
$ |
1.01 |
|
|
$ |
1.75 |
|
|
$ |
0.85 |
|
As of
March 14, 2008, there were 497 holders of record of our common stock. Because
brokers and other institutions hold many of the shares on behalf of
shareholders, we are unable to determine the actual number of shareholders
represented by these record holders.
Dividends
We have
never declared or paid cash dividends on our common stock. We currently
anticipate that we will retain all future earnings to fund the operation of our
business and do not anticipate paying dividends on our common stock in the
foreseeable future.
Recent
Issuances of Unregistered Stock
On April
2, 2008, eMagin Corporation (the “Company”) entered into a Securities Purchase
Agreement, pursuant to which it sold to certain qualified institutional buyers
and accredited investors an aggregate of 1,586,539 shares of the Company’s
common stock, par value $0.001 per share, and warrants to purchase an additional
793,273 shares of common stock, for an aggregate purchase price of $1,650,000.
The purchase price of the common stock was $1.04 per share and the strike price
of the corresponding warrant was $1.30 per share. The warrants expire April 2,
2013.
The
Company and Moriah Capital, L.P. (“Moriah”) entered into Amendment No. 2 to the
Loan and Security Agreement dated as of March 25, 2008 (the “Second
Amendment”). Pursuant to the Second Amendment, Moriah waived the
Company’s noncompliance with Sections 7.2, 7.3, 8.11, 9.1, 9.3, 9.5(c) and 11.5
of the Loan and Security Agreement to the extent such noncompliance resulted
solely from the Company’s inadvertently misstating the amount of its inventory
that contained defective parts (the “Defective Inventory Count”), provided that
on or before April 8, 2008 the Company repays Moriah all prior Advances (as
defined in the Loan and Security Agreement), which exceed the Maximum Credit (as
defined in the Loan and Security Agreement) if any, as a result of the Defective
Inventory Count.
Pursuant
to the Second Amendment, the Company has advised Moriah of certain delays
in implementing the Lockbox Agreement, as required under the Loan and
Security Agreement, which, if unwaived, would result in the Company’s
noncompliance with section 2.1(f) of the Loan and Security Agreement and with
Section 3 of the Post-Closing Agreement between the Company and Moriah, dated
August 7, 2007. Moriah agreed to waive noncompliance with Sections
2.1(f) of the Loan and Security Agreement and Section 3 of the Post-Closing
Agreement in reliance on the Company’s representation and warranty that all
lockbox arrangements required to be implemented under Section 2.1(f) of the Loan
and Security Agreement and under Section 3 of the Post-Closing Agreement have
been consummated and are in full force and effect as of March 12,
2008.
On
January 30, 2008, the Company and Moriah entered into a Warrant Issuance
Agreement (the “Warrant Issuance Agreement”). The Company and Moriah
entered into Amendment No. 1 to the Warrant Issuance Agreement. Pursuant to the
Amendment No. 1 to Warrant Issuance Agreement, the Company issued Moriah a
Warrant to purchase 250,000 shares of the Company’s common stock at an exercise
price of $1.50 per share until March 25, 2013 (the “March 2008 Warrant”).
Pursuant to the Amendment No. 1 to the Warrant Issuance Agreement, Section 3.2
of the Warrant Issuance Agreement was amended to provide that the Company has to
file by April 29, 2008 a registration statement with the Securities and Exchange
Commission to register 1,000,000 shares of the Company’s common stock issuable
upon exercise of warrants issued to Moriah (including the March 2008 Warrant and
a warrant to purchase 750,000 shares of the Common Stock which was previously
issued to Moriah).
The
Company entered into agreements, effective as of August 7, 2007 with Moriah,
pursuant to which the Company may borrow an amount not to exceed
$2,500,000. Such funds may be drawn down by the Company in tranches
of at least $25,000 up to five times each month. In connection with the
transaction, the Company issued, executed and delivered to Moriah a Secured
Convertible Revolving Loan Note (the “Moriah Agreement”) with a principal amount
not to exceed $2,500,000, of which up to $2,000,000 is convertible into up to
1,333,333 shares (at a conversion price of $1.50 per share), and a Securities
Issuance Agreement pursuant to which the Company issued 162,500 shares of its
common stock, which shares had an aggregate market value at the Closing Date of
$195,000.
On July
23, 2007, we entered into Amendment 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 March
28, 2007, we entered into an amendment of the Note Purchase Agreement (the
“Stillwater Note Purchase Agreement”) for the sale of $500 thousand of senior
secured debentures (the “Stillwater Note”) and warrants to purchase
approximately 1.0 million shares of common stock, par value $.001 per share. The
investor purchased the Stillwater Note with a conversion price of $0.35 per
share that may convert into approximately 1.4 million shares of common stock and
warrants exercisable at $0.48 per share into approximately 1.0 million shares of
common stock expiring in 4.2 years. On April 9, 2007, we closed the transaction
and received approximately $460 thousand, net of offering costs of approximately
$40 thousand which are amortized over the life of the Stillwater
Note. On July 23, 2007, Stillwater 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 remaining principal
amount was amended on July 23, 2007 to an Amended Note as referred to
above.
The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”. The
statements of operations data for the years ended December 31, 2007, 2006, and
2005 and the balance sheet data at December 31, 2007 and 2006 are derived from
our audited financial statements which are included elsewhere in this Form
10-K. The statement of operations
data for the year ended December 31, 2004 and 2003 and the balance sheet data at
December 31, 2005, 2004 and 2003 are derived from our audited financial
statements which are not included in this Form 10-K. The
historical results are not necessarily indicative of results to be expected for
future periods. The following information is presented in thousands, except per
share data.
Consolidated
Statements of Operations Data:
|
|
|
For
the Year Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
17,554 |
|
|
$ |
8,169 |
|
|
$ |
3,745 |
|
|
$ |
3,593 |
|
|
$ |
2,578 |
|
|
Cost
of goods sold
|
|
|
12,628 |
|
|
|
11,359 |
|
|
|
10,219 |
|
|
|
5,966 |
|
|
|
5,141 |
|
|
Gross
profit (loss)
|
|
|
4,926 |
|
|
|
(3,190 |
) |
|
|
(6,474 |
) |
|
|
(2,373 |
) |
|
|
(2,563 |
) |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
2,949 |
|
|
|
4,406 |
|
|
|
4,020 |
|
|
|
898 |
|
|
|
19 |
|
|
Selling,
general and administrative
|
|
|
6,591 |
|
|
|
8,860 |
|
|
|
6,316 |
|
|
|
4,428 |
|
|
|
5,712 |
|
|
Total
operating expenses
|
|
|
9,540 |
|
|
|
13,266 |
|
|
|
10,336 |
|
|
|
5,326 |
|
|
|
5,731 |
|
|
Loss
from operations
|
|
|
(4,614 |
) |
|
|
(16,456 |
) |
|
|
(16,810 |
) |
|
|
(7,699 |
) |
|
|
(8,294 |
) |
|
Other
(expense) income, net
|
|
|
(13,874 |
) |
|
|
1,190 |
|
|
|
282 |
|
|
|
(5,012 |
) |
|
|
3,571 |
|
|
Net
loss
|
|
$ |
(18,488 |
) |
|
$ |
(15,266 |
) |
|
$ |
(16,528 |
) |
|
$ |
(12,711 |
) |
|
$ |
(4,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$ |
(1.59 |
) |
|
$ |
(1.52 |
) |
|
$ |
(1.94 |
) |
|
$ |
(1.98 |
) |
|
$ |
(1.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in calculation of loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
11,633 |
|
|
|
10,058 |
|
|
|
8,541 |
|
|
|
6,428 |
|
|
|
3,599 |
|
Consolidated
Balance Sheet Data:
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Cash
and cash equivalents
|
|
$ |
713 |
|
|
$ |
1,415 |
|
|
$ |
6,727 |
|
|
$ |
13,457 |
|
|
$ |
1,054 |
|
|
Working
capital (deficit)
|
|
$ |
(4,708 |
) |
|
$ |
(305 |
) |
|
$ |
8,868 |
|
|
$ |
14,925 |
|
|
$ |
106 |
|
|
Total
assets
|
|
$ |
6,648 |
|
|
$ |
7,005 |
|
|
$ |
14,142 |
|
|
$ |
18,436 |
|
|
$ |
3,749 |
|
|
Long-term
obligations
|
|
$ |
60 |
|
|
$ |
2,229 |
|
|
$ |
56 |
|
|
$ |
22 |
|
|
$ |
6,161 |
|
|
Total
Shareholders’ (capital deficit) equity
|
|
$ |
(3,975 |
) |
|
$ |
(1,164 |
) |
|
$ |
10,401 |
|
|
$ |
16,447 |
|
|
$ |
(4,767 |
) |
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Introduction
The
following discussion should be read in conjunction with the Financial Statements
and Notes thereto. Our fiscal year ends December 31. This document contains
certain forward-looking statements including, among others, anticipated trends
in our financial condition and results of operations and our business strategy.
(See Part I, Item 1A, "Risk Factors "). These forward-looking statements are
based largely on our current expectations and are subject to a number of risks
and uncertainties. Actual results could differ materially from these
forward-looking statements. Important factors to consider in evaluating such
forward-looking statements include (i) changes in external factors or in our
internal budgeting process which might impact trends in our results of
operations; (ii) unanticipated working capital or other cash requirements; (iii)
changes in our business strategy or an inability to execute our strategy due to
unanticipated changes in the industries in which we operate; and (iv) various
competitive market factors that may prevent us from competing successfully in
the marketplace.
Overview
We design
and manufacture miniature displays, which we refer to as
OLED-on-silicon-microdisplays, and microdisplay modules for virtual imaging,
primarily for incorporation into the products of other manufacturers.
Microdisplays are typically smaller than many postage stamps, but when viewed
through a magnifier they can contain all of the information appearing on a
high-resolution personal computer screen. Our microdisplays use organic light
emitting diodes, or OLEDs, which emit light themselves when a current is passed
through the device. Our technology permits OLEDs to be coated onto silicon chips
to produce high resolution OLED-on-silicon microdisplays.
We
believe that our OLED-on-silicon microdisplays offer a number of advantages in
near to the eye applications over other current microdisplay technologies,
including lower power requirements, less weight, fast video speed without
flicker, and wider viewing angles. In addition, many computer and video
electronic system functions can be built directly into the OLED-on-silicon
microdisplay, resulting in compact systems with lower expected overall system
costs relative to alternate microdisplay technologies.
Since our
inception in 1996 through 2004, we derived the majority of our revenues from
fees paid to us under research and development contracts, primarily with the
U.S. federal government. We have devoted significant resources to the
development and commercial launch of our products. We commenced limited initial
sales of our SVGA+ microdisplay in May 2001 and commenced shipping samples of
our SVGA-3D microdisplay in February 2002. From inception to December 31, 2007,
we have recognized an aggregate of approximately $35.7 million from sales of our
products, and as of March 14, 2008, we have a backlog of approximately $7.3
million in products ordered for delivery through December 31, 2008. These
products are being applied or considered for near-eye and headset applications
in products such as entertainment and gaming headsets, handheld Internet and
telecommunication appliances, viewfinders, and wearable computers to be
manufactured by original equipment manufacturer (OEM) customers. We have also
shipped a limited number of our Z800 3DVisor personal display systems. In
addition to marketing OLED-on-silicon microdisplays as components, we also offer
microdisplays as an integrated package, which we call Microviewer that includes
a compact lens for viewing the microdisplay and electronic interfaces to convert
the signal from our customer's product into a viewable image on the
microdisplay. We are also developing head-wearable displays, including our Z800
3DVisor that incorporate our Microviewer.
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 that we are the only company to demonstrate publicly and market
full-color small molecule OLED-on-silicon microdisplays.
Company
History
Historically,
we have been a developmental stage company. As of January 1, 2003, we were no
longer classified as a development stage company. We have transitioned to
manufacturing our product and intend to significantly increase our marketing,
sales, and research and development efforts, and expand our operating
infrastructure. Currently, most of our operating expenses are fixed. 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
and Cost 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, 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
eMagin’s
cash, cash equivalents, accounts receivable, short-term investments, accounts
payable and debt are stated at cost which approximates fair value due to the
short-term nature of these instruments.
Stock-based
Compensation
eMagin
maintains 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 December 31, 2007, the number of shares of
common stock available for issuance was 225,000. As of December 31,
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” (“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 11 to the financial statements for a further
discussion on stock-based compensation.
Results
of Operations
The
following table presents certain financial data as a percentage of total revenue
for the periods indicated. Our historical operating results are not necessarily
indicative of the results for any future period.
|
|
|
As
a Percentage of Total Revenue
Year
Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Consolidated
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
100
|
% |
|
|
100
|
% |
|
|
100
|
% |
|
Cost
of goods
sold
|
|
|
72 |
|
|
|
139 |
|
|
|
273 |
|
|
Gross
profit (loss)
|
|
|
28 |
|
|
|
(39 |
) |
|
|
(173 |
) |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
17 |
|
|
|
54 |
|
|
|
107 |
|
|
Selling,
general and administrative
|
|
|
38 |
|
|
|
109 |
|
|
|
169 |
|
|
operating
expenses
|
|
|
55 |
|
|
|
163 |
|
|
|
276 |
|
|
Loss
from operations
|
|
|
(27 |
) |
|
|
(202 |
) |
|
|
(449 |
) |
|
Other
(expense) income
|
|
|
(78 |
) |
|
|
15 |
|
|
|
8 |
|
|
Net
loss
|
|
|
(105 |
)
% |
|
|
(187 |
)
% |
|
|
(441 |
)
% |
Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenues
Revenues
increased by approximately $9.4 million to a total of approximately $17.6
million for the year ended December 31, 2007 from approximately $8.2 million for
the year ended December 31, 2006, representing an increase of 115%. This
increase was primarily due to increased microdisplay sales and increased
availability of finished displays due to manufacturing improvements. Our
contract revenue increased approximately $1.2 million while our product revenue
increased approximately $8.2 million. Average price per unit for microdisplays
was $371 in 2007 and $386 in 2006. Our current expectation is that
revenue will continue to grow in 2008 if we successfully execute our business
plan.
Cost
of Goods Sold
Cost of
goods sold includes direct and indirect costs associated with production of our
products. Cost of goods sold for the years ended December 31, 2007 and 2006 was
approximately $12.6 million and $11.4, respectively, an increase of $1.3
million. The increase included an inventory write-off of
approximately $0.4 million and an increase in our warranty return reserve of
approximately $0.6 million, both related to a non-recurring production issue
that occurred during the fourth quarter of 2007.
The
gross profit was approximately $4.9 million for the year ended December 31, 2007
and the gross loss was approximately ($3.2) million for the year ended December
31, 2006. The gross margin was 28% for the year ended December 31,
2007 as compared to the gross loss of (39%) for the year ended December 31,
2006. The gross margin improvement was attributed to fuller
utilization of our fixed production overhead due to higher unit production
volume.
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
year ended December 31, 2007 were approximately $2.9 million as compared to
approximately $4.4 million for the year ended December 31, 2006. 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 Expenses
Selling,
general and administrative expenses consist primarily of salaries and fees for
professional services, legal fees incurred in connection with patent filings,
SEC and related matters, as well as other marketing and administrative
expenses. General and administrative expenses decreased by
approximately $2.3 million to a total of approximately $6.6 million for the year
ended December 31, 2007 from $8.9 million for the year ended December 31, 2006.
The decrease was primarily related to a reduction of marketing, tradeshow and
personnel costs.
Other
(Expense) Income
Other
(expense) income, 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
year ended December 31, 2007, interest expense was approximately $3.1 million as
compared to $1.3 million for the year ended December 31,
2006. Interest expense for 2007 consisted of interest expense
associated with debt of approximately $744 thousand; the amortization of the
deferred costs associated with debt of approximately $418 thousand; and the
amortization of the debt discount associated with the debt of approximately $1.9
million. Interest expense for the year ended December 31, 2006 was
comprised of interest associated with debt of approximately $124 thousand; the
amortization of the deferred costs associated with the notes payable of
approximately $221 thousand; and the amortization of the debt discount
associated with the debt of approximately $956 thousand.
For the
year ended December 31, 2007, the change in the derivative liability was a loss
of approximately $853 thousand as compared to a gain of approximately $2.4
million ended December 31, 2006.
The loss
on extinguishment of debt was $10.7 million for the year ended December 31, 2007
as compared to $0 for the year ended December 31, 2006. See Note 8 to the
financial statements: Debt for additional information.
Other
income for the year ended December 31, 2007 was approximately $815 thousand
which consisted of interest income of approximately $43 million, a gain on the
license of intangible assets of $869 thousand, offset by a write-off of a
miscellaneous receivable of $103 thousand, and other income of $7 thousand as
compared to $91 thousand for the year ended December 31, 2006. See
Note 12 to the financial statements: Commitments and Contingencies –
Royalties for additional information.
Off-Balance
Sheet Arrangements
We have
no 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.
Year
Ended December 31, 2006 Compared to Year Ended December 31, 2005
Revenues
Revenues
increased by approximately $4.5 million to a total of approximately $8.2 million
for the year ended December 31, 2006 from approximately $3.7 million for the
year ended December 31, 2005, representing an increase of 118%. This increase
was due to increased microdisplay demand and the broadening of our product
revenue through the sales of the Z800 3D Visor. Our contract revenue increased
approximately $150 thousand while our product revenue increased approximately
$4.3 million. Average price per unit for microdisplays was $386 in 2006 and $372
in 2005.
Cost
of Goods Sold
Cost of
goods sold includes direct and indirect costs associated with production of our
products. Cost of goods sold for the years ended December 31, 2006 and 2005 was
approximately $11.4 million and approximately $10.2, respectively, an increase
of $1.2 million. The gross loss was approximately ($3.2) million and
approximately ($6.5) million, respectively, for the years ended December 31,
2006 and 2005, respectively. The gross loss was (39%) for the year
ended December 31, 2006 as compared to (173%) for the year ended December 31,
2005. The increase in cost of goods sold for the year ended December
31, 2006 was attributed to higher materials usage to support increased
production as well as approximately $343 thousand of stock compensation expense
reflected in accordance with SFAS No. 123R in 2006. The
decrease in gross loss was attributed to fuller utilization of our fixed
production overhead due to higher unit volume.
Research
and Development Expenses
Research
and development expenses included 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 year ended December 31, 2006 were approximately $4.4 million as compared to
approximately $4.0 million for the year ended December 31, 2005. The
increase was primarily due to the stock-based compensation expense of
approximately $435 thousand in 2006.
Selling, General
and Administrative Expenses
Selling,
general and administrative expenses consist primarily 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. General and administrative expenses increased by
approximately $2.9 million to a total of approximately $8.9 million for the year
ended December 31, 2006 from $6.3 million for the year ended December 31, 2005.
The increase in selling, general and administrative expenses was due primarily
to stock-based compensation expense of approximately $2.9 million and an
increase in marketing expenses related to our Z800 3DVisor.
Other Income
(Expense)
Other
income, net consists primarily of interest income earned on investments,
interest expense related to the secured debentures, and gain from the change in
the derivative liability. For the year ended December 31, 2006,
interest income was approximately $91 thousand as compared to approximately $210
thousand for the year ended December 31, 2005. The decrease in
interest income was primarily a result of lower cash balances available for
investment. For the year ended December 31, 2006, interest expense
was approximately $1.3 million as compared to approximately $4 thousand for the
year ended December 31, 2005. The increase in the interest
expense was a result of interest associated with our notes payable of
approximately $124 thousand, the amortization of the deferred costs associated
with the notes payable of approximately $221 thousand, and the amortization of
the debt discount of approximately $956 thousand. For the year ended
December 31, 2006, income from the change in the derivative liability was
approximately $2.4 million as compared to $0 for the year ended December 31,
2005.
As of
December 31, 2007, we had approximately $0.8 million of cash and investments as
compared to $1.6 million as of December 31, 2006. The decrease of
approximately $0.8 million was due primarily to cash used for operating
activities.
For the
year ended December 31, 2007, net cash used by operating activities was
approximately $1.9 million, primarily attributable to our $18.5 million net loss
offset primarily by the non-cash expense components of loss on extinguishment of
debt of $10.7 million, stock based compensation of $1.7 million, amortization of
discount on notes payable of $1.9 million, and issuance of common stock for
services of $1.3 million. Net cash used by operating activities for
the year ended December 31, 2006 was approximately $10.4 million, primarily
attributable to our net loss of approximately $15.3 million.
For the
year ended December 31, 2007, net cash from investing activities was
approximately $61 thousand primarily related to the maturing of
investments. Net cash used by investing activities for the year ended
December 31, 2006 was approximately $257 thousand primarily related to equipment
purchases.
Net cash
provided by financing activities for the year ended December 31, 2007 was
approximately $1.2 million and was comprised primarily of approximately $1.6
million in proceeds from debt issuance and offset by payments on long-term debt
and capitalized lease obligations of approximately $63 thousand and deferred
financing costs of approximately $368 thousand. Net cash provided by
financing activities during the year ended December 31, 2006 was approximately
$5.3 million and was comprised primarily of approximately $6.0 million in
proceeds from debt issuance offset by payments on long-term debt and capitalized
lease obligations of approximately $55 thousand and deferred financing costs of
approximately $591 thousand.
Our
consolidated financial statements as of December 31, 2007 have been prepared
under the assumption that we will continue as a going concern for the year
ending December 31, 2008. Our independent registered public accounting firm has
issued a report dated April 9, 2008 that included an explanatory paragraph
expressing substantial doubt in our ability to continue as a going concern
without additional capital becoming available. Our ability to continue as a
going concern ultimately is dependent on our ability to generate a profit which
is likely dependent 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.
In
addition to the foregoing, as previously reported, we have retained CIBC World
Markets Corporation and Larkspur Capital Corporation to assist us in
investigating and evaluating various strategic alternatives, ranging from
investment to acquisition.
Contractual
Obligations
The
following chart describes the outstanding contractual obligations of eMagin as
of December 31, 2007 (in thousands):
|
|
|
Payments
due by period
|
|
|
|
|
Total
|
|
|
1
Year
|
|
|
2-3
Years
|
|
|
4-5
Years
|
|
|
Operating
lease obligations
|
|
$ |
1,982 |
|
|
$ |
1,444 |
|
|
$ |
538 |
|
|
$ |
— |
|
|
Purchase
obligations (a)
|
|
|
1,647 |
|
|
|
1,647 |
|
|
|
— |
|
|
|
— |
|
|
Other
long-term liabilities (b)
|
|
|
7,119 |
|
|
|
6,597 |
|
|
|
272 |
|
|
|
250 |
|
|
Total
|
|
$ |
10,748 |
|
|
$ |
9,688 |
|
|
$ |
810 |
|
|
$ |
250 |
|
|
|
(a)
The majority of purchase orders outstanding contain no cancellation fees
except for minor re-stocking fees.
|
|
|
(b)
This amount represents the obligation for Notes and estimated interest,
royalty payments, capitalized software and the New York Urban Development
settlement.
|
Effect
of Recently Issued Accounting Pronouncements
See Note
3 of the Consolidated Financial Statements in Item 8 for a full description of
recent accounting pronouncements, including the expected dates of adoption and
estimated effects on results of operations and financial condition.
ITEM
7A. 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.
Financial
Statement Index
|
|
|
|
|
Page
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
32
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
33
|
|
Consolidated
Statements of Operations for the years ended December 31, 2007, 2006, and
2005
|
34
|
|
Consolidated
Statements of Changes in Shareholders’ Equity (Capital Deficit) for the
years ended December
31, 2007, 2006, and 2005
|
35
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006, and
2005
|
36
|
|
Notes
to the Consolidated Financial Statements
|
37
|
Board of
Directors and Stockholders
eMagin
Corporation
We have
audited the accompanying consolidated balance sheets of eMagin Corporation (the
"Company") as of December 31, 2007 and 2006, and the related consolidated
statements of operations, shareholders' equity (capital deficit) and cash flows
for each of the three years in the period ended December 31,
2007. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of eMagin Corporation as
of December 31, 2007 and 2006, and the consolidated results of its
operations and its consolidated cash flows for each of the three years in the
period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has had recurring losses from
operations which it believes will continue, and has working capital and capital
deficits at December 31, 2007. These factors raise substantial
doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also
discussed in Note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for stock-based compensation effective
January 1, 2006.
\s\
Eisner LLP
New York,
New York
April 9,
2008
eMAGIN
CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In
thousands, except
|
|
|
|
|
share
and per share amounts)
|
|
|
ASSETS
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
713 |
|
|
$ |
1,415 |
|
|
Investments
– held to maturity
|
|
|
94 |
|
|
|
171 |
|
|
Accounts
receivable, net
|
|
|
2,383 |
|
|
|
908 |
|
|
Inventory
|
|
|
1,815 |
|
|
|
2,485 |
|
|
Prepaid
expenses and other current assets
|
|
|
850 |
|
|
|
656 |
|
|
Total
current assets
|
|
|
5,855 |
|
|
|
5,635 |
|
|
Equipment,
furniture and leasehold improvements, net
|
|
|
292 |
|
|
|
666 |
|
|
Intangible
assets, net
|
|
|
51 |
|
|
|
55 |
|
|
Other
assets
|
|
|
232 |
|
|
|
233 |
|
|
Deferred
financing costs, net
|
|
|
218 |
|
|
|
416 |
|
|
Total assets
|
|
$ |
6,648 |
|
|
$ |
7,005 |
|
| |
|
|
LIABILITIES
AND CAPITAL DEFICIT
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
620 |
|
|
$ |
1,192 |
|
|
Accrued
compensation
|
|
|
891 |
|
|
|
959 |
|
|
Other
accrued expenses
|
|
|
729 |
|
|
|
749 |
|
|
Advance
payments
|
|
|
35 |
|
|
|
444 |
|
|
Deferred
revenue
|
|
|
179 |
|
|
|
126 |
|
|
Current
portion of debt
|
|
|
7,089 |
|
|
|
1,223 |
|
|
Derivative
liability - warrants
|
|
|
— |
|
|
|
1,195 |
|
|
Other
current liabilities
|
|
|
1,020 |
|
|
|
52 |
|
|
Total current
liabilities
|
|
|
10,563 |
|
|
|
5,940 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
60 |
|
|
|
2,229 |
|
|
Total liabilities
|
|
|
10,623 |
|
|
|
8,169 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 par value: 3,198 shares designated and none
issued
|
|
|
— |
|
|
|
— |
|
|
Common
stock, $.001 par value: authorized 200,000,000 shares, issued and
outstanding, 12,620,900 shares in 2007 and 10,341,029 shares in
2006
|
|
|
12 |
|
|
|
10 |
|
|
Additional
paid in capital
|
|
|
195,326 |
|
|
|
179,651 |
|
|
Accumulated
deficit
|
|
|
(199,313 |
) |
|
|
(180,825 |
) |
|
Total capital
deficit
|
|
|
( 3,975 |
) |
|
|
( 1,164 |
) |
|
Total liabilities
and capital deficit
|
|
$ |
6,648 |
|
|
$ |
7,005 |
|
See notes to Consolidated Financial
Statements.
eMAGIN
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
For the Year Ended December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In
thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Product
revenue
|
|
$ |
16,169 |
|
|
$ |
7,983 |
|
|
$ |
3,709 |
|
|
Contract
revenue
|
|
|
1,385 |
|
|
|
186 |
|
|
|
36 |
|
|
Total
revenue, net
|
|
|
17,554 |
|
|
|
8,169 |
|
|
|
3,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
12,628 |
|
|
|
11,359 |
|
|
|
10,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
|
4,926 |
|
|
|
(3,190 |
) |
|
|
(6,474 |
) |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
2,949 |
|
|
|
4,406 |
|
|
|
4,020 |
|
|
Selling,
general and administrative
|
|
|
6,591 |
|
|
|
8,860 |
|
|
|
6,316 |
|
|
Total
operating expenses
|
|
|
9,540 |
|
|
|
13,266 |
|
|
|
10,336 |
|
|
Loss
from operations
|
|
|
(4,614 |
) |
|
|
(16,456 |
) |
|
|
(16,810 |
) |
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(3,087 |
) |
|
|
(1,306 |
) |
|
|
(4 |
) |
|
Loss
on extinguishment of debt
|
|
|
(10,749 |
) |
|
|
— |
|
|
|
— |
|
|
(Loss)
gain on warrant derivative liability
|
|
|
(853 |
) |
|
|
2,405 |
|
|
|
— |
|
|
Other
income, net
|
|
|
815 |
|
|
|
91 |
|
|
|
286 |
|
|
Total
other (expense) income, net
|
|
|
(13,874 |
) |
|
|
1,190 |
|
|
|
282 |
|
|
Net
loss
|
|
$ |
(18,488 |
) |
|
$ |
(15,266 |
) |
|
$ |
(16,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share, basic and diluted
|
|
$ |
(1.59 |
) |
|
$ |
(1.52 |
) |
|
$ |
(1.94 |
) |
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
11,633 |
|
|
|
10,058 |
|
|
|
8,541 |
|
See notes to Consolidated Financial
Statements.
eMAGIN
CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CAPITAL DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Shareholders’
Equity
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid
–in Capital
|
|
|
Deficit
|
|
|
(Capital
Deficit)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
|
7,964 |
|
|
$ |
8 |
|
|
$ |
165,471 |
|
|
$ |
(149,031 |
) |
|
$ |
16,448 |
|
|
Sale
of common stock, net of issuance costs
|
|
|
1,662 |
|
|
|
2 |
|
|
|
8,398 |
|
|
|
— |
|
|
|
8,400 |
|
|
Stock
options exercised
|
|
|
11 |
|
|
|
— |
|
|
|
37 |
|
|
|
— |
|
|
|
37 |
|
|
Exercise
of common stock warrants
|
|
|
306 |
|
|
|
— |
|
|
|
1,584 |
|
|
|
— |
|
|
|
1,584 |
|
|
Issuance
of common stock for services
|
|
|
54 |
|
|
|
— |
|
|
|
461 |
|
|
|
— |
|
|
|
460 |
|
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(16,528 |
) |
|
|
(16,528 |
) |
|
Balance,
December 31, 2005
|
|
|
9,997 |
|
|
$ |
10 |
|
|
$ |
175,950 |
|
|
$ |
(165,559 |
) |
|
$ |
10,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
to equity conversion
|
|
|
85 |
|
|
|
— |
|
|
|
220 |
|
|
|
— |
|
|
|
220 |
|
|
Issuance
of common stock for services
|
|
|
254 |
|
|
|
— |
|
|
|
580 |
|
|
|
— |
|
|
|
580 |
|
|
Stock-based
compensation
|
|
|
— |
|
|
|
— |
|
|
|
2,891 |
|
|
|
— |
|
|
|
2,891 |
|
|
Stock
options exercised
|
|
|
5 |
|
|
|
— |
|
|
|
10 |
|
|
|
— |
|
|
|
10 |
|
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15,266 |
) |
|
|
(15,266 |
) |
|
Balance,
December 31, 2006
|
|
|
10,341 |
|
|
$ |
10 |
|
|
|
179,651 |
|
|
$ |
(180,825 |
) |
|
$ |
(1,164 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
to equity conversion
|
|
|
797 |
|
|
|
1 |
|
|
|
310 |
|
|
|
— |
|
|
|
311 |
|
|
Issuance
of common stock for services
|
|
|
1,473 |
|
|
|
1 |
|
|
|
1,324 |
|
|
|
— |
|
|
|
1,325 |
|
|
Exercise
of common stock warrants
|
|
|
10 |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
|
Stock-based
compensation
|
|
|
— |
|
|
|
— |
|
|
|
1,652 |
|
|
|
— |
|
|
|
1,652 |
|
|
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
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
(18,488 |
) |
|
|
(18,488 |
) |
|
Balance,
December 31, 2007
|
|
|
12,621 |
|
|
$ |
12 |
|
|
$ |
195,326 |
|
|
$ |
(199,313 |
) |
|
$ |
(
3,975 |
) |
See notes
to Consolidated Financial Statements.
eMAGIN
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Year Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In
thousands)
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(18,488 |
) |
|
$ |
(15,266 |
) |
|
$ |
(16,528 |
) |
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
392 |
|
|
|
841 |
|
|
|
908 |
|
|
Amortization
of deferred financing fees
|
|
|
418 |
|
|
|
221 |
|
|
|
--- |
|
|
Reduction
of provision for sales returns and doubtful accounts
|
|
|
(79 |
) |
|
|
(39 |
) |
|
|
(284 |
) |
|
Stock
based compensation
|
|
|
1,652 |
|
|
|
2,891 |
|
|
|
--- |
|
|
Issuance
of common stock for services, net
|
|
|
1,325 |
|
|
|
553 |
|
|
|
470 |
|
|
Amortization
of discount on notes payable
|
|
|
1,925 |
|
|
|
956 |
|
|
|
--- |
|
|
Loss
(gain) on warrant derivative liability
|
|
|
853 |
|
|
|
(2,405 |
) |
|
|
--- |
|
|
Loss
on extinguishment of debt
|
|
|
10,749 |
|
|
|
--- |
|
|
|
--- |
|
|
Loss
on other asset
|
|
|
--- |
|
|
|
157 |
|
|
|
--- |
|
|
Write-off
of miscellaneous receivable
|
|
|
103 |
|
|
|
--- |
|
|
|
--- |
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,390 |
) |
|
|
(42 |
) |
|
|
(2 |
) |
|
Inventory
|
|
|
670 |
|
|
|
1,354 |
|
|
|
(1,821 |
) |
|
Prepaid
expenses and other current assets
|
|
|
(194 |
) |
|
|
389 |
|
|
|
(175 |
) |
|
Advance
payments
|
|
|
(409 |
) |
|
|
384 |
|
|
|
(4 |
) |
|
Deferred
revenue
|
|
|
53 |
|
|
|
30 |
|
|
|
96 |
|
|
Accounts
payable, accrued compensation, and accrued expenses
|
|
|
(381 |
) |
|
|
(566 |
) |
|
|
1,613 |
|
|
Other
current liabilities
|
|
|
858 |
|
|
|
153 |
|
|
|
14 |
|
|
Net
cash used in operating activities
|
|
|
(1,943 |
) |
|
|
(10,389 |
) |
|
|
(15,713 |
) |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(16 |
) |
|
|
(204 |
) |
|
|
(898 |
) |
|
Proceeds
from maturity of (purchase of) investments – held to
maturity
|
|
|
77 |
|
|
|
(51 |
) |
|
|
(120 |
) |
|
Purchase
of intangibles and other assets
|
|
|
--- |
|
|
|
(2 |
) |
|
|
(54 |
) |
|
Net
cash provided by (used in) investing activities
|
|
|
61 |
|
|
|
(257 |
) |
|
|
(1,072 |
) |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock, net of issuance costs
|
|
|
--- |
|
|
|
--- |
|
|
|
8,400 |
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
3 |
|
|
|
10 |
|
|
|
1,621 |
|
|
Proceeds
from long-term debt
|
|
|
1,608 |
|
|
|
5,970 |
|
|
|
50 |
|
|
Payments
related to deferred financing costs
|
|
|
(368 |
) |
|
|
(591 |
) |
|
|
--- |
|
|
Payments
of long-term debt and capitalized lease obligations
|
|
|
(63 |
) |
|
|
(55 |
) |
|
|
(16 |
) |
|
Net
cash provided by financing activities
|
|
|
1,180 |
|
|
|
5,334 |
|
|
|
10,055 |
|
|
Net
decrease in cash and cash equivalents
|
|
|
(702 |
) |
|
|
(5,312 |
) |
|
|
(6,730 |
) |
|
Cash
and cash equivalents, beginning of year
|
|
|
1,415 |
|
|
|
6,727 |
|
|
|
13,457 |
|
|
Cash
and cash equivalents, end of year
|
|
$ |
713 |
|
|
$ |
1,415 |
|
|
$ |
6,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
426 |
|
|
$ |
128 |
|
|
$ |
4 |
|
|
Cash
paid for taxes
|
|
$ |
78 |
|
|
$ |
40 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of debt to equity
|
|
$ |
311 |
|
|
$ |
220 |
|
|
$ |
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the year ended December 31, 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 and fourth quarters of
2007. $869 thousand was recorded as other income from the gain on the
licensing of intangible assets;
|
|
·
|
Entered into an 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 valued at
$5.5 million. |
See notes
to Consolidated Financial Statements.
eMAGIN
CORPORATION
NOTES
TO THE CONSOLIDATED FINANCIAL STATMENTS
Note
1 - NATURE OF BUSINESS
eMagin
Corporation and its wholly owned subsidiary (the “Company”)
designs, develops, manufactures, and markets virtual imaging products
for consumer, commercial, industrial and military applications. The
Company’s products are sold mainly in North America, Asia, and
Europe.
Principles
of consolidation
The
accompanying audited consolidated financial statements include the accounts of
eMagin Corporation and its wholly owned subsidiary. All intercompany
transactions have been eliminated in consolidation.
Basis
of presentation
The
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 for the foreseeable
future. The Company’s cash requirements over the next twelve months are
greater than the Company’s current cash, cash equivalents, and
investments. At December 31, 2007, the Company has working capital
and capital deficits. These factors raise substantial doubt regarding the
Company’s ability to continue as a going concern without continuing to obtain
additional funding. The Company does not have commitments for such
financing and no assurance can be given that additional financing will be
available, or if available, will be on acceptable terms. If the Company is
unable to obtain sufficient funds during the next twelve months, the Company
will further reduce the size of its organization and/or curtail operations which
will have a material adverse impact on the Company’s business prospects. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. To partially address the liquidity
issue, the Company completed a private placement of its common stock for gross
proceeds of $1.65 million on April 2, 2008. Please see Note 17 –
Subsequent Events for additional information.
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.
Use
of estimates
In
accordance with accounting principles generally accepted in the United States of
America, management utilizes certain estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and
judgments. Management bases its estimates and judgments on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from those estimates.
Revenue and cost
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.
Research and
development expenses
Research
and development costs are expensed as incurred.
Cash
and cash equivalents
All
highly liquid instruments with an original maturity of three months or less at
the date of purchase are considered to be cash equivalents.
Investments-held
to maturity
Securities
that the Company has the positive intent and ability to hold to maturity are
classified as held-to-maturity and are carried at amortized cost on the
accompanying balance sheet.
Accounts
receivable
The
majority of the Company’s commercial accounts receivable is 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.
Allowance for doubtful
account
The
allowance for doubtful accounts reflects an estimate of probable losses inherent
in the accounts receivable balance. The allowance is determined based on a
variety of factors, including the length of time receivables are past due,
historical experience, 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.
Inventory
Inventory
is stated at the lower of cost or market. Cost is determined using the first-in
first-out method. Cost includes materials, labor, and manufacturing overhead
related to the purchase and production of inventories. The Company regularly
reviews inventory quantities on hand, future purchase commitments with the
Company’s suppliers, and the estimated utility of the inventory. If the Company
review indicates a reduction in utility below carrying value, the inventory is
reduced to a new cost basis.
Equipment,
furniture and leasehold improvements
Equipment,
furniture and leasehold improvements are stated at cost. Depreciation on
equipment is calculated using the straight-line method of depreciation over its
estimated useful life. Amortization of leasehold improvements is calculated by
using the straight-line method over the shorter of their estimated useful lives
or lease terms. Expenditures for maintenance and repairs are charged to expense
as incurred.
In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company performs impairment tests on its long-lived
assets when circumstances indicate that their carrying amounts may not be
recoverable. If required, recoverability is tested by comparing the estimated
future undiscounted cash flows of the asset or asset group to its carrying
value. Impairment losses, if any, are recognized based on the excess of the
assets' carrying amounts over their estimated fair values.
Intangible
Assets
The
Company’s intangible assets consist of patents that are amortized over their
estimated useful lives of fifteen years using the straight line
method. Total intangible amortization expense was approximately $4
thousand for each of the years ended December 31, 2007, 2006, and 2005,
respectively.
Advertising
Costs
related to advertising and promotion of products is charged to sales and
marketing expense as incurred. Advertising expense for the years
ended December 31, 2007, 2006, and 2005 was $10 thousand, $296 thousand, and
$108 thousand, respectively.
Income
taxes
The
Company accounts for income taxes in accordance with the provisions of Statement
of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS
No. 109”). SFAS No. 109 requires that the Company recognize deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined on the basis of the difference between the tax basis of assets and
liabilities and their respective financial reporting amounts (“temporary
differences”) at enacted tax rates in effect for the years in which the
temporary differences are expected to reverse. The Company records an
estimated valuation allowance on its deferred income tax assets if it is more
likely than not that these deferred income tax assets will not be
realized.
Loss
per common share
In
accordance with SFAS No. 128, "Basic Earnings Per Share", net loss per common
share amounts ("basic EPS") is computed by dividing net loss by the weighted
average number of common shares outstanding and excluding any potential
dilution. Net loss per common share amounts assuming dilution ("diluted EPS")
reflects the potential dilution from the exercise of stock options and warrants.
These common equivalent shares have been excluded from the computation of
diluted EPS for all periods presented as their effect is antidilutive. The years
ended December 31, 2007, 2006, and 2005 do not include options and warrants to
purchase common equivalent shares of 9,234,832, 4,613,919, and 4,424,988,
respectively, as their effect would be antidilutive.
Comprehensive
income (loss)
SFAS No.
130, "Reporting Comprehensive Income", requires companies to report all changes
in equity during a period, except those resulting from investment by owners and
distributions to owners, for the period in which they are recognized.
Comprehensive income (loss) is the total of net income (loss) and other
comprehensive income (loss) items, such as unrealized gains or losses on foreign
currency translation adjustments. Comprehensive income (loss) must be reported
on the face of the annual financial statements. The Company's operations did not
give rise to any material items includable in comprehensive income (loss), which
were not already in net loss for the years ended December 31, 2007, 2006, and
2005. Accordingly, the Company's comprehensive loss is the same as its net
income (loss) for the periods presented.
Stock-based
compensation
On
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. Prior to January 1, 2006, the Company accounted for
share-based compensation under the recognition and measurement provisions of
APB No. 25 and related interpretations, as permitted by SFAS No.
123. We adopted SFAS No. 123R using the modified prospective
transition method. Accordingly, periods prior to adoption have not
been restated. Compensation cost recognized for the twelve months
ended December 31, 2007 and 2006 includes a) compensation cost for all
share-based compensation granted prior to, but not vested as of January 1, 2006,
based on the grant-date fair value estimated in accordance with the original
provisions of SFAS No.123 and b) compensation cost for all share-based
compensation granted beginning January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS
No.123R. The compensation cost was recognized using the straight-line
attribution method. See Note 11 for a further discussion
on stock-based compensation.
At
December 31, 2007, the Company's cash, cash equivalents, accounts receivable,
short-term investments, accounts payable and debt are shown at cost which
approximates fair value due to the short-term nature of these
instruments.
Concentration
of Credit Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist of cash and cash equivalents. The Company’s cash and
cash equivalents are deposited with financial institutions which, at times, may
exceed federally insured limits. To date, the Company has not
experienced any loss associated with this risk.
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. SFAS 157 is
effective for the Company on January 1, 2008 and is not expected to have a
material impact on its consolidated results of operations and 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. SFAS 159 is effective for the Company on January 1, 2008
and is not expected to have a material impact on its consolidated results of
operations and financial condition.
In June
2007, the FASB ratified EITF No. 07-03, “Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Future Research and Development
Activities (“EITF 07-03”). EITF 07-03 requires that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and
capitalized and recognized as an expense as the goods are delivered or the
related services are performed. EITF 07-03 is effective, on a
prospective basis, for fiscal years beginning after December 15,
2007. The Company will be required to adopt EITF 07-03 in the first
quarter of 2008. The Company does not expect the adoption of EITF
07-03 to have a material effect on its operations or financial
position.
Note
4- RECEIVABLES
Receivables
consisted of the following (in thousands):
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Trade
receivables
|
|
$ |
2,741 |
|
|
$ |
1,351 |
|
|
Less
allowance for doubtful accounts
|
|
|
(358 |
) |
|
|
(443 |
) |
|
Net
receivables
|
|
$ |
2,383 |
|
|
$ |
908 |
|
Note
5 - INVENTORY
The
components of inventories were as follows (in thousands):
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Raw
materials
|
|
$ |
1,069 |
|
|
$ |
1,146 |
|
|
Work
in process
|
|
|
370 |
|
|
|
558 |
|
|
Finished
goods
|
|
|
376 |
|
|
|
781 |
|
|
Total
inventory
|
|
$ |
1,815 |
|
|
$ |
2,485 |
|
Prepaid
expenses and other current assets consist of the following (in
thousands):
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Vendor
prepayments
|
|
$ |
537 |
|
|
$ |
294 |
|
|
Other
prepaid expenses*
|
|
|
310 |
|
|
|
353 |
|
|
Other
current assets
|
|
|
3 |
|
|
|
9 |
|
|
Total
prepaid expenses and other current assets
|
|
$ |
850 |
|
|
$ |
656 |
|
*No
individual amounts greater than 5% of current assets.
Note
7 – EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment,
furniture and leasehold improvements consist of the following (in
thousands):
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Computer
hardware and software
|
|
$ |
1,025 |
|
|
$ |
1,017 |
|
|
Lab
and factory equipment
|
|
|
3,318 |
|
|
|
3,312 |
|
|
Furniture,
fixtures, and office equipment
|
|
|
306 |
|
|
|
306 |
|
|
Assets
under capital leases
|
|
|
66 |
|
|
|
66 |
|
|
Leasehold
improvements
|
|
|
473 |
|
|
|
473 |
|
|
Total
equipment, furniture and leasehold improvements
|
|
|
5,188 |
|
|
|
5,174 |
|
|
Less: accumulated
depreciation
|
|
|
(4,896 |
) |
|
|
(4,508 |
) |
|
Equipment,
furniture and leasehold improvements, net
|
|
$ |
292 |
|
|
$ |
666 |
|
Depreciation
expense was $388 thousand, $837 thousand, and $904 thousand for the years ended
December 31, 2007, 2006, and 2005, respectively. Assets under capital
leases are fully amortized.
Debt is
as follows (in thousands):
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Current
portion of long-term debt:
|
|
|
|
|
|
|
|
Capitalized
lease obligations
|
|
$ |
— |
|
|
$ |
6 |
|
|
Other
debt
|
|
|
44 |
|
|
|
58 |
|
|
Line
of credit
|
|
|
1,108 |
|
|
|
— |
|
|
6%
Senior Secured Convertible Notes
|
|
|
— |
|
|
|
2,880 |
|
|
Less: Unamortized
discount on notes payable
|
|
|
— |
|
|
|
(1,721 |
) |
|
8%
Amended Senior Secured Convertible Notes
|
|
|
5,962 |
|
|
|
— |
|
|
Less: Unamortized
discount on notes payable
|
|
|
(25 |
) |
|
|
— |
|
|
Current
portion of long-term debt, net
|
|
|
7,089 |
|
|
|
1,223 |
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
Other
debt
|
|
|
60 |
|
|
|
104 |
|
|
6%
Senior Secured Convertible Notes
|
|
|
— |
|
|
|
2,890 |
|
|
Less: Unamortized
discount on notes payable
|
|
|
— |
|
|
|
(765 |
) |
|
Long-term
debt, net
|
|
|
60 |
|
|
|
2,229 |
|
|
Total
debt, net
|
|
$ |
7,149 |
|
|
$ |
3,452 |
|
Maturities
with respect to the other debt, line of credit and the 8% Amended Senior Secured
Convertible Notes as of December 31, 2007 are as follows (in
thousands):
|
Years
Ending December 31,
|
|
|
|
|
2008
|
|
$ |
7,089
|
|
|
2009
|
|
|
60
|
|
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.
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 charge 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. For the year ended December 31, 2007,
approximately $93 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 into 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. On
January 30 and on March 25, 2008, the loan agreement was
amended. Please see Note 17 - Subsequent Events for additional
information.
For the
year ended December 31, 2007, interest expense consisted of interest paid or
accrued on outstanding debt of $836 thousand.
The
difference between the statutory federal income tax rate on the Company's
pre-tax income and the Company's effective income tax rate is summarized as
follows:
|
|
|
For
the years ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
U.S.
Federal income tax provision (benefit) at federal statutory
rate
|
|
|
(
34 |
)% |
|
|
(34 |
)% |
|
|
(35 |
)% |
|
Change
in valuation allowance
|
|
|
2 |
% |
|
|
32 |
% |
|
|
35 |
% |
|
Permanent
difference
|
|
|
32 |
% |
|
|
2 |
% |
|
|
— |
|
|
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
The tax
effects of significant items comprising the Company’s deferred taxes as of
December 31 are as follows (numbers are in thousands):
|
|
|
For
the years ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal
and state net operating loss carry-forwards
|
|
$ |
42,266 |
|
|
$ |
41,554 |
|
|
$ |
37,159 |
|
|
Research
and development carry-forwards
|
|
|
1,397 |
|
|
|
— |
|
|
|
— |
|
|
Other
provision and expenses not currently deductible
|
|
|
1,746 |
|
|
|
520 |
|
|
|
216 |
|
|
Total
deferred tax assets
|
|
|
45,409 |
|
|
|
42,074 |
|
|
|
37,375 |
|
|
Less
valuation allowance
|
|
|
(45,409 |
) |
|
|
(42,074 |
) |
|
|
(37,375 |
) |
|
Net
deferred tax asset
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
As of
December 31, 2007 and 2006, the Company has net deferred tax assets of
approximately of $45 and $42 million, respectively, primarily
resulting from the future tax benefit of net operating loss
carryforwards. Such net deferred tax assets are fully offset by a
valuation allowance due to the uncertainty as to their
realizability. A valuation allowance has been established to reserve
for the deferred tax assets arising from the net operating losses and other
temporary differences due to the uncertainty that their benefit will be realized
in the future. The valuation allowance increased approximately $3.3 million for
the year ended December 31, 2007 and $4.7 million for the year ended December
31, 2006.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007. The Company did not
have unrecognized tax benefits which would require an adjustment to the January
1, 2007 beginning balance of retained earnings. The Company did not
have any unrecognized tax benefits at January 1, 2007 and December 31,
2007.
The
Company recognizes interest accrued and penalties related to unrecognized tax
benefits in tax expense. During the years ended December 31, 2007 and
2006 the Company recognized no interest and penalties.
The
Company files income tax returns in the U.S. federal jurisdiction and New
York. The tax years 2004-2006 remain open to examination by major
taxing jurisdictions to which the Company is subject.
Note
10 - SHAREHOLDERS' EQUITY
Preferred
Stock
2007
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.
Common
Stock
2007
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, recognized as deferred financing costs, 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 year ended December 31, 2007
approximately $116 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. On
January 30, and March 25, 2008, the loan agreement was
amended. Please see Note 17 - Subsequent Events for additional
information.
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. Please
see Note 17 – Subsequent Events for additional information.
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.
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 year
ended December 31, 2007, the Company recorded losses of 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 March
28, 2007, the Company entered into a Note Purchase Agreement for the sale of
$500 thousand of 6% senior secured convertible debentures (the “Note”) and
warrants to purchase approximately 1,000,000 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 1,400,000 shares of
common stock and issued warrants exercisable at $0.48 per share for
approximately 1,000,000 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 amortized over the life of the Note. The
Note was amended on July 23, 2007 as described in Note
8: Debt.
As a
result of the issuance of the Note, the outstanding 116,573 Series A Common
Stock Purchase Warrants, that were issued to certain accredited and/or
institutional investors pursuant to the Securities Purchase Agreement dated
January 9, 2004, were re-priced from $2.60 to $0.35 and 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 $8.60 to $7.12. 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
provision of the original agreement. These warrants were further
re-priced in connection with the loan agreement with Moriah from $4.39 to
$4.09. The repricing of the warrants has no effect on the financial
statements.
For the
year ended December 31, 2007, there were no stock options exercised and the
Company received approximately $3 thousand in proceeds for warrants exercised.
For the year ended December 31, 2007, the Company also issued approximately 1.5
million shares of common stock for payment of approximately $1.3 million 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 consolidated statement of operations for the year ended
December 31, 2007.
2006
At the
Company’s 2006 Annual Meeting of Shareholders held on October 20, 2006, the
Company’s shareholders approved an amendment to the Company’s certificate of
incorporation to effect a reverse stock split of the issued and outstanding
common stock on a ratio of 1-for-10. On November 3, 2006, the reverse
stock split became effective. The Company has adjusted its shareholders’ equity
accounts by reducing its stated capital and increasing its additional paid-in
capital by approximately $91 thousand as of December 31, 2006 and 2005 to
reflect the reduction in outstanding shares as a result of the reverse stock
split.
On July
21, 2006, the Company entered into several Note Purchase Agreements for the sale
of approximately $5.99 million of senior secured debentures (the “Notes”) and
warrants to purchase approximately 1.8 million shares of common stock, par value
$.001 per share. The investors purchased $5.99 million principal
amount of Notes with conversion prices of $2.60 per share that may convert into
approximately 2.3 million shares of common stock and 5 year warrants exercisable
at $3.60 per share into approximately 1.6 million shares of common
stock. If the Notes are not converted, 50% of the principal amount
will be due on July 23, 2007 and the remaining 50% will be due on January 21,
2008. Commencing September 1, 2006, 6% interest is payable in
quarterly installments on outstanding notes. For the year ended
December 31, 2006, the Company paid approximately $124 thousand of interest to
investors. The Company received approximately $5.4 million, net of deferred
financing costs of approximately $0.6 million which are amortized over the life
of the Notes. The Company amortized approximately $221 thousand
of deferred financing costs in 2006. For the year ended December 31, 2006, two
note holders converted their promissory notes valued at approximately $220
thousand and were issued an aggregate of approximately 85,000
shares.
Under
EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in, a Company’s Own Stock”, the fair value of the warrants,
$3.6 million, have been recorded as a liability since the warrant agreement
requires a potential net-cash settlement in the first year of the warrant
agreement if the registration statement is not effective. As of
December 31, 2006, the registration statement is effective. The
liability will be adjusted to fair value at each reporting
period. The change in the fair value of the warrants will be recorded
in the Consolidated Statement of Operations as other income
(expense). For the twelve months ended December 31, 2006, the Company
recorded approximately $2.4 million of gain from the change in the fair value of
the derivative liability.
An
additional $0.5 million was to be invested through the exercise of a warrant to
purchase approximately 192,000 shares of common stock at $2.60 per share on or
prior to December 14, 2006, or at the election of the Company, by the purchase
of additional Notes and warrants. The Company determined the relative
fair value of the warrants to be approximately $157,000 which was recorded as an
other asset. The following assumptions were used to determine the
fair value of the warrant:
|
Dividend
yield
|
|
0%
|
|
Risk
free interest rates
|
|
5.25%
|
|
Expected volatility
|
|
122%
|
|
Expected
term (in years)
|
|
0.4
years
|
The
investor elected not to exercise its warrants prior to December 14,
2006. The fair value of the warrants which was recorded as an other
asset was written off as a sales, general and administrative
expense.
In
connection with the Notes, a registration rights agreement was entered into
which requires the Company to file a registration statement for the resale of
the common stock underlying the Notes and the warrants. 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 underlying the Notes
and the warrants have been sold or may be sold without volume restrictions
pursuant to Rule 144(k) of the Securities Act. If the Company fails
to have the registration statement declared effective within the grace period or
fails to maintain the effectiveness as set forth in the preceding sentence, the
Company is required to pay each investor cash payments equal to 1.0% of the
aggregate purchase price monthly until the failure is cured. If the
Company fails to pay the liquidated damages, interest at 16.0% will accrue until
the liquidated damages are paid in full. The registration statement
was filed and declared effective by the Securities and Exchange Commission
within the specified grace period.
The
Company accounts for the registration rights agreement as a separate
freestanding instrument and accounts for the liquidated damages provision as a
derivative liability subject to SFAS 133. The estimated fair value of
the derivative liability is based on an estimate of the probability and costs of
cash penalties being incurred. The Company determined that the fair
value of the liability was immaterial and it is not recorded in accrued
liabilities. The Company will revalue the potential liability at each
balance sheet date.
As a
result of the issuance of the Notes, the outstanding 116,576 Series A Common
Stock Purchase Warrants, that were issued to certain accredited and/or
institutional investors pursuant to the Securities Purchase Agreement dated
January 9, 2004, were re-priced from $5.50 to $2.60 and the outstanding 650,001
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 $10.90 to $8.60.
For the
year ended December 31, 2006, the Company received approximately $10 thousand
for the exercise of 5,000 options and there were no warrants
exercised. For year ended December 31, 2006, the Company issued
approximately 254,000 shares of common stock in lieu of cash payments in the
amount of approximately $580 thousand as compensation for services rendered
and to be rendered in the future. The fair value of the services was
measured at market value of the common stock at the time of
payment. As such, the Company recorded the fair value of the services
rendered in selling, general and administrative expenses in the accompanying
audited consolidated statement of operations for the year ended December 31,
2006.
The 2004
Non-Employee Compensation Plan (the “2004 Plan”) was established to help the
Company retain consultants, professionals and service providers. The
Board of Directors will select the recipient of the awards, the nature of the
awards and the amount. At the 2006 Annual Shareholder meeting, the shareholders
approved an increase in the number of authorized shares of common stock usable
from 200,000 to 950,000. This number is subject to adjustment in the
event of a recapitalization, reorganization or similar event.
2005
On
October 20, 2005, the Company entered into a Securities Purchase Agreement,
pursuant to which the Company sold and issued 1,661,906 shares of common stock,
par value $0.001 per share, at a price of $5.50 per share and warrants to
purchase up to 997,143 shares of common stock for an aggregate purchase price of
approximately $9.14 million. The net proceeds received after expenses
were approximately $8.4 million.
The
warrants are exercisable at a price of $10.00 per share and expire on April 20,
2011. Of the 997,143 warrants, 664,763 of the warrants are
exercisable on or after May 20, 2006. The remaining 332,381 are
exercisable after March 31, 2007, however these warrants will be cancelled if
the Company’s net revenue for fiscal year 2006 exceeds $20 million or if the
investor has sold more than 25% of the shares purchased under the securities
purchase agreement prior to December 31, 2006.
As a
result of the above transaction, the outstanding 121,335 Series A Common Stock
Purchase Warrants, that were issued to participants of the Securities Purchase
Agreement dated January 9, 2004, were re-priced from $10.50 to $5.50 and the
outstanding 650,001 Series F Common Stock Purchase Warrants, that were issued to
participants of the Securities Purchase Agreement dated October 25, 2004, were
re-priced from $12.10 to $10.90.
A
registration rights agreement was entered into in connection with the private
placement which requires the Company to file a registration statement for the
resale of the common stock and the shares underlying the
warrants. 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
common stock have been sold or may be sold without volume restrictions pursuant
to Rule 144(k) of the Securities Act. If the Company fails to have
the registration statement declared effective within the grace period or fails
to maintain the effectiveness, the agreement requires the Company to pay each
investor cash payments equal to 2.0% of the aggregate purchase price monthly
until the failure is cured. If the Company fails to pay the
liquidated damages, interest at 15.0% will accrue until the liquidated damages
are paid in full. The registration statement was filed and declared
effective within the specified grace period. As of December 31, 2006,
the registration statement remains effective.
The
Company accounts for the registration rights agreement as a separate
freestanding instrument and accounts for the liquidated damages provision as a
derivative liability subject to SFAS 133. The estimated fair value of
the liability is based on an estimate of the probability and costs of cash
penalties being incurred. The Company determined that the fair value
of the liability was immaterial and it is not recorded in accrued
liabilities. The Company will revalue the potential liability at each
balance sheet date.
In 2005,
the Company received approximately $1.6 million for the exercise of
approximately 11,100 options and 306,000 warrants. The Company also
issued approximately 54,300 shares of common stock for the payment of $461
thousand of services rendered and to be rendered in the future. The
fair value of the services was measured at market value of the common stock at
the time of payment. As such, the Company recorded the fair value of
the services rendered in selling, general and administrative expenses in the
accompanying audited consolidated statement of operations for the year ended
December 31, 2005.
Note
11 - STOCK COMPENSATION
Employee
stock purchase plan
In 2005,
the stockholders approved the 2005 Employee Stock Purchase Plan
(“ESPP”). The ESPP provides the Company’s 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. At December 31, 2006, the number of shares of common
stock available for issuance was 225,000 and the plan will automatically
increase 75,000 shares on January 1 of each year for a period of three years
starting January 1, 2006. As of December 31, 2007, the plan had not been
implemented.
Incentive
compensation plans
In 2000,
the Company established the 2000 Stock Option Plan (the "2000 Plan"). The Plan
permits the granting of options and stock purchase rights to employees and
consultants of the Company. The 2000 Plan allows for the grant of incentive
stock options meeting the requirements of Section 422 of the Internal Revenue
Code of 1986 (the "Code") or non-qualified stock options which are not intended
to meet such requirements.
In 2003,
the Company established the 2003 Stock Option Plan (the "2003 Plan"). The 2003
Plan provided for the granting of options to purchase an aggregate of 9,200,000
shares of the common stock to employees and consultants. On July 2, 2003, the
shareholders approved the plan and the 2003 Plan was subsequently amended by the
Board of Directors on July 2, 2003 to reduce the number of additional shares
that may be provided for issuance under the "evergreen" provisions of the 2003
Plan. The amended 2003 Plan provides for an increase of 2,000,000 shares in
January 2004 and an annual increase on January 1 of each year for a period of
nine (9) years commencing on January 1, 2005 of 3% of the diluted shares
outstanding. The shareholders approved an amendment to the 2003 Plan
to provide grants of shares of common stock in addition to options to purchase
shares of common stock. In 2005, approximately 2.4 million shares
were added to the plan.
On
February 20, 2008, the Board of Directors authorized the establishment of the
2007 Incentive Stock Plan. Please see Note 17 - Subsequent events for
addition information.
Vesting
terms of the options range from immediate vesting to a ratable vesting period of
5 years. Option activity for the years ended December 31, 2007, 2006 and 2005 is
summarized as follows:
|
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life (In Years)
|
|
Aggregate
Intrinsic Value
|
|
Balances
at December 31, 2004
|
|
|
1,355,916 |
|
|
$ |
11.40 |
|
|