UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2020
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-15751
eMAGIN CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | 56-1764501 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
700 South Drive, Suite 201, Hopewell Junction, NY 12533
(Address of principal executive offices) (Zip Code)
(845) 838-7900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock, $.001 Par Value Per Share |
| EMAN |
| NYSE American |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☑ Smaller reporting company ☑
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Large accelerated filer ☐ | Smaller Reporting Company ☑ | |
Accelerated filer ☐ | Emerging growth company ☐ | |
Non-accelerated filer ☑ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☑
Indicate the numberAs of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: [April 30, 2020, there were 49,161,273]53,818,852 common shares of common stock,at $0.001 par value wereper share of the registrant outstanding as of May 1, 2019.
Form 10-Q
For the Quarter ended March 31, 2019
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Page | |||
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PART I - FINANCIAL INFORMATION | |||
Item 1 | Condensed Consolidated Financial Statements |
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| Condensed Consolidated Balance Sheets as of March 31, | 5 | |
| 6 | ||
| 7 | ||
| 8 | ||
| Notes to Condensed Consolidated Financial Statements (unaudited) | 9 | |
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | |
Item 3 | 28 | ||
Item 4 | 28 | ||
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PART II - OTHER INFORMATION | |||
Item 1 | 28 | ||
Item 1A | 28 | ||
Item 2 |
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Item 3 |
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Item 4 |
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Item 5 | 29 | ||
Item 6 |
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2
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q, or Report, contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect our results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December
31, 20182019, and elsewhere in this Report.Report on Form 10-Q. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Report and the documents that we reference in this Report and have filed with the Securities and Exchange Commission, or the SEC, as exhibits to this Report, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.
In particular, forward-looking statements in this Report include statements about:
· | our ability to generate sufficient cash flows and obtain the additional financing we need in order to continue as a going concern; |
· | our ability to generate additional revenue or secure additional external financing when, or if, required, in order to continue our current operations; |
· | our ability to manufacture our products on a timely basis and at a competitive cost; |
· | our ability to successfully remediate manufacturing issues that have resulted in production delays and successfully integrate new equipment on our manufacturing line; |
· | our ability to achieve our yield improvement initiatives; |
· | our ability to meet our obligations as they become due over the next twelve months; |
· | our needs for additional financing, as well as our ability to obtain such additional financing on reasonable terms and the interest rate and expense we incur on any debt financing; |
· | our anticipated cash needs and our estimates regarding our capital requirements; |
· | our ability to |
· | our ability to protect our intellectual property; |
· | 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, including the consumer market; |
· | technological developments in our target markets and the development of alternate, competing technologies in them; |
· | the rate of acceptance of AR/VR systems and products in the consumer and commercial marketplace; |
· | our potential exposure to product liability claims; |
· | our ability to meet customers’ delivery schedules; |
· |
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| market pricing for our products and for competing products; |
· | the concentration of a significant ownership percentage in our Company in a relatively small number of stockholders and the ability of one or more of such stockholders to exert substantial control over our affairs; |
· | changes in demand by |
· | increasing competition; |
· | provisions in certain of our organizational documents, commercial agreements and our military contracts that may prevent or delay an acquisition of, partnership with, or investment in, our Company and our ability to develop original equipment manufacturer and mass production partnerships; |
· | our ability to maintain our operations as a result of potential employee, customer and supplier disruptions caused by the Covid-19 pandemic; and |
· | our efforts to |
The forward-looking statements in this Report represent our views as of the date of this Report. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some
3
point in the future, we have no current intention of doing so except to the extent required by applicable law. Therefore, these forward-looking statements do not represent our views as of any date other than the date of this Report.
3
In this Report, references to “eMagin Corporation,” “eMagin,” “the Company,” “we,” “us,” and “our company” refer to eMagin Corporation and our wholly owned subsidiary, Virtual Vision, Inc. References to “Consumer Night Vision Business” refers to our consumer night vision products business.
eMagin® is a registered trademark of eMagin Corporation. dPdTM is an unregistered trademark of eMagin. All rights reserved. All other trademarks used in this Report are the property of their respective owners.
4
ITEM 1. Condensed Consolidated Financial Statements
eMAGIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
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| March 31, |
| December 31, |
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| 2019 |
| 2018 |
| March 31, |
| December 31, | ||||
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| 2020 |
| 2019 | |||
ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 3,457 |
| $ | 3,359 |
| $ | 3,138 |
| $ | 3,515 |
Accounts receivable, net |
| 3,696 |
| 3,186 |
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| 3,737 |
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| 3,966 | ||
Unbilled accounts receivable |
| 69 |
| 224 |
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| 470 |
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| 155 | ||
Inventories |
| 8,827 |
| 8,582 |
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| 8,821 |
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| 8,832 | ||
Prepaid expenses and other current assets |
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| 795 |
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| 875 |
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| 1,344 |
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| 1,130 |
Total current assets |
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| 16,844 |
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| 16,226 |
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| 17,510 |
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| 17,598 |
Equipment, furniture and leasehold improvements, net |
| 8,630 |
| 8,921 |
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| 7,926 |
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| 8,100 | ||
Operating lease right- of- use assets |
| 4,112 |
| — | ||||||||
Operating lease right - of - use assets |
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| 3,545 |
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| 3,729 | ||||||
Intangibles and other assets |
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| 209 |
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| 269 |
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| 133 |
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| 160 |
Total assets |
| $ | 29,795 |
| $ | 25,416 |
| $ | 29,114 |
| $ | 29,587 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
| $ | 1,974 |
| $ | 2,024 |
| $ | 1,577 |
| $ | 1,302 |
Accrued compensation |
| 1,502 |
| 1,634 |
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| 1,566 |
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| 1,778 | ||
Revolving credit facility, net |
| 2,535 |
| — |
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| 2,191 |
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| 2,891 | ||
Common stock warrant liability |
| 703 |
| 1,497 |
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| 43 |
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| 23 | ||
Other accrued expenses |
| 1,703 |
| 1,827 |
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| 1,485 |
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| 1,401 | ||
Deferred revenue |
| 95 |
| 38 |
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| 294 |
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| 277 | ||
Operating lease liability - current portion |
| 675 |
| — | ||||||||
Operating lease liability - current |
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| 791 |
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| 775 | ||||||
Other current liabilities |
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| 323 |
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| 427 |
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| 351 |
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| 342 |
Total current liabilities |
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| 9,510 |
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| 7,447 |
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| 8,298 |
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| 8,789 |
Operating lease liability-long term |
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| 3,562 |
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| — | ||||||
Finance lease liability - long term |
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| 20 |
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| 24 | ||||||
Operating lease liability - long term |
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| 2,863 |
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| 3,067 | ||||||
Total liabilities |
| $ | 13,072 |
| $ | 7,447 |
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| 11,181 |
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| 11,880 |
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Commitments and contingencies (Note 8) |
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Commitments and contingencies |
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Shareholders’ equity: |
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Preferred stock, $.001 par value: authorized 10,000,000 shares: |
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Series B Convertible Preferred stock, (liquidation preference of $5,659) stated value $1,000 per share, $.001 par value: 10,000 shares designated and 5,659 issued and outstanding as of March 31, 2019 and December 31, 2018 |
| — |
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Common stock, $.001 par value: authorized 200,000,000 shares, issued 45,323,339 shares, outstanding 45,161,273 shares as of March 31, 2019 and December 31, 2018 |
| 45 |
| 45 | ||||||||
Series B Convertible Preferred stock, (liquidation preference of $5,659) stated value $1,000 per share, $.001 par value: 10,000 shares designated and 5,659 issued and outstanding as of March 31, 2020 and December 31, 2019. |
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Common stock, $.001 par value: authorized 200,000,000 shares, issued 53,980,918 shares, outstanding 53,818,852 shares as of March 31, 2020 and issued 50,250,378 shares, outstanding 50,088,312 shares as of December 31, 2019. |
|
| 54 |
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| 50 | ||||||
Additional paid-in capital |
| 254,929 |
| 254,736 |
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| 260,358 |
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| 258,767 | ||
Accumulated deficit |
| (237,751) |
| (236,312) |
|
| (241,979) |
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| (240,610) | ||
Treasury stock, 162,066 shares as of March 31, 2019 and December 31, 2018 |
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| (500) |
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| (500) | ||||||
Treasury stock, 162,066 shares as of March 31, 2020 and December 31, 2019. |
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| (500) |
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| (500) | ||||||
Total shareholders’ equity |
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| 16,723 |
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| 17,969 |
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| 17,933 |
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| 17,707 |
Total liabilities and shareholders’ equity |
| $ | 29,795 |
| $ | 25,416 |
| $ | 29,114 |
| $ | 29,587 |
See notes to Condensed Consolidated Financial Statements.
5
CONDENSEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(unaudited)
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| Three Months Ended |
| Three Months Ended | ||||||||
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| March 31, |
| March 31, | ||||||||
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| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
Revenues: |
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Product |
| $ | 5,507 |
| $ | 5,863 |
| $ | 5,634 |
| $ | 5,507 |
Contract |
| 605 |
| 1,004 |
|
| 1,097 |
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| 605 | ||
Total revenues, net |
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| 6,112 |
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| 6,867 |
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| 6,731 |
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| 6,112 |
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Cost of revenues: |
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Product |
| 4,426 |
| 4,359 |
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| 4,790 |
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| 4,426 | ||
Contract |
| 350 |
| 528 |
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| 507 |
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| 350 | ||
Total cost of revenues |
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| 4,776 |
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| 4,887 |
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| 5,297 |
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| 4,776 |
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Gross profit |
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| 1,336 |
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| 1,980 |
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| 1,434 |
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| 1,336 |
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Operating expenses: |
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Research and development |
| 1,597 |
| 1,631 |
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| 980 |
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| 1,597 | ||
Selling, general and administrative |
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| 1,939 |
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| 2,912 |
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| 1,798 |
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| 1,939 |
Total operating expenses |
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| 3,536 |
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| 4,543 |
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| 2,778 |
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| 3,536 |
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Loss from operations |
| (2,200) |
| (2,563) |
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| (1,344) |
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| (2,200) | ||
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Other income (expense): |
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Change in fair value of common stock warrant liability |
| 794 |
| 503 |
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| (20) |
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| 794 | ||
Interest expense, net |
| (33) |
| (42) |
|
| (17) |
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| (33) | ||
Other income, net |
|
| — |
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| 21 |
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| 12 |
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| — |
Total other income |
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| 761 |
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| 482 | ||||||
Total other (expense) income |
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| (25) |
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| 761 | ||||||
Loss before provision for income taxes |
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| (1,439) |
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| (2,081) |
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| (1,369) |
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| (1,439) |
(Provision) benefit for income taxes |
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| — |
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| — | ||||||
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Income taxes |
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| — |
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| — | ||||||
Net loss |
| $ | (1,439) |
| $ | (2,081) |
| $ | (1,369) |
| $ | (1,439) |
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Loss per share, basic and diluted |
| $ | (0.03) |
| $ | (0.05) |
| $ | (0.03) |
| $ | (0.03) |
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Weighted average number of shares outstanding: |
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Basic and Diluted |
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| 45,161,273 |
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| 42,255,189 |
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| 51,638,598 |
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| 45,161,273 |
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See notes to Condensed Consolidated Financial Statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
(In thousands, except share and per share data)
(unaudited)
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| Preferred Shares |
| Preferred Stock |
| Common Shares |
| Common Stock |
| Additional Paid-in Capital |
| Accumulated Deficit |
| Treasury Stock |
| Total Shareholders’ Equity | ||||||||
Balance, December 31, 2019 |
|
| 5,659 |
| $ | — |
|
| 50,250,378 |
| $ | 50 |
| $ | 258,767 |
| $ | (240,610) |
| $ | (500) |
| $ | 17,707 |
Stock based compensation |
|
| — |
|
| — |
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| — |
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| — |
|
| 43 |
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| — |
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| — |
|
| 43 |
Public offering of common shares, net of offering costs |
|
| — |
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| — |
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| 3,730,540 |
|
| 4 |
|
| 1,548 |
|
| — |
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| — |
|
| 1,552 |
Net loss |
|
| — |
|
| — |
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| — |
|
| — |
|
| — |
|
| (1,369) |
|
| — |
|
| (1,369) |
Balance, March 31, 2020 |
|
| 5,659 |
| $ | — |
|
| 53,980,918 |
| $ | 54 |
| $ | 260,358 |
| $ | (241,979) |
| $ | (500) |
| $ | 17,933 |
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| Preferred Shares |
| Preferred Stock |
| Common Shares |
| Common Stock |
| Additional Paid-in Capital |
| Accumulated Deficit |
| Treasury Stock |
| Total Shareholders’ Equity | ||||||||
Balance, December 31, 2018 |
|
| 5,659 |
| $ | — |
|
| 45,323,339 |
| $ | 45 |
| $ | 254,736 |
| $ | (236,312) |
| $ | (500) |
| $ | 17,969 |
Stock based compensation |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 193 |
|
| — |
|
| — |
|
| 193 |
Net loss |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,439) |
|
| — |
|
| (1,439) |
Balance, March 31, 2019 |
|
| 5,659 |
| $ | — |
|
| 45,323,339 |
| $ | 45 |
| $ | 254,929 |
| $ | (237,751) |
| $ | (500) |
| $ | 16,723 |
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| Three Month Period Ended March 31, 2019 | ||||||||||||||||||||||
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| Preferred |
| Preferred |
| Common |
| Common Stock |
| Additional |
| Accumulated |
| Treasury |
| Total | ||||||||
Balance, December 31, 2018 |
|
| 5,659 |
| $ | — |
|
| 45,323,339 |
| $ | 45 |
| $ | 254,736 |
| $ | (236,312) |
| $ | (500) |
| $ | 17,969 |
Stock based compensation |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 193 |
|
| — |
|
| — |
|
| 193 |
Net loss |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,439) |
|
| — |
|
| (1,439) |
Balance, March 31, 2019 |
|
| 5,659 |
| $ | — |
|
| 45,323,339 |
| $ | 45 |
| $ | 254,929 |
| $ | (237,751) |
| $ | (500) |
| $ | 16,723 |
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| Three Month Period Ended March 31, 2018 | ||||||||||||||||||||||
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| Preferred |
| Preferred |
| Common |
| Common Stock |
| Additional |
| Accumulated |
| Treasury |
| Total | ||||||||
Balance, December 31, 2017 |
|
| 5,659 |
| $ | — |
|
| 35,182,589 |
| $ | 35 |
| $ | 244,726 |
| $ | (226,769) |
| $ | (500) |
| $ | 17,492 |
Exercise of common stock options |
|
| — |
|
| — |
|
| 49,937 |
|
| 0 |
|
| 62 |
|
|
|
|
|
|
|
| 62 |
Exercise of common stock warrants |
|
|
|
|
|
|
|
| 30,000 |
|
| 0 |
|
| 46 |
|
|
|
|
|
|
|
| 47 |
Public offering of common shares, net of offering costs |
|
|
|
|
|
|
|
| 10,010,813 |
|
| 10 |
|
| 9,264 |
|
|
|
|
|
|
|
| 9,274 |
Stock based compensation |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 205 |
|
| — |
|
| — |
|
| 205 |
Net loss |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (2,081) |
|
| — |
|
| (2,081) |
Balance, March 31, 2018 |
|
| 5,659 |
| $ | — |
|
| 45,273,339 |
| $ | 45 |
| $ | 254,304 |
| $ | (228,850) |
| $ | (500) |
| $ | 24,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to Condensed Consolidated Financial Statements
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
|
|
|
|
| |||||||||
|
|
|
|
| |||||||||
|
| Three Months Ended |
|
|
|
|
|
|
| ||||
|
| March 31, |
| Three Months Ended |
| ||||||||
|
| 2019 |
| 2018 |
| March 31, |
| ||||||
|
|
|
| 2020 |
| 2019 |
| ||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
| ||
Net loss |
| $ | (1,439) |
| $ | (2,081) |
| $ | (1,369) |
| $ | (1,439) |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
| ||
Depreciation and amortization |
| 510 |
| 489 |
|
| 482 |
|
| 510 |
| ||
Change in fair value of common stock warrant liability |
| (794) |
| (503) |
|
| 20 |
|
| (794) |
| ||
Stock-based compensation |
| 193 |
| 205 |
|
| 43 |
|
| 193 |
| ||
Amortization of operating lease right-of-use assets |
| 155 |
| — |
|
| 184 |
|
| 155 |
| ||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
| ||
Accounts receivable |
| (510) |
| 390 |
|
| 229 |
|
| (510) |
| ||
Unbilled accounts receivable |
| 155 |
| (120) |
|
| (315) |
|
| 155 |
| ||
Inventories |
| (245) |
| (307) |
|
| 11 |
|
| (245) |
| ||
Prepaid expenses and other current assets |
| 29 |
| 213 |
|
| (214) |
|
| 29 |
| ||
Deferred revenues |
| 57 |
| (577) |
|
| 17 |
|
| 57 |
| ||
Change in operating lease liabilities |
| (159) |
| — | |||||||||
Operating lease liabilities |
|
| (192) |
|
| (159) |
| ||||||
Accounts payable, accrued expenses, and other current liabilities |
|
| (263) |
|
| 135 |
|
| 181 |
|
| (263) |
|
Net cash used in operating activities |
|
| (2,311) |
|
| (2,156) |
|
| (923) |
|
| (2,311) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment |
|
| (188) |
|
| (51) |
|
| (306) |
|
| (188) |
|
Net cash used in investing activities |
|
| (188) |
|
| (51) |
|
| (306) |
|
| (188) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings (repayments) under revolving line of credit, net |
| 2,597 |
| (3,808) |
|
| (700) |
|
| 2,597 |
| ||
Proceeds from public offering, net |
| — |
| 12,180 |
|
| 1,552 |
|
| — |
| ||
Proceeds from warrant exercise, net |
| — |
| 48 | |||||||||
Proceeds from exercise of stock options |
|
| — |
|
| 63 | |||||||
Net cash provided by (used in) financing activities |
|
| 2,597 |
|
| 8,483 | |||||||
Net increase (decrease) in cash and cash equivalents |
|
| 98 |
|
| 6,276 | |||||||
Net cash provided by financing activities |
|
| 852 |
|
| 2,597 |
| ||||||
Net (decrease) increase in cash and cash equivalents |
|
| (377) |
|
| 98 |
| ||||||
Cash and cash equivalents, beginning of period |
|
| 3,359 |
|
| 3,526 |
|
| 3,515 |
|
| 3,359 |
|
Cash and cash equivalents, end of period |
| $ | 3,457 |
| $ | 9,802 |
| $ | 3,138 |
| $ | 3,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 32 |
| $ | 21 |
| $ | 22 |
| $ | 32 |
|
Cash paid for income taxes |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
See notes to Condensed Consolidated Financial Statements.
8
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1:1 – Description of the Business and Summary of Significant Accounting Policies
The Business
eMagin Corporation (the “Company”) designs, develops, manufactures and markets OLED (organic light emitting diode)–on-silicon microdisplays and virtual imaging products which utilize OLED microdisplays. The Company’s products are sold mainly in North America, Asia, and Europe.
Basis of Presentation
In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements of eMagin Corporation and its subsidiary reflect all adjustments, including normal recurring accruals, necessary for a fair presentation. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosure normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the SEC. The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited condensed consolidated financial statements are read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019. The results of operations for the periodperiods ended March 31, 20192020 are not necessarily indicative of the results to be expected for the full year. The consolidated condensed financial statements as of December 31, 20182019 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. 2019.
Use of estimates
In accordance with accounting principles generally accepted in the United States of America (“GAAP”), management utilizes certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments related to, among others, allowance for doubtful accounts, warranty reserves, inventory reserves, stock-based compensation expense, deferred tax asset valuation allowances, litigation and other loss contingencies. Management bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Reclassifications
Certain immaterial prior period amounts have been reclassified to conform to current period presentation with no impact on previously reported net income, assets or shareholders’ equity.
Intangible Assets – Patents
Acquired patents are recorded at purchase price as of the date acquired and amortized over the expected useful life which is generally the remaining life of the patent.
The total intangible amortization expense was approximately $9$2.0 thousand and $14$9.0 thousand for the three month periodsmonths ended March 31, 2020 and 2019 and 2018, respectively.
Product warranty
The Company generally offers a one-year product replacement warranty. The standard policy is to repair or replace the defective products. The Company accrues for estimated returns of defective products at the time revenue is recognized based on historical activity as well as for specific known product issues. The determination of these accruals requires the Company to make estimates of the frequency and extent of warranty activity and estimate future costs to replace the products under warranty. If the actual warranty activity and/or repair and replacement costs differ significantly from these estimates, adjustments to cost of revenue may be required in future periods.
9
The following table provides a summary of the activity related to the Company's warranty liability included in other current liabilities, (in thousands):
|
|
|
|
| ||||||||
|
| Three Months Ended |
|
|
|
|
|
| ||||
|
| March 31, |
| Three Months Ended | ||||||||
|
| 2019 |
| 2018 |
| March 31, | ||||||
|
|
| (unaudited) |
| 2020 |
| 2019 | |||||
Beginning balance |
| $ | 423 |
| $ | 468 |
| $ | 300 |
| $ | 423 |
Warranty accruals and adjustments |
| (78) |
| (72) |
|
| 38 |
|
| (78) | ||
Warranty claims |
|
| (24) |
|
| (34) |
|
| (7) |
|
| (24) |
Ending balance |
| $ | 321 |
| $ | 362 |
| $ | 331 |
| $ | 321 |
Net Loss per Common Share
Basic loss per share is computed using the weighted average number of common shares outstanding during the period, and excludes any dilutive effects of common stock equivalent shares such as stock options, warrants, and convertible preferred stock. Diluted loss per share is computed using the weighted average number of common shares outstanding and potentially dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.
The Company’s Series B Convertible Preferred stock (“Preferred Stock – Series B”) is considered a participating security as the preferred stock participates in dividends with the common stock, which requires the use of the two-class method when computing basic and diluted earnings per share. The Preferred Stock – Series B is not required to absorb any net loss. Although the Company paid a one-time special dividend in 2012, the Company does not expect to pay dividends on its common or preferred stock in the near future.
The following table sets forth the computation of basic and diluted earnings per share forFor the three months ended March 31, 2020 and 2019, the Company reported a net loss and 2018 (in thousands, exceptas a result, basic and diluted loss per common share are the same. Therefore, in calculating net loss per share andamounts, shares underlying the potentially dilutive common stock equivalents were excluded from the calculation of diluted net income per common share data):because their effect was anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2019 |
| 2018 | ||
|
| (unaudited) | ||||
Net Loss |
| $ | (1,439) |
| $ | (2,081) |
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
| 45,161,273 |
|
| 42,255,189 |
Dilutive effect of stock options |
|
| — |
|
| — |
Weighted average common shares outstanding |
|
| 45,161,273 |
|
| 42,255,189 |
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
|
|
Basic |
| $ | (0.03) |
| $ | (0.05) |
Diluted |
| $ | (0.03) |
| $ | (0.05) |
10
The following table sets forth the potentially dilutive common stock equivalents for the three month periodsmonths ended March 31, 20192020 and 20182019 that were not included in diluted EPS as their effect would be anti-dilutive:
|
|
|
|
| ||||
|
|
|
|
| ||||
|
| Three Months Ended |
|
|
|
| ||
|
| March 31, |
| Three Months Ended | ||||
|
| 2019 |
| 2018 |
| March 31, | ||
|
| (unaudited) |
| 2020 |
| 2019 | ||
Options |
| 5,160,445 |
| 4,911,801 |
| 5,183,360 |
| 5,160,445 |
Warrants |
| 9,055,773 |
| 9,055,773 |
| 19,295,773 |
| 9,055,773 |
Convertible preferred stock |
| 7,545,333 |
| 7,545,333 |
| 7,545,333 |
| 7,545,333 |
Total potentially dilutive common stock equivalents |
| 21,761,551 |
| 21,512,907 |
| 32,024,466 |
| 21,761,551 |
Fair Value of Financial Instruments
Cash, cash equivalents, accounts receivable, short-term investments and accounts payable are stated at cost, which approximates fair value, due to the short-term nature of these instruments. The revolving creditasset based lending facility (the “ABL Facility”) is also stated at cost, which approximates fair value because the interest rate is based on a market based rate plus a margin.
We have categorized our assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy in accordance with GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3).
Assets and liabilities recorded in the balance sheets at fair value are categorized based on a hierarchy of inputs as follows:
Level 1 – Unadjusted quoted prices in active markets of identical assets or liabilities.
Level 2 – Quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 – Unobservable inputs for the asset or liability.
10
The common stock warrant liability is currently the only financial asset or liability recorded at fair value on a recurring basis, and is considered a Level 3 liability. The fair value of the common stock warrant liability is included in current liabilities on the Condensed Consolidated Balance Sheets, as the warrants are currently exercisable.
The following table shows the reconciliation of the Level 3 warrant liability measured and recorded at fair value on a recurring basis, using significant unobservable inputs (in thousands):
|
|
|
|
|
| Estimated | |
| |||
Balance as of January 1, |
| $ | |
Fair value of warrants issuance during period | - | ||
Change in fair value of warrant liability, net |
|
| |
Balance as of March 31, |
| $ |
The fair value of the liability for common stock purchase warrants at issuance and at March 31, 20192020 was estimated using the Black Scholes option pricing model based on the market value of the underlying common stock at the measurement date, thedate. The remaining contractual term of the warrants ranging from 3.22.2 to 3.8 2.8 years, at risk-free interest rates of 2.37%0.5%, with no expected dividends, and expected volatility of the price of the underlying common stock ranging from 40.5% to 41.8%of 73.1%.
Concentrations
The Company purchases principally all of its silicon wafers, which are a key ingredient in its OLED production process, from two suppliers located in Taiwan and Korea.
11
For the three months ended March 31, 2020, three customers accounted for 19.5%, 14.9%, and 10.2% of net revenues, respectively. For the three months ended March 31, 2019, one customer accounted for 11%11.0% of net revenues. For the three months ended March 31, 2019, there were no other customers individually accounting for over 10% of net revenues.As of March 31, 20192020, twothree customers accounted for 13% 34.2%, 16.1%, and 11%, respectively10.2% of the Company’s consolidated accounts receivable balance and no other single customer accounted for over 10% of the consolidated accounts receivable. balance.
For the three months ended March 31, 2018, one customer accounted for 11% of net revenues and there were no other single customers accounting for over 10% of net revenues.
Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared on thea going concern basis, which assumes that the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. For the three months ended March 31, 20192020, the Company incurred a net loss of $1.4 million and used cash in operating activities of $2.3$0.9 million. As of March 31, 2019,2020, the Company had $3.5$3.1 million of cash, $2.5$2.2 million of outstanding debt,indebtedness and borrowing availability of $0.9 million under ourits ABL FacilityFacility. For the three months ended March 31, 2020, the Company raised $1.6 million, net of $0.8 million.offering expenses, through the sale of shares under its At The Market (“ATM”) facility entered into in November 2019. For the year ended December 31, 2018,2019, the Company incurred a net loss of $9.5$4.3 million and used cash in operating activities of $6.4$5.1 million.
The COVID-19 pandemic has significantly increased economic and demand uncertainty. It is likely that the current outbreak and continued spread of COVID-19 will cause the economic slowdown to continue, and it is possible that it could cause a global recession. There is a significant degree of uncertainty and lack of visibility as to the extent and duration of the current slowdown or any recession. If either were prolonged, demand for the Company’s products will be significantly harmed. The Company conducted an equity raiseis currently seeing delays in April 2019 that generated $3.6 millionproduct shipments and is expecting slowing economic conditions to adversely affect its business in net proceeds. the second half of 2020. Given the significant economic uncertainty and volatility created by the pandemic, it is difficult to predict the nature and extent of the impact on demand for the Company’s products. These expectations are subject to change without warning and investors are cautioned not to place undue reliance on them. Unanticipated consequences of the pandemic and resulting economic uncertainty could adversely affect the Company’s liquidity and capital resources in the future as well as its ability to continue as a going concern.
Due to continuing losses, the Company’s financial position, the COVID-19 pandemic, and uncertainty regarding the Company’s ability to borrow under its ABL Facility, or continue to raise funds under its ATM facility, the Company may not be able to meet its financial obligations as they become due without additional financing or sources of capital. Management is prepared to reduce expenses and raise additional capital, but there can be no assurance that the Company will be successful in sufficiently reducing expenses or raising capital to meet its operating needs.
11
The Company’s ABL Facility expires on December 31, 20192020, and while relationsrenews automatically for another year unless terminated pursuant to its terms. Although preliminary renewal discussions with the lender are positive there is no assurance the lender will renew or extend this facility, or continue to make funds available during 20192020 and beyond at present availability levels, or at all. Therefore, in accordance with applicable accounting guidance, and based on the Company’s current financial condition and availability of funds, there is substantial doubt about the Company’s ability to continue as a going concern through twelve months from the date these financial statements were issued.
The Company has taken actions to increase revenues and to reduce expenses and is considering financing alternatives. In addition, the Company has entered into its ATM Facility. There can be no assurance, however, that the Company will be successful in sufficiently increasing revenues, mitigating the impacts of COVID-19, reducing expenses or securing additional financing to meet its operating needs. The Company’s plans with regard to these matters include the following actions: 1) focus production and engineering resources on improving manufacturing yields and increasing production volumes, 2) continuing a Work Status Reduction program that began in October 2019 wherein senior management work status was reduced by approximately 20%, 3) reduce headcount and not replace departed employees, 4) reduce discretionary and other expenses, and 5) considering financing and/or strategic alternatives.
Based on the Company’s current projections, operational and yield improvements, and the anticipated availability of the ABL Facility, the Company estimates it will have sufficient liquidity to fund operations through the end of the secondfirst quarter of 2020.2021. However, there can be no assurance projected resultsthe Company’s plans will be achieved, or funds will be available under our ABL Facility. If actual results are less than projected or additional needs for liquidity arise,that the Company may be able to raise additional debt or equity financing and is prepared to reduce expenses or enter into a strategic transaction. However, the Company can make no assurance that it will be able to reduce expenses sufficiently,continue to borrow under its ABL Facility, continue to raise funds under its ATM facility, secure additional capital, financing, and/or enter into apursue strategic transactionalternatives on terms acceptable to the Company, or at all.
12 The Company’s common stock is listed on the NYSE American, and it is subject to its continued listing requirements, including maintaining certain share prices and a minimum amount of shareholder’s equity. If the Company is unable to comply with the NYSE American continued listing requirements, including its trading price requirements, our common stock may be suspended from trading on and/or delisted from the NYSE American.
Recently adopted accounting pronouncements
The Company's accounting policies are the same as those described in Note 1 to the Company's consolidated financial statements in its 2018Annual Report on Form 10-K withfor the exception of the accounting policies related to leases.year ended December 31, 2019.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule was effective on November 5, 2018. The Company adopted the guidance on January 1, 2019, and such adoption did not have a material impact on its financial statements.
In February 2016, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) a guidance which requires lessees to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term and, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis for all leases (with the exception of short-term leases). Under the new guidance, leases previously defined as operating leases will be presented on the balance sheet. As a result, these leases will be recorded as an asset and a corresponding liability at the present value of the total lease payments. The asset will be decremented over the life of the lease on a pro-rata basis resulting in lease expense while the liability will be decremented using the interest method (i.e. principal and interest). The Company adopted the guidance effective January 1, 2019. The Company elected the transition package of three practical expedients permitted under the transition guidance and elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption, without a restatement of prior periods. Further, the Company elected a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. As a result of the adoption, the Company adjusted its beginning balance for the quarter ended March 31, 2019 by recording operating lease ROU assets and liabilities through a cumulative-effect adjustment. The adoption impacted the accompanying condensed balance sheet, but did not have an impact on the condensed statements of operations and comprehensive loss.
At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, the Company calculates the associated lease liability and corresponding ROU assets upon lease commencement using a discount rate based on a credit-adjusted secured borrowing rate commensurate with the term of the lease. The Company records lease liabilities within current or noncurrent liabilities based upon the length of time associated with the lease payments. The operating lease ROU assets includes any lease payments made and excludes lease incentives and initial direct costs incurred, if any, and are recorded as noncurrent assets. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. There are no finance leases as of March 31, 2019.
Leases with an initial term of 12 months or less are not recorded on the accompanying condensed balance sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The impact of the adoption of ASC 842 on the accompanying condensed balance sheet as of January 1, 2019 was as follows (in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, |
|
| Adjustments |
|
| January 1, | ||
Right of Use Assets (1) |
|
|
|
|
|
|
|
|
|
|
Operating lease - right of use asset |
| $ | — |
| $ | 4,267 |
|
| $ | 4,267 |
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities |
|
|
|
|
|
|
|
|
|
|
Current |
| $ | — |
| $ | 964 |
|
| $ | 964 |
Noncurrent |
| $ | — |
| $ | 3,432 |
|
| $ | 3,432 |
|
|
|
|
|
|
|
|
|
|
|
(1) Operating lease right-of-use assets includes deferred rent of $129 thousand |
13
Recently issued accounting pronouncements
In August 2018, the FASB issued guidance which adds, amends, and removes certain disclosure requirements related to fair value measurements. Among other changes, this standard requires certain additional disclosure surrounding Level 3 assets, including changes in unrealized gains or losses in other comprehensive income and certain inputs in those measurements. This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Certain amendedThe amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or eliminated disclosuresannual period presented in thisthe initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted the guidance on January 1, 2020, on a prospective basis and such adoption did not have a material impact on our financial statements.
Recently issued accounting pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) as part of its initiative to reduce complexity in accounting standards. This standard simplify the accounting for income taxes. This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. This standard may be adopted early, while certain additional disclosure requirements in this standard can be adopted on its effective date. In addition, certain changes in the standard require retrospective adoption, while other changes must be adopted prospectively. The Company is currently evaluatingdoes not expect the adoption of this new standard and itsASU to have a significant impact on ourthe consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) and subsequently issued amendments. The guidance affects the Company's accounts receivable, and it requires the measurement of expected credit losses to be based on relevant information from past events, including historical experiences, current conditions and reasonable and supportable forecasts that affect collectability. This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Based on the composition of the Company's receivables, current market conditions and historical credit loss activity, the Company does not expect the adoption of this ASU to have a significant impact on the consolidated financial statements.
12
Note 2:2 – Revenue Recognition
All of the Company’s revenues are earned from contracts with customers and are classified as either Product or Contract revenues. Contracts include R&D activities performed pursuant to written agreements and purchase orders, as well as arrangements that are implied by customary practices or law.
Product revenue is generated primarily from contracts to produce, ship and deliver OLED microdisplays. eMagin’s performance obligations are satisfied, control of our products is transferred, and revenue is recognized at a single point in time when control transfers to our customer for product shipped. Our customary terms are FOB our factory and control is deemed to transfer upon shipment. The Company has elected to treat shipping and other transportation costs charged to customers as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. As customers are invoiced at the time control transfers and the right to consideration is unconditional at that time, the Company does not maintain contract asset balances for product revenue. Additionally, the Company does not maintain contract liability balances for product revenues, as performance obligations are satisfied prior to customer payment for product. The Company generally offers a one-year product warranty, for replacement of product only, and does not allow returns. The Company offers industry standard payment terms that typically require payment from our customers from 30 to 60 days after title transfers.
The Company also recognizes revenues under the over time method from certain research and development (“R&D”) activities (contract revenues) under both firm fixed-price contracts and cost-type contracts. Progress and revenues from research and development activities relating to firm fixed-price contracts and cost-type contracts are generally recognized on an input method of accounting as costs are incurred. Under the input method, revenue is recognized based on efforts expended to date (e.g., the costs of resources consumed or labor hours worked, or machine hours used) relative to total efforts intended to be expended.expended. Contract costs include all direct material, labor and subcontractor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates. These rates are subject to audit by the other party. Any changes in estimate related to contract accounting are accounted for prospectively over the remaining life of the contract. Under the over time method, billings may not correlate directly to the revenue recognized. Based upon the terms of the specific contract, billings may be in excess of the revenue recognized, in which case the amounts are included in deferred revenues as a liability on the Condensed Consolidated Balance Sheets. Likewise, revenue recognized may exceed customer billings in which case the amounts are reported as unbilled receivables. Unbilled revenues are expected to be billed and collected within one year. The incidental costs related to obtaining product sales contracts are non-recoverable from customers and, accordingly, are expensed as incurred.
The Company adopted the provisions of ASC No. 606, Revenue from Contracts with Customers, and related amendments (“ASC 606”) on January 1, 2018 using the modified retrospective adoption method with the cumulative effect of initially applying the guidance recognized at the date of initial application. During 2017, the Company analyzed its revenue recognition policies under ASC 606 and then current revenue recognition policies and determined that the performance obligations, transaction price, allocation of transaction price, recognition of contract costs and timing of revenue recognition would not be materially impacted by adopting ASC 606. Accordingly, there was no modified retrospective adoption adjustment necessary as of January 1, 2018.
14
Disaggregation of Revenue
The Company'sCompany sells its products directly to original equipment manufacturers ormilitary contractors and OEM’s and military contractorsthey use our displays in a diverse range of industries applications encompassing the military industrial,and commercial, including medical and industrial, market sectors. Revenues are classified as either military, commercial, consumer market sectors.or multiple based on management’s knowledge of the customer’s products and markets served by displays or the R&D contract work. Revenues classified as multiple are for sales to customers that incorporate the Company’s displays in products that could be used for either military or commercial applications. R&D activities are performed for both military customers and U.S. Government defense related agencies.agencies and consumer companies. Product and Contractcontract revenues are disclosed on the Condensed Consolidated Statements of Operations.
Additional disaggregated revenue information for the three month periodsmonths ended March 31, 20192020 and 20182019 were as follows (in thousands):
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
| |||||||
| Three Months Ended |
|
|
|
|
|
|
| ||||||
| March 31, |
|
| Three Months Ended | ||||||||||
| 2019 |
|
| 2018 |
|
| March 31, | |||||||
| (unaudited) |
|
| 2020 |
|
| 2019 | |||||||
North and South America | $ | 3,398 |
|
| $ | 2,948 |
|
| $ | 3,540 |
|
| $ | 3,398 |
Europe, Middle East, and Africa |
| 2,327 |
|
|
| 2,444 |
|
|
| 2,701 |
|
|
| 2,327 |
Asia Pacific |
| 387 |
|
|
| 1,475 |
|
|
| 490 |
|
|
| 387 |
Total | $ | 6,112 |
|
| $ | 6,867 |
|
| $ | 6,731 |
|
| $ | 6,112 |
|
|
|
|
|
|
|
|
| Three Months Ended |
| |||||
| March 31, |
| |||||
| 2019 |
|
| 2018 |
| ||
| (unaudited) |
| |||||
Military |
| 69 | % |
|
| 72 | % |
Commercial, including industrial and medical |
| 6 | % |
|
| 7 | % |
Consumer |
| 7 | % |
|
| 11 | % |
Multiple |
| 19 | % |
|
| 10 | % |
|
| 100 |
|
|
| 100 |
|
13
|
|
|
|
|
|
|
|
|
| Three Months Ended | |||||
|
| March 31, | |||||
|
|
| 2020 |
|
|
| 2019 |
Military |
| $ | 4,799 |
|
| $ | 4,447 |
Commercial, including industrial and medical |
|
| 313 |
|
|
| 336 |
Consumer |
|
| 688 |
|
|
| 422 |
Multiple |
|
| 931 |
|
|
| 907 |
|
| $ | 6,731 |
|
| $ | 6,112 |
Accounts Receivable from Customers
Accounts receivable, net of allowances, associated with revenue from customers were approximately $3.7 million and $3.2$4.0 million as offor the three months ended March 31, 20192020 and December 31, 2018,2019, respectively.
Contract Assets and Liabilities
Unbilled Accounts Receivables (Contract Assets) - - Pursuant to the over time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled accounts receivable is recorded to reflect revenue that is recognized when the proportional performancecost based input method is applied and such revenue exceeds the amount invoiced to the customer. Unbilled receivables are disclosed on the Condensed Consolidated Balance Sheet as of March 31, 2019.Sheet.
Customer Advances and Deposits (Contract Liabilities)
-The Company recognizes a contract liability when it has billed and received consideration from the customer pursuant to the terms of a contract but has not yet recognized the related revenue. These billings in excess of revenue are classified as deferred revenue on the Condensed Consolidated Statements of Operations.
Total contract assets and liabilities consisted of the following amounts (in thousands):
|
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|
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|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, |
|
| December 31, |
| 21 | March 31, |
|
| December 31, | ||||
| 2019 |
|
| 2018 |
|
|
| 2020 |
|
|
| 2019 | ||
| (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
| |
Unbilled Receivables (contract assets) | $ | 69 |
|
| $ | 224 |
|
| $ | 470 |
|
| $ | 155 |
|
|
|
|
|
|
|
| |||||||
Deferred Revenue (contract liabilities) |
| (95) |
|
|
| (38) |
|
| $ | (294) |
|
| $ | (277) |
Net contract asset (liability) | $ | (26) |
|
| $ | 186 |
|
15
InFor the first quarter of fiscalthree months ended March 31, 2020 and 2019 the Company recognized revenue$30 thousand and $38 thousand of $38 thousandrevenue related to its contract liabilities that existed at December 31, 2018. In the first quarter of fiscal2019 and 2018, the Company recognized revenue of $762 thousand, related to its contract liabilities that existed at December 31, 2017.respectively.
Remaining Performance Obligations.
The Company has elected the practical expedient, which allows disclosure of remaining performance obligations only for contracts with an original duration of greater than one year. Such remaining performance obligations primarily relate to engineering and design services. As ofFor the three months ended March 31, 2019,2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $864 thousand.$1.0 million. The Company expects to recognize revenue on all of its remaining performance obligations over the next 12 months.
14
Note 3:3 – Accounts Receivable, net
The majority of the Company’s commercial accounts receivable are due from OEM’s. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required.
Accounts receivable consisted of the following (in thousands):
|
|
|
|
| ||||||||
|
|
|
|
| ||||||||
|
| March 31, |
| December 31, |
|
|
|
|
|
| ||
|
| 2019 |
| 2018 |
| March 31, |
| December 31, | ||||
|
| (unaudited) |
|
|
| 2020 |
| 2019 | ||||
Accounts receivable |
| $ | 3,835 |
| $ | 3,325 |
| $ | 3,876 |
| $ | 4,105 |
Less allowance for doubtful accounts |
|
| (139) |
|
| (139) |
|
| (139) |
|
| (139) |
Accounts receivable, net |
| $ | 3,696 |
| $ | 3,186 |
| $ | 3,737 |
| $ | 3,966 |
Note 4:4 – Inventories, net
The components of inventories are as follows (in thousands):
|
|
|
|
| ||||||||
|
|
|
|
| ||||||||
|
| March 31, |
| December 31, |
|
|
|
|
|
| ||
|
| 2019 |
| 2018 |
| March 31, |
| December 31, | ||||
|
| (unaudited) |
|
|
| 2020 |
| 2019 | ||||
Raw materials |
| $ | 3,672 |
| $ | 3,701 |
| $ | 2,707 |
| $ | 2,788 |
Work in process |
| 1,704 |
| 1,033 |
|
| 1,986 |
|
| 1,561 | ||
Finished goods |
|
| 4,306 |
|
| 4,888 |
|
| 5,038 |
|
| 5,248 |
Total inventories |
|
| 9,682 |
|
| 9,622 |
|
| 9,731 |
|
| 9,597 |
Less inventory reserve |
|
| (855) |
|
| (1,040) |
|
| (910) |
|
| (765) |
Total inventories, net |
| $ | 8,827 |
| $ | 8,582 |
| $ | 8,821 |
| $ | 8,832 |
Note 5:5 – Line of Credit
|
|
|
|
|
|
|
|
| March 31, |
| December 31, | ||
(in thousands) |
| 2020 |
| 2019 | ||
Revolving credit facility |
| $ | 2,191 |
| $ | 2,891 |
On December 21, 2016, the Company entered into a revolving credit asset based lending facility, (the “ABL facility”)the ABL Facility with a lender that provides for up to a maximum amount of $5 million based on a borrowing base equivalent to 85% of eligible accounts receivable plus the lesser of $2 million or 50% of eligible inventory. The interest on the ABL facilityFacility is equal to the Prime Rate plus 3% but may not be less than 6.5% with a minimum monthly interest payment of $2 thousand. The Company is also obligated to pay the lender a monthly administrative fee of $1 thousand and an annual facility fee equal to 1% of the maximum amount borrowable under the facility.
The ABL facilityFacility will automatically renew on December 31, 20192020 for a one-year term unless written notice to terminate the agreement is provided by either party. In conjunction with entering into the financing, the Company incurred $228 thousand of debt issuance costs including lender and legal costs that will be amortized over the life of the ABL facility. In accordance with recently issued accounting guidance, any revolving credit facility balances outstanding are presented net of these unamortized debt issuance costs on the accompanying Condensed Consolidated Balance Sheet.
The ABL facilityFacility is secured by a lien on all receivables, property and the proceeds thereof, credit insurance policies and other insurance relating to the collateral, books, records and other general intangibles, inventory and equipment, proceeds of the collateral and accounts, instruments, chattel paper, and documents. Collections received on accounts receivable are directly used to pay down the outstanding borrowings on the credit facility.
16
The ABL facilityFacility contains customary representations and warranties, affirmative and negative covenants and events of default. The Company is required to maintain a minimum tangible net worth of $13 million and a minimum working capital balance of $4 million at all times. As ofFor the three months ended March 31, 2019,2020, the Company had $2.5$2.2 million in borrowings outstanding, had unused borrowing availability of $0.8$0.9 million and was in compliance with all financial debt covenants.
For the three months ended March 31, 2019 and 2018 interest expense includes interest paid, capitalized or accrued of $52 thousand, and $42 thousand, respectively, on outstanding debt. Interest expense for the three month periods ended March 31, 2019 and 2018 includes the amortization of debt issuance costs of $21 thousand.
Note 6: Stock-based6 – Stock Compensation
The Company uses the fair value method of accounting for share-based compensation arrangements. The fair value of stock options is estimated at the date of grant using the Black-Scholes option valuation model. Stock-based compensation expense is reduced for estimated forfeitures and is amortized over the vesting period using the straight-line method.
15
The following table summarizes the allocation of non-cash stock-based compensation to our expense categories for the three and nine month periodsmonths ended March 31, 20192020 and 20182019 (in thousands):
|
|
|
|
| ||||||||
|
|
|
|
| ||||||||
|
| Three Months Ended |
|
|
|
|
|
| ||||
|
| March 31, |
| Three Months Ended | ||||||||
|
| 2019 |
| 2018 |
| March 31, | ||||||
|
|
| (unaudited) |
| 2020 |
| 2019 | |||||
Cost of revenues |
| $ | 8 |
| $ | 15 |
| $ | 6 |
| $ | 8 |
Research and development |
| 24 |
| 22 |
|
| 17 |
|
| 24 | ||
Selling, general and administrative |
|
| 161 |
|
| 168 |
|
| 20 |
|
| 161 |
Total stock compensation expense |
| $ | 193 |
| $ | 205 |
| $ | 43 |
| $ | 193 |
At March 31, 2019,2020, total unrecognized compensation costs related to stock options was approximately $0.5$0.2 million, net of estimated forfeitures. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of approximately 30.4 years.
The following key assumptions were used in the Black-Scholes option pricing model to determine the fair value of stock options granted:
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
| ||||||
| Three Months Ended |
|
|
|
|
|
| |||||
| March 31, | Three Months Ended | ||||||||||
| 2019 |
| 2018 | March 31, | ||||||||
| (unaudited) | 2020 |
| 2019 | ||||||||
Dividend yield |
| 0 | % |
| 0 | % |
| 0 | % |
| 0 | % |
Risk free interest rates |
| 2.48 | % |
| 2.16-2.59 | % |
| 2.48 | % |
| 2.48 | % |
Expected volatility |
| 41.7 to 49.2 | % |
| 46.4 to 50.0 | % |
| 41.7 to 49.2 | % |
| 41.7 to 49.2 | % |
Expected term (in years) |
| 3.5 to 4.0 |
|
| 3.5 to 4.75 |
|
| 3.5 to 4.8 |
|
| 3.5 to 4.8 |
|
The Company does not expect to pay dividends in the near future. Therefore, the Company used an expected dividend yield of 0%. The risk-free interest rate used in the Black-Scholes option pricing model is based on applicable yield available at the date of the option grant on U.S. Treasury securities with an equivalent term. Expected volatility is based on the weighted average historical volatility of the Company’s common stock for the equivalent term. The expected term of the options represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience and vesting schedules of similar awards.
17
A summary of the Company’s stock option activity for the three months ended March 31, 20192020 is presented in the following table (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Number of |
| Weighted |
| Weighted |
| Aggregate |
| Number of |
| Weighted |
| Weighted |
| Aggregate | ||||||||
Outstanding at December 31, 2018 |
|
| 4,678,420 |
| $ | 2.81 |
|
|
|
|
|
| ||||||||||||
Outstanding at December 31, 2019 |
|
| 5,404,985 |
| $ | 2.40 |
|
|
|
|
|
| ||||||||||||
Options granted |
| 515,558 |
| 0.92 |
|
|
|
|
|
| — |
|
| — |
|
|
|
|
|
| ||||
Options exercised |
| — |
| — |
|
|
|
|
|
| — |
|
| — |
|
|
|
|
|
| ||||
Options forfeited |
| — |
| — |
|
|
|
|
|
| — |
|
| — |
|
|
|
|
|
| ||||
Options cancelled or expired |
|
| (33,533) |
|
| 9.98 |
|
|
|
|
|
|
| (221,625) |
|
| 3.46 |
|
|
|
|
|
| |
Outstanding at March 31, 2019 |
|
| 5,160,445 |
| $ | 2.62 |
|
| 4.37 |
| $ | 4,875 | ||||||||||||
Vested or expected to vest at March 31, 2019 |
|
| 5,156,680 |
| $ | 2.63 |
|
| 4.37 |
| $ | 4,875 | ||||||||||||
Exercisable at March 31, 2019 |
|
| 4,972,266 |
| $ | 3.03 |
|
| 4.33 |
| $ | 4,875 | ||||||||||||
Outstanding at March 31, 2020 |
|
| 5,183,360 |
| $ | 2.40 |
|
| 3.27 |
| $ | — | ||||||||||||
Vested or expected to vest at March 31, 2020 (1) |
|
| 5,180,131 |
| $ | 2.40 |
|
| 3.27 |
| $ | — | ||||||||||||
Exercisable at March 31, 2020 |
|
| 5,021,954 |
| $ | 2.40 |
|
| 3.27 |
| $ | — |
(1) | The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total unvested options. |
The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock. There were no stock option exercises duringThe aggregate intrinsic value of options exercised was zero for the three months ended March 31, 2019.2020. The Company issues new shares of common stock upon exercise of stock options.
16
Note 7:7 – Income Taxes
The Company’s effective tax rate is calculated quarterly based upon current assumptions relating to the full year’s estimated operating results and various tax-related items. The Company’s effective tax rate was 0%for the three month periodmonths ended March 31, 20192020 and 2018 was2019. 0%.The difference between the effective tax rate of 0% and the U.S. federal statutory rate of 21% for the three month periodsmonths ended March 31, 20192020 and 20182019 was primarily due to recognizing a full valuation allowance on deferred tax assets.
As of March 31, 2019, theThe Company determined that, based on all available evidence, both positive and negative, including the Company’s latest forecasts and cumulative losses in recent years, it was more likely than not that none of its deferred tax assets would be realized and therefore it continued to record a full valuation allowance. allowance as of March 31, 2020.
The Company’s net operating loss carryforwardcarry-forward amounts expire through 2037 and are subject to certain limitations that may occur due to a change in the ownership provisions under Section 382 of the Internal Revenue Code and similar state provisions.
Due to the Company’s operating loss carryforwards,carry-forwards, all tax years remain open to examination by the major taxing jurisdictions to which the Company is subject. In the event that the Company is assessed interest or penalties at some point in the future, it will be classified in the financial statements as tax expense.
On March 27, 2020, the President of the United States signed the Coronavirus Aid Relief and Economic Security Act (“CARES Act”). The CARES Act provides several provisions that effect businesses from an income tax perspective. Due to the history of the tax losses, most of the CARES Act provisions have no current benefit to the Company. The Company can, however, benefit from one provision which allows for the immediate refund of the Alternative Minimum Tax Credit (“AMT Credit”). The Company has filed an amendment to claim the AMT Credit and is anticipating a refund of $212 thousand. This tax receivable was recorded during 2017, in Prepaid Expenses and Other Current Assets on the condensed consolidated balance sheet as of March 31, 2020.
18
Note 8:8 – Commitments and Contingencies
Equipment Purchase Commitments
The Company has committed to equipment purchases of approximately $0.8$0.2 million at March 31, 2019.2020.
Litigation
From time to time, wethe Company may become subject to various legal proceedings that are incidental to the ordinary conduct of ouris business. In March 2019, wethe Company received a demand letter seeking payment of $0.9 million of outstanding invoices relating to purchased inventory from Suga Electronics Limited, or Suga,(“Suga”), a contract manufacturer located in China, which manufactured product sold by our consumer night vision business. We haveThe Company has responded to the demand letter, and requested that Suga provide substantiation of purchased inventory. On August 1, 2019 the Company was notified by Suga that they intend to pursue arbitration. During September and October, 2019, Company held preliminary discussions with Suga to attempt to reach a settlement, however in November 2019 the Company received a formal request for arbitration which Suga filed with the International Chamber of Commerce (“ICC”). The Company retained local counsel in Hong Kong to represent it before the ICC and in December 2019 filed an answer to Suga’s request for arbitration including a counterclaim seeking repayment of amounts previously paid to Suga. An arbitrator has been appointed and arbitral proceedings for the consideration of the claims and counterclaims are expected to run through the first quarter of 2021. The parties are permitted to settle at any point during the arbitration proceedings.
As disclosed in the financial statements of our Annual Report on Form 10-K for the year ended December 31, 2018, during the quarter ended June 30, 2018, wethe Company made a decision to exit the consumer night vision businessConsumer Night Vision Business and accrued approximately $1.0 million related to invoices received for inventory purchased by Suga in anticipation of future production. While we believethe Company believes that we haveit has adequately accrued for the losses and areis in discussions to resolve related claims by the contract manufacturers, there is the risk that additional losses or litigation related expenses may be incurred above the amounts accrued for as of March 31, 2019,2020 if we failthe Company fails to resolve these claims in a timely and/or favorable mannermanner.
17
Note 9: Common Stock Warrant Liability 9 – Warrants
We accountThe Company accounts for common stock warrants pursuant to applicable accounting guidance contained in ASC 815, "Derivatives and Hedging - Contracts in Entity's Own Equity" and makemakes a determination as to their treatment as either equity instruments or a warrant liability based on an analysis of the underlying warrant agreements.
During January 2018, in conjunction with a registered equity offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issued |
| Outstanding |
| Exercise Price |
| Expire | ||||
2015 Warrant Issuance |
|
| 383,500 |
|
| 383,500 |
|
| 2.05 |
|
| Jun 2021 |
2016 Warrant Issuance |
|
| 2,947,949 |
|
| 2,947,949 |
|
| 2.60 |
|
| Feb 2022 |
2017 Warrant Issuance (1)(2) |
|
| 100,000 |
|
| 100,000 |
|
| 2.25 |
|
| Mar 2022 |
2017 Warrant Issuance (1) |
|
| 1,650,000 |
|
| 1,650,000 |
|
| 2.45 |
|
| Nov 2022 |
2018 Warrant Issuance (1) |
|
| 4,004,324 |
|
| 3,974,324 |
|
| 1.55 |
|
| Jul 2023 |
2019 Warrant Issuance |
|
| 240,000 |
|
| 240,000 |
|
| 0.55 |
|
| Apr 2024 |
2019 Warrant Issuance (3) |
|
| 4,000,000 |
|
| 4,000,000 |
|
| 0.49 |
|
| Oct 2024 |
2019 Warrant Issuance (4) |
|
| 6,000,000 |
|
| 6,000,000 |
|
| 0.78 |
|
| Oct 2024 |
|
|
|
|
|
| 19,295,773 |
|
|
|
|
|
|
(1) | Warrants are subject to liability accounting. |
(2) | Issued in conjunction with an unsecured line of credit as described in Note 9: Debt / Line of Credit. |
(3) | Immediately exercisable pre-funded warrants at an exercise price of $0.01 per share. |
(4) | Private Placement unregistered warrants exercisable six months following issuance. |
Equity classified warrants
The 2015, 2016, and a concurrent private placement that closed in February 2018,2019 warrants share similar terms, and the Company issued warrants to purchase an aggregate of 4,004,324 common shares at an exercise price of $1.55.the Warrant Shares are subject to adjustment in the event of any stock dividends and splits, reverse stock splits, stock dividends, recapitalizations, reorganizations or similar transactions. The Warrants will be exercisable on a “cashless” basis in certain circumstances, including in the event a registration statement is not in effect at time of exercise. The warrant agreements contain a clause specifying that in the event there is no effective registration in effect for the underlying warrant shares to be issued at time of exercise, in no circumstance will the Company be required to net cash settle the warrants.
Based on the Company’s analysis of the terms and conditions of the warrants, the Company has concluded that they meet the conditions outlined in applicable accounting guidance to be classified as equity instruments. As a result, the Company has accounted for the exercise price paid by investors for purchase of March 31, 2019, relatedthe pre-funded warrants to purchase 3,974,324 shares of common stock remain outstanding. as additional paid in capital on the accompanying Balance Sheets.
Liability classified warrants
The 2017 and 2018 warrants have alternative settlement provisions that, at the option of the holder, provide for physical settlement or if, at the time of settlement there is no effective registration statement, a cashless exercise as defined in the warrant agreement.
Based on analysis of the underlying warrant agreement and applicable accounting guidance, the Company concluded that these registered warrants require the issuance of registered securities upon exercise and do not sufficiently preclude an implied right to net cash settlement. Accordingly, these warrants were classified onin the Condensedaccompanying Consolidated Balance Sheet as a current liability upon issuance and will be revalued at each subsequent balance sheet date.
The fair value of the liability for common stock purchase warrants is estimated using the Black Scholes option pricing model based on the market value of the underlying common stock at the measurement date, the contractual term of the warrant, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common stock.
We determined that, based
18
Based on the Black Sholes methodology,method the liability for the January and February 2018 common stock warrants had a fair value as of March 31, 2019 of $0.6 million. In addition, warrants the company issued during 2017 that were classified as liabilities had a fair value of $0.1 millionthe Company’s warrants are as of March 31, 2019. The combined changes in fair value as of March 31, 2019 was reflected as income from change in the fair market value of common stock warrant liability of $0.8 million in the Condensed Consolidated Statement of Operations for the three month period ended March 31, 2019.follows (in thousands):
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| March 31, |
| December 31, | ||
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| 2020 |
| 2019 | ||
2018 January and February Issuance |
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Fair Value |
| $ | 39 |
| $ | 22 |
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2017 May issuance |
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Fair Value |
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| 4 |
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| 1 |
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| $ | 43 |
| $ | 23 |
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| Three Months Ended | ||||
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| March 31, | ||||
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| (in thousands) | ||||
Change in Fair Value of common stock warrant liability (1) |
| $ | (20) |
| $ | 794 |
(1) | The combined changes in fair value is reflected as income from change in the fair market value of common stock warrant liability. |
Note 10:10 – Leases
The Company leases office and manufacturing facilities in Hopewell Junction, NY under a non-cancelable operating lease agreement. The lease for these facilities, as amended, expires in May 2024 and does not contain a renewal option. The lease agreement does not contain any residual value guarantees, or material restrictive covenants.
The Company also leases an office facility for its design group in Santa Clara, California,California. During the fourth quarter of 2019, the Company signed a two-year extension of this lease that expires on October 31, 2019. Because the remaining term is less than one year, the Company has elected2021. The lease agreement does not to apply the recognition requirement of the new leasing standard to this lease.contain any residual value guarantees or material restrictive covenants.
19
For the three months ended March 31, 2019, the components of operating lease expense were as follows:
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The Company's operating leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.
The Company's weighted average remainingcomponents of lease term and weighted average discount rate for operating leasesexpense were as of March 31, 2019 are:follows (in thousands):
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| Three Months Ended |
| Three Months Ended | ||
|
| March 31, 2020 |
| March 31, 2019 | ||
Finance Lease Cost: |
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|
|
Amortization of right-of-use assets |
| $ | 4 |
| $ | - |
Interest on lease liabilities |
|
| 1 |
|
| - |
Operating lease cost |
|
| 246 |
|
| 246 |
Short-term lease cost |
|
| 15 |
|
| 14 |
Total Lease Cost |
| $ | 266 |
| $ | 260 |
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Other Information |
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Cash paid for amounts included in the measurement lease liabilities: |
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Operating cash flows from operating leases |
| $ | 266 |
| $ | 250 |
Financing cash flows from finance leases |
| $ | 5 |
| $ | - |
Right-of-use assets obtained in exchange for new finance lease liabilities |
| $ | - |
| $ | - |
Right-of-use assets obtained in exchange for new operating lease liabilities |
| $ | - |
| $ | - |
The table below reconciles the undiscounted future
19
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|
| March 31, 2020 |
| December 31, 2019 | ||
Finance lease right-of-use assets |
| $ | 36 |
| $ | 40 |
Operating lease right-of-use assets |
| $ | 3,545 |
| $ | 3,729 |
Finance lease liability, current |
| $ | 16 |
| $ | 16 |
Finance lease liability, non-current |
| $ | 20 |
| $ | 24 |
Operating lease liabilities, current |
| $ | 791 |
| $ | 775 |
Operating lease liabilities, non-current |
| $ | 2,863 |
| $ | 3,067 |
Weighted average remaining lease terms - finance leases |
|
| 2.08 years |
|
| 2.33 years |
Weighted average remaining lease terms - operating leases |
|
| 4.17 years |
|
| 4.42 years |
Weighted average discount rate - finance leases |
|
| 10.91% |
|
| 10.91% |
Weighted average discount rate - operating leases |
|
| 8.48% |
|
| 8.48% |
Future annual minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total operatingfinance lease liabilities recognized on the Condensed Consolidated Balance Sheetscommitments as of March 31, 2019:2020 were as follows (in thousands):
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|
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April 1, 2019 through December 31, 2019 |
| $ | 752 |
2020 |
|
| 1,002 |
2021 |
|
| 1,002 |
2022 |
|
| 1,014 |
2023 |
|
| 1,022 |
Thereafter |
|
| 426 |
Total undiscounted future minimum lease payments |
|
| 5,218 |
Less: Difference between undiscounted lease payments and discounted operating lease liabilities |
|
| 981 |
Total operating lease liabilities |
| $ | 4,237 |
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|
| Operating Leases |
| Finance Leases | ||
2020 (excluding the three months ended March 31, 2020) |
| $ | 798 |
| $ | 15 |
2021 |
|
| 1,054 |
|
| 20 |
2022 |
|
| 1,014 |
|
| 6 |
2023 |
|
| 1,022 |
|
| - |
2024 |
|
| 426 |
|
| - |
Total undiscounted future minimum lease payments |
|
| 4,314 |
|
| 41 |
Less imputed interest |
|
| 660 |
|
| 5 |
Lease liability |
| $ | 3,654 |
| $ | 36 |
Cash paid for amounts included in the measurement of operating lease liabilities were $250 thousand for the three months ended March 31, 2019, and this amount is included in operating activities in the Condensed Consolidated Statements of Cash Flows.
Note 11: Subsequent Events11 – Shareholders’ Equity
April 2019 Equity Raises
On April 9, 2019,February 13, 2020, the Company closed a registered directentered into an amendment to its ATM facility, dated November 22, 2019, with H. C. Wainwright & Co., LLC (“Wainwright”). The amendment modifies the agreement to increase the aggregate offering of 4 million shares of Company common stock at a purchase price per share of $0.50, for gross proceeds of approximately $2.0 million before deducting placement agent fees and other offering expenses. The Company also issued unregistered warrants to the investor to purchase up to 3$2.5 million related to shares of common stock at an exercise price of $0.78 per share. The warrants are exercisable six months following issuance and will expire five and one-half years from the issuance date.
On April 9, 2019,that the Company closed an additional $2.0 million registered direct offering consisting of immediately exercisable pre-funded warrantsmay offer and sell through Wainwright from time to purchase up to 4 million shares of Company common stock at a purchase price of $0.49 per warrant and an exercise price of $0.01 per share. In a concurrent private placement, the Company issued to the investor in the registered direct offering unregistered warrants to purchase up to 3 million shares of the Company’s common stock at an exercise price of $0.78 per share. The unregistered warrants are exercisable six months following issuance and will expire five and one-half years from the issuance date.
time. The Company intends to use the net proceeds from these offeringssales made under the ATM offering for working capital and other general corporate purposes. During the quarter ended March 31, 2020 the Company raised $1.6 million, net of offering expenses, through the sale of shares under the ATM facility.
20
ItemITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business
The following discussion should be read in conjunction with our financial statements and notes thereto. Our fiscal year ends December 31. This documentReport contains certain forward‑looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. These forward‑looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Please see "Statement Regarding Forward-Looking Information" and See Part I,II, Item 1A, "Risk Factors". Actual results could differ materially from these forward‑looking statements. Important factors to consider in evaluating such forward‑looking statements include changes in external factors or in our internal budgeting process which might impact trends in our results of operations, unanticipated working capital or other cash requirements, changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate, and various competitive market factors that may prevent us from competing successfully in the marketplace. Forward-looking statements do not represent our views as of any date other than the date of this Report.
Business
We believedesign, develop, manufacture and market organic light emitting diode, or OLED miniature displays, which we refer to as OLED-on silicon microdisplays, virtual imaging products that we will maintainutilize OLED microdisplays, and related products. We also perform research in the OLED field. Our virtual imaging products integrate OLED technology with silicon chips to produce high-resolution microdisplays which, when viewed through a magnifying headset, create virtual images that appear comparable in size to that of a computer monitor or a large‑screen television. Our products enable our leadership positionoriginal equipment manufacturer, or OEM, customers in our corethe military and commercial (including industrialmarkets to develop and medical) markets by continuing to improve both product performance and manufacturing processes. market improved or new electronic products.
We believe that our OLED microdisplays offer a number of significant advantages over comparable liquid crystal microdisplays, including higher contrast, greater power efficiency, less weight, more compact size, and negligible image smearing. Using our active matrix OLED technology, roadmap should enable usmany computer and electronic system functions can be built directly into the OLED microdisplays silicon backplane, resulting in compact, high resolution and power efficient systems. Already proven in military and commercial systems, our product portfolio of OLED microdisplays deliver high‑resolution, virtual images that perform effectively even in extreme temperatures and high‑vibration conditions.
We have been deemed to be an essential business in New York State and have continued to produce and ship products during the COVID-19 pandemic. We have implemented employee health and safety measures per Centers for Disease Control and Prevention, or CDC, guidelines and continued to supply products to our customers as well as maintain continuity in our competitive advantage assupply chain and expect to continue our operations throughout the duration of the pandemic and beyond. To date we believehave experienced disruptions in supply, had two employees test positive for the COVID-19 virus and had to close our facilities for cleaning purposes. There is no assurance that our focus on high brightness aligns well with the performance requirements of current and future military ground and aviation programsoperations will not be disrupted in the U.S.future by additional impacts of the COVID-19 virus on either our internal operations or those of our suppliers or customers. In addition, please review the various risk factors relating to the COVID-19 pandemic discussed in Part II, Item 1A of this Report.
During the fourth quarter of 2018, equipment issues led to lower yields and U.S allied countries acrossdecreased production volumes, which resulted in a lower gross margin and reduced display revenues. Although we began implementing remedial production measures during the globe. Key growth opportunitiesfourth quarter of 2018, manufacturing issues continued into the second quarter of 2019, resulting in shipments for us include the consumer electronicsecond quarter of fiscal 2019 that were less than forecast and enterprise OEM markets where, we believe, our direct patterned technology or dPd, isyields and production volumes that were below pre-fourth quarter 2018 levels. As a key differentiator for enabling next generation AR/VR hardware because of its brightness and pixel density. In order to achieve growthresult, early in the consumerthird quarter of 2019 we began accelerating the implementation of remedial measures. There can be no assurance as to the ongoing effectiveness of any remedial measures we have implemented or that yields and enterprise OEM markets, we believe weproduction volumes will needreturn to partner with industry leaders in consumer electronics who can help us capitalize on our technology to meet the needslevels previously achieved.
As a result of end users from both a cost and performance standpoint. Our strategy for these markets is to license our dPd technology and to partner with established high volume manufacturersefforts, production yields in the masssecond half of 2019 improved over yields experienced in the first half of 2019 and production volumes were up over 50% during the second half of microdisplays.
2019 as compared to the first half of 2019 reflecting greater second half demand, which increased revenues and reduced unit costs. As a result of the improvements in manufacturing efficiency and throughput, our on time delivery of customer orders reached levels of over 95% during the third and fourth quarter of 2019 and continued through the first quarter of 2020. During the first quarter of fiscal2020, our yields were consistent with the second half of 2019; however, our gross margin declined slightly over the year ago period, due to lower production volumes. Our backlog at March 31, 2020 was $13.3 million compared to backlog of $11.7 million at December 31, 2019 we made progress towards our goals of securing new U.S. military programs, broadening our presence in foreign military applications, and in commercial, including industrial and medical, markets. We continue to participate in government discussions on microdisplay development for future defense aviation/mounted/dismounted programs and to position our displays as a key component ofreflecting increased bookings during the future Soldier System 2030 technology suite for enhanced soldier performance and accelerated decision making. As the only U.S. based manufacturer of OLED microdisplays, we are also working to secure additional government funding to ensure the advancement of our manufacturing capabilities in support of defense programs that may benefit from our standard and high brightness OLED microdisplays including those incorporating our dPd technology.quarter.
We continue to work towards our strategic shift from being solely a component provider to offering our customers a more complete solution. We have developed a prism optic, which we shipped during the quarter to a major military customer for evaluation. We also developed a fiber optic taper that will enable our displays to be incorporated into products which are being retrofitted or otherwise designed for a different sized microdisplay. In addition, a new assembly process was developed and validated that allows additional optical elements to be attached to our microdisplays, providing for a broader range of applications by the customer with less up-front engineering design work.
Our technology development efforts continue to focus on advancing and enhancing our leading dPd display technology. During the first quarter of fiscal 2019, we continued to improve the performance and availability of our dPd displays by incorporating in the manufacturing process equipment that improves production yields and expands throughput and that increases the maximum brightness, and lowers their power consumption. Our goal is to achieve at least 10,000 nits by year-end 2019. Additionally, such efficient and high brightness displays lead to longer battery life and longer device lifetime for a given brightness. We believe that our high luminance OLED-on-silicon technology is gaining greater attention in the AR/VR industry, which requires high brightness and has contributed to our signing agreements with multiple Tier One consumer product and electronics companies.
Operationally, we furthered our progress on our multi-year yield improvement initiative as we continued to increase production resources, make key technical hires, and install new, advanced production equipment. This initiative is expected to position us to increase production capacity, lower unit costs and achieve greater operating efficiencies which we believe will enable us to meet growing customer demand and achieve higher gross profits. As part of our yield improvement initiative, we also qualified for production capital equipment acquisitions made over the past several quarters. We expect that these additions will increase production reliability by reducing our dependency on critical equipment at key stages of the production process while providing greater operating flexibility and permitting us to address the increasingly demanding needs of our customers without compromising throughput volumes or unit profitability.
21
Production activities during the first quarter were negatively impacted by manufacturing challenges which arose in the fourth quarter of 2018. During the fourth quarter, delays in the process qualification of a product type on our higher volume deposition tool along with an equipment issue led to a loss of production and lower yields. Although remedial measures were implemented and yields and production volumes began to recover, delays continued in the first quarter of fiscal 2019 and, as a result, shipments for the quarter were less than originally planned. The equipment purchases, installations, and qualifications mentioned above should reduce the probability of future reoccurrences.
New Business
We are seeing growing demand for our products, particularly under U.S. military and aviation programs and with new and existing international customers. During the first quarter of fiscal 2019, we soldalso implemented spending reductions and controls to over 70 customers and supplied products for over 20 new programs. The increased demand is leading to more orders and the requested acceleration of existing orders. As of March 31, 2019,reduce our backlog of products scheduled for delivery through March 31, 2020, was $10.7 million an increase of approximately $100 thousand over the backlog of $10.6 million at December 31, 2018. Variations in the magnitude and duration of purchase orders and customer delivery requirements may result in substantial fluctuations in backlog from period to period. Many ofoverall cost structure. These measures lowered our purchase orders allow for rescheduling or cancellationoverall spending as evidenced by the customer with no or limited penalties.
Among our successes during the first quarter were:
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New Technology Development
Our technology development centers on advancing our industry-leading high brightness full-color microdisplays incorporating our color filter and proprietary dPd technology. We believe our dPd 2K x 2K displays demonstrate the best combination of high brightness and resolution in the global market today. We have designed these displays to incorporate the attributes that consumer electronics companies demand for their next generation products including variable persistence and global illumination. We view the continued development and demonstration of the advantages of our dPd technology as integral to driving our growth in the enterprise and consumer AR/VR markets, and to accelerate our discussions with mass production partners.
Recent improvements in our manufacturing processes have led to the production of microdisplays with brightness levels that surpass the 5,000 nits threshold requirements of Tier One companies for their AR/VR applications and put us on track to exceed the future brightness levels required by the military. We developed microdisplays that achieved a measured brightness of 7,500 nits in 2018 and are targeting a brightness of 10,000 nits in full color by the end of 2019, consistent with our goal of achieving over 25,000 nits by the end of 2021. This compares to brightness levels of our standard full color products in the range of 150 to 1,500 nits.
We have also made proprietary architectural improvements and incorporated superior performing OLED materials that have led to demonstrated improvements in the efficiency and lifetime of our displays. In concert with these initiatives, we are upgrading our existing direct patterning equipment which we expect will significantly extend the lifetime of our dPd displays and improve production yields and volumes. The equipment upgrade is scheduled to be completed and qualifiedreduction during the second quarter of 2019our research and development, or R&D, and Selling, General and Administrative, or SG&A, expenses both year-over-year and sequentially quarter-to-quarter. These measures included a work status reduction, or Work Status Reduction, with dPd display production commencingthe objective of reducing expenses and saving cash. Pursuant to the Work Status Reduction, the work status of each of our executive officers was reduced by twenty percent (20%) and the work status of certain of our vice presidents was reduced by either twenty percent (20%) or ten percent (10%). We also negotiated
21
reductions in service fees, which are expected to further reduce our expenses going forward.
During the quarter, we shipped a significant amount of product for the ENVG-B program. The improved design of the wafers for the next generation F-35 HMD systems was recently completed with first shipments planned for later in the thirdyear. In addition, we received awards for two-multiyear U.S. helicopter helmet programs, one of which is for a new program with deliveries starting in the second quarter and the other, an upgrade, which will begin shipping in the fourth quarter. Finally, we received an order from a European military customer for displays used in shoulder fired weapon systems. Our USA-based design and manufacturing, combined with in-house advanced backplane design, and the promise of our Direct Patterning Display (dPdTM) technology continues to give us a competitive advantage more than ever before in these markets.
Consumer, medical, and military customers are increasingly turning to eMagin because of our technological leadership in display brightness and resolution. This leadership in brightness is further demonstrated by our proprietary dPdTM capability. Unlike traditional OLEDs that produce colors by using a white source with filters that eliminate about 80% of the emitted light, with dPdTM, we make full color displays by directly depositing each of the primary color materials (RGB) on respective sub-pixels, without the use of filters. This advanced technology gives us an increase in brightness of over 10X versus the competition and we are on track to achieve 10,000 cd/m2 by Q4 2020, and expect to achieve a brightness level of over 28,000 cd/m2 ready for mass production of full color displays by 2023. We achieved the highest monochrome brightness levels in the market years ago and are continuing our leadership with color displays. Display brightness is critical for AR/VR devices because of optics inefficiency and the need to eliminate motion artifacts. This is especially important for Heads Up Display’s (HUDs) used in bright, daylight environments.
Liquidity and Going Concern
As explained below under Liquidity and Capital Resources, the accompanying consolidated financial statements have been prepared on the going concern basis, which assumes we will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. However due to continuing losses, our financial position, and uncertainty regarding our ability to borrow under the ABL Facility, or continue to raise funds under our at the market facility, or ATM, facility, we may not be able to meet our financial obligations as they become due without additional financing or sources of capital.
For the three months ended March 31, 2020, we incurred a net loss of $1.4 million and used cash in operating activities of $0.9 million. At March 31, 2020, we had $3.1 million of cash, net working capital of $9.2 million, $2.2 million of outstanding indebtedness and borrowing availability of $0.9 million under the ABL Facility. For the three months ended March 31, 2020, we raised $1.6 million, net of offering expenses, through the sale of shares under our At The Market (“ATM”) facility entered into in November 2019. This is in comparison with cash and working capital of $3.5 million and $8.8 million, respectively, $2.9 million debt outstanding and borrowing availability under the ABL Facility of $1.2 million at December 31, 2019. Net cash used in operating activities for the year ended March 31, 2020 was $0.9 million, compared to $2.3 million for the year ended March 31, 2019. Our backlog at March 31, 2020 was $13.3 million compared to backlog of $11.7 million at December 31, 2019.
The COVID-19 pandemic has significantly increased economic and demand uncertainty. It is likely that the current outbreak and continued spread of COVID-19 will cause the economic slowdown to continue, and it is possible that it could cause a global recession. There is a significant degree of uncertainty and lack of visibility as to the extent and duration of the current slowdown or any recession. If either were prolonged, demand for our products will be significantly harmed. We are currently seeing delays in product shipments and are expecting slowing economic conditions to adversely affect our business in the second half of 2020. Given the significant economic uncertainty and volatility created by the pandemic, it is difficult to predict the nature and extent of the impact on demand for our products. These expectations are subject to change without warning and investors are cautioned not to place undue reliance on them. Unanticipated consequences of the pandemic and resulting economic uncertainty could adversely affect our liquidity and capital resources in the future as well as our ability to continue as a going concern.
We have also demonstratedtaken actions to increase revenues and to reduce expenses and are considering financing alternatives, but there can be no assurance that we will be successful in sufficiently increasing revenues, mitigating the impacts of COVID-19, reducing expenses or securing additional financing to meet our operating needs. The Company’s plans with regard to these matters include the following actions: 1) focus production and engineering resources on improving manufacturing yields and increasing production volumes, 2) continuing a high efficiency OLED stackWork Status Reduction program that can deliver maximum brightness levelsbegan in October 2019 wherein senior management work status was reduced by approximately 20%, 3) reduce headcount and not replace departed employees, 4) reduce discretionary and other expenses, and 5) considering financing and/or strategic alternatives.
Based on our current projections, operational and yield improvements, and the rangeanticipated availability of 2,500 - 3,000 nits using our core white OLED with color filter technology. This level of brightness is well suited for many of our customers whose products require higher brightness than our OLED-XLS platform. We expectthe ABL Facility, we estimate we will have sufficient liquidity to optimize this process and qualify it byfund operations through the end of the fourthfirst quarter of 2019.
New Product Development
2021. However, there can be no assurance our plans will be achieved, or that we will be able to continue to borrow under our ABL Facility, continue to raise funds under our ATM facility, secure additional financing, and/or pursue strategic alternatives on terms acceptable to us, or at all.Our next generation AR/VR 4K x 4K microdisplay design was successfully evaluated at wafer level this past quarter, validating both foundry and eMagin processes as suitable for large area microdisplay on silicon applications. Component level evaluation is being performed during the second quarter, with the expected completion of full color prototype using our dPd technology completed during the third quarter of 2019.
We continue our initiative to move from providing simply a component to offering a more comprehensive solution to our customers. A new assembly process was developed and validated that allows additional optical elements to be attached to our microdisplays. The validation was conducted over a larger than typical temperature range, demonstrating a solid robustness for multiple ground and airborne environments. We delivered to a major foreign customer the prism optic we are developing for our SXGA 096 display. Customer feedback is expected during the second quarter, which could lead to the development of production tooling for the optical elements. We believe these efforts have the potential to generate sizeable revenues.
We also developed a fiber optic taper that will enable our displays to be incorporated into products which are being retrofitted or otherwise designed for a different sized microdisplay. This will enable the customer to do so more efficiently and at a lower cost than would be associated with a major redesign to accommodate the original sized display. With existing end-use products being upgraded and the increasing demand for higher performance displays, this can give us significant opportunities for growth in new business and garner market share from other display companies which offer competing, and oftentimes inferior, display technologies. The fiber optic taper is currently being evaluated by one major prime defense contractor with interest expressed by other defense contractors.
Employees
At March 31, 2019, we had 106 employees, of whom 104 were full-time employees, as compared to 105 employees, of whom 103 were full-time employees, at December 31, 2018.
A detailed discussion of our business and operations may be found in Part I, “Business,” of our 2018 Annual Report on Form 10-K for the year ended December 31, 2018, and as filed with the Securities and Exchange Commission on March 29, 2019.
common stock
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CRITICAL ACCOUNTING POLICIES is listed on the NYSE American, and we are subject to its continued listing requirements, including maintaining certain share prices and a minimum amount of shareholder’s equity. If we are unable to comply with the NYSE American continued listing requirements, including its trading price requirements, our common stock may be suspended from trading on and/or delisted from the NYSE American.
In addition, even if we successfully generate additional funds through the sale of additional equity securities, borrowings or alternative financing, there can be no assurances that the revenue or capital infusion will be sufficient to enable the Company to develop its business to a level where it will be profitable or generate positive cash flow. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we incur additional debt, a substantial portion of its operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our operational business activities. The terms of any debt securities issued could also impose significant restrictions on our operations. In addition, broad market and industry factors may seriously harm the market price of our common stock, regardless of its operating performance, and may adversely impact its ability to raise additional funds.
Critical Accounting Policies
Please refer to the information provided under the heading "Critical Accounting Policies and Estimates" included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, filed with the SEC on March 29, 2019,11, 2020, for a discussion of our critical accounting policies. There were no material changes to such policies in the first three months of 2019.quarter ended March 31, 2020. New accounting policies adopted during the quarter are described in Note 1, "Summary of Significant Accounting Policies," to our unaudited consolidated financial statements included in this report.Report.
23
Results of Operations
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCHComparative results of operations for the three months ended March 31, 2020 and 2019 COMPARED TO THREE MONTHS ENDED MARCH 31, 2018(in thousands):
Revenues
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| 2019 |
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Product |
| $ | 5,507 |
| $ | 5,863 |
| $ | (356) |
| $ | 5,634 |
| $ | 5,507 |
| $ | 127 |
Contract |
| $ | 605 |
| $ | 1,004 |
| $ | (399) |
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| 1,097 |
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| 605 |
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| 492 |
Total revenue, net |
| $ | 6,112 |
| $ | 6,867 |
| $ | (755) |
| $ | 6,731 |
| $ | 6,112 |
| $ | 619 |
Revenues for the three months ended March 31, 2020 and 2019 were $6.7 million and 2018 were $6.1 million, and $6.9 million, respectively.
Product revenue is comprised primarily of sales of displays as well as sales of other hardware. For the three months ended March 31, 2019,2020 product revenue decreasedincreased by $0.4$0.1 million, as compared to revenue of $5.9 millionfrom the comparable prior year period. The increase in display revenues during the three months ended March 31, 2018. The decrease in display revenues in the first quarter of 20192020 was primarily due to changes in the effectsmix of certaindisplay types, resulting in displays shipped at higher average selling prices, as compared to the three months ended March 31, 2019. Revenues in 2019 were impacted by manufacturing challenges that began in the fourth quarter of 2018 production issuesand continued through the second quarter of 2019, which continued into the first quarteraffected yields and throughput and resulted in lower than planned shipments.shipments during the first six months of 2019.
Contract revenue is comprised of revenue from research and development (“R&D”), commercial contracts&D and non-recurring engineering (“NRE”) contracts. For the three months ended March 31, 2019,2020, contract revenue decreasedincreased by $0.4$0.5 million, compared tofrom the same period last year.comparable prior year period. The decreaseincrease in contract revenue for the three months ended March 31 2019 was primarily due a project to timing of development work ondesign a display for a Tier One customer in the consumer contract.space.
Cost of Revenues
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| 2018 |
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| 2020 |
| 2019 |
| Change | ||||||||||
Product |
| $ | 4,426 |
| $ | 4,359 |
| $ | 67 |
| $ | 4,790 |
| $ | 4,426 |
| $ | 364 |
Contract |
| $ | 350 |
| $ | 528 |
| $ | (178) |
|
| 507 |
| $ | 350 |
|
| 157 |
Total cost of revenues |
| $ | 4,776 |
| $ | 4,887 |
| $ | (111) |
| $ | 5,297 |
| $ | 4,776 |
| $ | 521 |
Total cost of revenues is comprised of costs of product and contract revenues. Cost of product revenue includes materials, labor and manufacturing overhead, warranty costs and depreciation related to our products. Total cost of revenues for the three months ended March 31, 2019 decreased2020 increased by $0.1$0.5 million, compared tofrom the comparable prior year’syear period primarily due to decreasesincreased revenues in contract costs.three months ended March 31, 2020.
24
The following table outlines product and contract total gross profit and related gross margins for the three month periodsmonths ended March 31, 20192020 and 20182019 (dollars in thousands):
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| 2020 |
| 2019 | ||||||||||
Product revenues gross profit | $ | 1,081 |
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| $ | 1,504 |
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| $ | 844 |
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| $ | 1,081 |
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Product revenues gross margin |
| 20 | % |
| 26 | % |
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| 15 | % |
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| 20 | % | |
Contract revenues gross profit | $ | 255 |
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| $ | 476 |
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| $ | 590 |
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| $ | 255 |
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Contract revenues gross margin |
| 42 | % |
| 47 | % |
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| 54 | % |
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| 42 | % | |
Total gross profit | $ | 1,336 |
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| $ | 1,980 |
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| $ | 1,434 |
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| $ | 1,336 |
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Total gross margin |
| 22 | % |
| 29 | % |
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| 21 | % |
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| 22 | % |
Total gross profit is a function of revenues less cost of revenues. Gross profit for the three months ended March 31, 2020 increased $0.1 million, from the comparable prior year period primarily reflecting increased contract revenue gross profit in the three months ended March 31, 2020. Total gross margin was 21% and 22% for the three months ended March 31, 2020 and 2019, respectively.
24
The product gross profit for the three months ended March 31, 2020 decreased $0.6 million, as from the comparable prior year period because of lower production volumes in the three months ended March 31, 2020compared to the prior year period, primarily reflecting decreasedand the resultant decrease of product revenue gross profit. Total gross margin was 22% and 29% for the three months periods ended March 31, 2019 and 2018, respectively.costs capitalized into finished good inventory. The total gross margin of 22% for the three month periods ended March 31, 2019 decreased from the prior year periods, primarily due to decreased revenuesdecrease in the 2019 periods.
The product gross profit and gross margins for the three months ended March 31, 2019 decreased2020, were impacted by the lowered production volumes as compared to the prior year period due to decreases in revenues,period.
Contract gross margin is dependent upon the mix of internal versus external third party costs and increases in operating expenses, primarily due to increased headcountmaterials, with the external third party costs and depreciationmaterials causing a lower gross margin and reducing the residual impact of certain fourth quarter 2018 production issues.contract gross profit. For the three month periodsmonths ended March 31, 2019 and 2018,2020, contract revenue gross profit was $0.6 million compared to $0.3 million and $0.5 million, respectively. Decreasedfor the prior year period. Increased contract revenue gross profit in the three months periods ended March 31, 20192020 was primarily due to the decreaseincrease in contract revenues partially offset by the contribution of several military related contracts at favorable margins. to design work for a Tier One customer.
Operating Expenses
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| 2019 |
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Research and development expense |
| $ | 1,597 |
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| $ | 1,631 |
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| $ | (34) |
| $ | 980 |
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| $ | 1,597 |
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| $ | (617) |
Percentage of net revenue |
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| 26 | % |
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| 24 | % |
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| 15 | % |
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| 26 | % |
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Selling, general and administrative expense |
| $ | 1,939 |
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| $ | 2,912 |
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| $ | (973) |
| $ | 1,798 |
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| $ | 1,939 |
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| $ | (141) |
Percentage of net revenue |
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| 32 | % |
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| 42 | % |
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| 27 | % |
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| 32 | % |
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Total operating expenses |
| $ | 3,536 |
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| $ | 4,543 |
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| $ | (1,007) |
| $ | 2,778 |
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| $ | 3,536 |
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| $ | (758) |
Percentage of net revenue |
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| 58 | % |
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| 66 | % |
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| 41 | % |
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| 58 | % |
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Research and Development (“R&D”).
R&D expenses are company-fundedcompany funded and includeare primarily compromised of salaries and related benefits, development materials and other costs specifically allocated to the development of new technologies, microdisplay products, OLED technologies and processes, OLED materials and subsystems.production processes. R&D related costs associated with fulfilling contracts are categorized as contract cost of revenues. R&D expenses were a consistent$1.0 million and $1.6 million for the three month periodsmonths ended March 31, 2020 and 2019 and 2018, which on a percentage basis was 26% of revenues and 24% of revenues, respectively. The decrease in R&D costs in the current year reflected work performed onfirst quarter of 2020 reflects increased allocations of R&D expenses to contracts related to the Company’s dPd technology including product development and process development associated with the manufacture of our direct patterned displays as well as resources expended on improving manufacturing processes. increases in contract revenues.
Selling, General and Administrative (“SG&A).
SG&A expenses consist principallyprimarily of salaries and related benefits,personnel expenses, professional services fees, andas well as other marketing, general corporate and administrative expenses. SG&A expenses for the three-month periods ended March 31, 2019, decreased $1.0were $1.8 million compared to the prior year period, reflecting higher expenses in the prior year’s period related to spending on professional services, legal and travel associated with negotiations with prospective consumer electronics and volume manufacturing partners. SG&A for the three-month period ended March 31, 2018 also included an allocation of approximately $240 thousand of transaction fees incurred in the January 2018 offering which were associated with the fair value of the warrant liability and, accordingly, expensed in SG&A.
SG&A expenses$1.9 million for the three months ended March 31, 2020 and 2019, wererespectively. The decrease was primarily due to lower than the prior year periodsspending salaries resulting from a 20% work status reduction implemented in October 2019 and decreased onreductions in non-cash compensation related to a percentage of revenue basis from 42% to 32%reduction in the current quarter. amount of stock options granted to the Board of Directors that took effect in December 2019.
Other Income (Expense)
25
Other Income, net. Other income (expense), net consists of changes in the fair value of warrant liability as well as interest income earned on cash balances and interest expense.balances. Income or expenses related to the change in fair value of warrant liability waswere $20 thousand and $0.8 million, and $0.5 million, respectively, for the three month periodsmonths ended March 31, 2020 and 2019, and 2018.respectively. This non-cash income or expense is associated with a decreasechanges in the liability related to registered warrants issued in May 2017 and January 2018. We are required to revalue warrants classified on our balance sheet as a liability at the end of each reporting period and reflect a gain or loss from the change in fair value in the period in which the change occurred. We calculate the fair value of the warrants outstanding using the Black-Scholes model.
Liquidity and Capital Resources
As ofFor the three months ended March 31, 2019,2020, we had $3.1 million in cash, and working capital of $3.5$9.2 million and $7.3 million, respectively, and borrowings outstanding and borrowing availability under the ABL facilityFacility of $2.5$2.2 million and $0.8$0.9 million, respectively. This is in comparison with $3.5 million in cash, and working capital of $3.4 million and $8.8 million respectively, noand borrowings outstanding and borrowing availability under the facilityABL Facility of $4.1$2.9 million and $1.2 million, respectively, at December 31, 2018.2019.
Cash flowFor the three months ended March 31, 2020 cash used in operating activities duringwere $0.9 million, which was attributable to a net loss of $1.4 million and changes in operating assets and liabilities of $0.3 million, partially offset by non-cash income and expenses of $0.7 million. Cash used in operating activities for the three months ended March 31, 2019 was $2.3 million, attributable to net loss of $1.4 million partially offset by non-cash income and expenses of $0.1 million and a net change in operating assets and liabilities of $0.8 million.
Cash flow used in operating activities during the25
For three months ended March 31, 2018 was $2.2 million.
Cash2020 cash used in investing activities during the three months ended March 31, 2019 was $0.2$0.3 million related to equipment purchases primarily to improve manufacturing yields and production capacity.capacity and to advance the Company’s dPdTM technology. As of March 31, 2019,2020, we had outstanding commitments to purchase approximately $0.8$0.2 million in capital expenditures, and expect to make additional capital expenditures during 2019the remainder of 2020 to improve our manufacturing and R&D capabilities. Cash used in investing activities during the three months ended March 31, 2019 was $0.1$0.2 million for equipment purchases.
CashFor the three months ended March 31, 2020, cash provided by financing activities was $0.9 million, from equity financing with net proceeds of $1.6 million offset by net repayments of $0.7 million under our credit facility. Net cash provided by financing activities during the three months ended March 31, 2019 was $2.6 million from net borrowings under our credit facility. Cash provided by financing activities during the three months ended March 31, 2018 was $8.5 million.
Going concern
For the three months ended March 31, 20192020, we incurred a net loss of $1.4 million and used cash in operating activities of $2.3$0.9 million. For the year ended DecemberAt March 31, 2018,2020, we incurred ahad cash and cash equivalents of $3.1 million, net lossworking capital of $9.5$9.2 million, $2.2 million of debt outstanding under our ABL Facility and used cash in operating activitiesborrowing availability of $6.4$0.9 million. We conducted an equity raise in April 2019 that generated $3.6 million in net proceeds.
Due to continuing losses, ourthe Company’s financial position, uncertainty related to the COVID-19 pandemic described above, and uncertainty regarding ourthe Company’s ability to borrow under theits ABL Facility, weor continue to raise funds under its ATM facility, the Company may not be able to meet ourits financial obligations as they become due without additional financing or sources of capital. Management is prepared to reduce expenses and raise additional capital, but there can be no assurance that wethe Company will be successful in sufficiently reducing expenses or raising capital to meet its operating needs.
OurThe Company’s ABL Facility expires on December 31, 20192020 and while relationsrenews automatically for another year unless terminated pursuant to its terms. Although preliminary renewal discussions with the lender are positive there is no assurance the lender will renew or extend this facility, or continue to make funds available during 20192020 and beyond at present availability levels, or at all. Therefore, in accordance with applicable accounting guidance, and based on ourthe Company’s current financial condition and availability of funds, there is substantial doubt about ourthe Company’s ability to continue as a going concern through twelve months from the date this report is filed.these financial statements were issued.
Based on our current projectionsThe Company has taken actions to increase revenues and the availability of the ABL Facility, we estimate we will have sufficient liquidity through the end of the second quarter of 2020. However,to reduce expenses and is considering financing alternatives, but there can be no assurance projected resultsthat the Company will be achieved or funds will be available under our ABL Facility. If actual results are less than projected or additional needs for liquidity arise, we may be able to raise additional debt or equity financing and are prepared to reducesuccessful in sufficiently increasing revenues, mitigating the impact of COVID-19, reducing expenses or enter intosecuring additional financing to meet its operating needs. The Company’s plans with regard to these matters include the following actions: 1) focus production and engineering resources on improving manufacturing yields and increasing production volumes, 2) continuing a Work Status Reduction program that began in October 2019 wherein senior management work status was reduced by approximately 20%, 3) reduce headcount and not replace departed employees, 4) reduce discretionary and other expenses, and 5) considering financing and/or strategic transaction. However, we can make no assurance that we will be able to reduce expenses sufficiently, raise additional capital, or enter into a strategic transaction on terms acceptable to us, or at all.alternatives.
26
April 2019 Equity Raises
On April 9,February 13, 2020, we amended our ATM facility, dated November 22, 2019, we announcedwith Wainwright. The amendment modifies the closing of a registered directagreement to increase the aggregate offering of 4 million shares of our common stock at a purchase price per share of $0.50, for gross proceeds of approximately $2.0 million before deducting placement agent fees and other offering expenses. We also issued unregistered warrants to the investor to purchase up to 3$2.5 million related to shares of common stock at an exercise price of $0.78 per share.that we may offer and sell through Wainwright from time to time. The warrants are exercisable six months following issuance and will expire five and one-half years from the issuance date.
On April 9, 2019, we announced the closing of an additional $2.0 million registered direct offering consisting of immediately exercisable pre-funded warrants to purchase up to 4 million shares of our common stock at a purchase price of $0.49 per warrant and an exercise price of $0.01 per share. In a concurrent private placement, we also issued to the investor in the registered direct offering unregistered warrants to purchase up to 3 million shares of the Company’s common stock at an exercise price of $0.78 per share. The unregistered warrants are exercisable six months following issuance and will expire five and one-half years from the issuance date.
We intendCompany intends to use the net proceeds from these offeringssales made under the ATM offering for working capital and other general corporate purposes.
2018Underwritten Public Offering and Concurrent Private Placement
On January 25, 2018, During the quarter ended March 31, 2020, we entered into an underwriting agreement to issue and sell 9,807,105 sharesraised $1.6 million, net of Company Common Stock, together with warrants to purchase 3,922,842 shares of Common Stock with an initial exercise price of $1.55 per share (at a public offering price of $1.35 per fixed combination consisting of one share of Common Stock and associated warrant to purchase four tenths of one share of Common Stock). These share and warrant amounts includeexpenses, through the exercise of an overallotment option by the underwriter to purchase 1,279,187 additional shares of Common Stock and additional warrants to purchase 511,674 shares of Common Stock. The Common Stock and Warrants were registered on a Form S-1. The offering closed on January 29, 2018 and the Company received net proceeds after underwriting discounts and expenses of $11.9 million.
In a concurrent private placement, certain of our directors and officers purchased an aggregate of 203,708 shares of Common Stock, together with warrants to purchase up to 81,487 shares of Common Stock at the public offering price per fixed combination. The sale of these shares of common stock and warrants was not registered under the Securities Act and is subject to a 180-day lock-up. The private placement closed on February 15, 2018, and the Company received net proceeds of $0.3 million.ATM facility.
ABL Facility
On December 21, 2016, we entered into an asset based revolving credit facility with a lender that provides for up to a maximum amount of $5 million based on a borrowing base equivalent of 85% of eligible accounts receivable plus the lesser of $2 million or 50% of eligible inventory. The interest on the ABL Facility is equal to the Prime Rate plus 3% but may not be less than 6.5% with a minimum monthly interest payment of $2,000. We are obligated to pay the lender a monthly administrative fee of $1,000 and an annual facility fee equal to 1% of the maximum amount borrowable under the facility. The ABL Facility will automatically renew on December 31, 20192020 for a one-year term unless written notice to terminate the Financing Agreement is provided by either party.
The ABL Facility is secured by a lien on all receivables, property and the proceeds thereof, credit insurance policies and other insurance relating to the collateral, books, records and other general intangibles, inventory and equipment, proceeds of the collateral and accounts, instruments, chattel paper, and documents. The ABL Facility contains customary representations and warranties, affirmative and negative covenants and events of default, including a provision that we maintain a minimum tangible net worth of $13 million and a minimum working capital balance of $4 million. As of March 31, 2019,2020, we had $2.5$2.2 million in borrowings, outstanding, had unused borrowing availability of $0.8$0.9 million and were in compliance with all financial debt covenants.
26
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.
27
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Report on Form 10-Q.
Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report,Report, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2019, we implemented new controls as part of our efforts to adopt ASU 2016-02. We implemented new controls related to the adoption process, including reviewing agreements for potential lease elements, and gathering the necessary data to properly account for leases under ASC 842. There2020, there were no other changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As a result of the COVID-19 pandemic, the majority of our finance and administrative workforce began working remotely in March 2020. These changes to the working environment did not have a material effect on our internal controls over financial reporting during the most recent quarter. We are continually monitoring and assessing the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.
PART II - OTHER INFORMATION
From time to time, we may become subject to various legal proceedings that are incidental to the ordinary conduct of our business. In March 2019, we received a demand letter seeking payment of $0.9 million of outstanding invoices relating to purchased inventory from Suga Electronics Limited, or Suga, a contract manufacturer located in China, which manufactured product sold by our consumer night vision business. We have responded to the demand letter, and requested that Suga provide substantiation of purchased inventory. On August 1, 2019 we were notified by Suga that they intend to pursue arbitration. During September and October, 2019, we held preliminary discussions with Suga to attempt to reach a settlement, however in November 2019 we received a formal request for arbitration which Suga filed with the International Chamber of Commerce or ICC. We retained local counsel in Hong Kong to represent it before the ICC and in December 2019 filed an answer to Suga’s request for arbitration including a counterclaim seeking repayment of amounts previously paid to Suga. An arbitrator has been appointed and arbitral proceedings for the consideration of the claims and counterclaims are expected to run through the first quarter of 2021. The parties are permitted to settle at any point during the arbitration proceedings.
As disclosed in the financial statements of the Company’sin our Annual Report on Form 10-K for the year ended December 31, 2018, during the quarter ended June 30, 2018, we made a decision to exit the consumer night vision business and accrued approximately $1.0 million related to invoices received for inventory purchased by Suga in anticipation of future production. While we believe that we have adequately accrued for the losses and are in discussions to resolve related claims by the contract manufacturers, there is the risk that additional losses or litigation related expenses may be incurred above the amounts accrued for as of March 31,September 30, 2019, if we fail to resolve these claims in a timely and/or favorable manner
28
We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Report and the risks discussed below, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2019 Form 10-K. In addition to our discussion in the Company’s Annual Report onMD&A, and other sections of this report, to address effects of the COVID-19 pandemic, we have provided an additional risk factor regarding COVID-19 below. The impact of COVID-19 can also exacerbate other risks discussed in the “Risk Factors” sections of our 2019 Form 10-K and this Report, which could in turn have a material adverse effect on us. The “Risk Factors” section in our 2019 Form 10-K otherwise remains current in all material respects. The risks discussed below and in the “Risk Factors” section in our 2019 Form 10-K do not identify all risks that we face—our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.
The COVID-19 pandemic has affected our business and could materially adversely affect our financial condition and results of operations and ability to continue as a going concern.
The novel strain of the coronavirus identified in China in late 2019 (COVID-19) has globally spread throughout Asia, Europe, the Middle East, and North America and has resulted in authorities imposing, and businesses and individuals implementing, numerous unprecedented measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders, and shutdowns. These measures have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners.
The COVID-19 pandemic has impacted our business. We experienced closures of sections of our plant that lasted between one and two weeks after two of our employees tested positive for COVID-19. During the closures, we were unable to complete certain manufacturing stages and unable to ship some of our products. We have also experienced production disruptions related to the unwillingness or inability of certain of our equipment repair vendors to travel to our facility, the temporary loss of services of employees quarantined due to COVID-19 and delays in the supply of raw materials caused by disruptions due to COVID-19 at one of our vendors. Any period of interrupted access to our manufacturing facilities or our workforce, or similar limitations for our vendors and suppliers, can impact our ability to meet customer demand and could have a material adverse effect on our financial condition and results of operations, particularly if prolonged. In addition, if we are unable to continue regularly scheduled maintenance of our manufacturing equipment, our manufacturing capabilities may be negatively impacted and we may experience further unscheduled closures and/or production disruptions, which could have a material adverse effect on our financial condition and results of operations.
Due to the measures implemented to contain the COVID-19 outbreak, our suppliers, located both inside and outside of the United States, may have limited supplies of, or may be unable to produce, the components we use to manufacture our products. Any significant disruption in the supply of such components could impair our ability to satisfy customer orders, which could have a material adverse effect on our financial condition and results of operations. In addition, there has been an increase in demand, both inside and outside of the United States, for the year ended December 31, 2018 as filed withpersonal protective equipment, or PPE, we use in our manufacturing facilities in order to maintain a safe working environment. If we are unable to obtain the Securities and Exchange Commission,required PPE, we may have to temporarily close certain sectors of our facilities until the needed supplies are obtained, which could materiallyhave a material adverse effect on our financial condition and results of operations.
Certain of our customers have experienced, and may continue to experience, disruptions in their operations and supply chains, which can result in delayed, reduced, or canceled orders, or collection risks, and which may adversely affect our results of operations. We have been notified that certain of our customers are requesting delays in product deliveries due to plant closures related to COVID-19. In April, the US Defense Department announced a three-month slowdown in equipment procurement related to COVID-19. Due to shelter-in-place and similar measures, which restrict, and in some cases prohibit, elective medical procedures, in the future we may also experience delayed, reduced or canceled orders from our customers in the medical market sector. Any existing or future delays, reductions or cancellation of orders from our customers military, commercial or consumer market customers may adversely affect our results of operations.
Escalating trade tensions between the U.S. and China have led to increased tariffs and trade restrictions and have affected customer ordering patterns. The U.S. has imposed restrictions on the export of U.S.-regulated products and technology to our international customers, including those located in China. As a result of the COVID-19 pandemic, we believe there is a risk that U.S. laws and regulations governing the export of goods and technology, including the EAR and ITAR, may be revised to impose even tighter restrictions, which could negatively impact our ability to successfully market and sell our non-military products to customers located in China. Existing and future restrictions could also potentially interfere with our ability to pursue manufacturing in China and our efforts to partner with consumer companies who might seek to build displays using our technology at high volume manufacturing facilities located in China.
29
The spread of COVID-19 has caused us to modify our business practices (including employee travel, employee work locations, cancellation of physical participation in meetings, events and conferences, and social distancing measures), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, vendors, and suppliers. Work-from-home and other measures introduce additional operational risks, including cybersecurity risks, and have affected the way we conduct our activities, which could have an adverse effect on our operations. Due to the increase in employees working from home and accessing our network and systems remotely, we face increased risk of security breaches and other disruptions which could compromise our information technology systems, and expose to liability, theft of sensitive data or damage to our reputation. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and future employee virus or workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions. In addition, our ability to attract, recruit and retain highly skilled and qualified technical and consulting personnel or other employees may be impacted by COVID-19 travel restrictions, and other COVID-19 health concerns related to relocation on the part of potential employees and their families.
The pandemic has significantly increased economic and demand uncertainty. It is likely that the current outbreak and continued spread of COVID-19 will cause the economic slowdown to continue, and it is possible that it could cause a global recession. There is a significant degree of uncertainty and lack of visibility as to the extent and duration of the current slowdown or any recession. If either were prolonged, demand for our products will be significantly harmed. We are currently seeing delays in product shipments. Slowing economic conditions could adversely affect our business financial condition orin the second half of 2020. Given the significant economic uncertainty and volatility created by the pandemic, it is difficult to predict the nature and extent of the impact on demand for our products. These expectations are subject to change without warning and investors are cautioned not to place undue reliance on them. Unanticipated consequences of the pandemic and resulting economic uncertainty could adversely affect our liquidity and capital resources in the future results.as well as our ability to continue as a going concern.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
NoneNone.
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Mine Safety Disclosures
Not applicable.
28
None.
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101.INS | XBRL Instance Document (1) |
101.SCH | XBRL Taxonomy Extension Schema Document (1) |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (1) |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (1) |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document (1) |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (1) |
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(1) Filed herewith. | |
(2) Furnished herewith. |
2931
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 14, 2020
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| eMAGIN CORPORATION |
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| By: | /s/ Andrew G. Sculley |
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| Andrew G. Sculley |
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