UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

~~(Mark One)~~

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

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

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

~~For the transition period from to~~

For the quarterly period ended March 31, 2020

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

For the transition period from to

Commission file number 001-15751

eMAGIN CORPORATION

(Exact name of registrant as specified in its charter)


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

~~2070 Route 52,~~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:


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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months ).(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 ~~definition~~the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~

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


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 byin Rule 12b-2 of the Exchange Act) Yes ☐ No ☑

~~The number~~As of April 30, 2020, there were 53,818,852 common shares at $0.001 par value per share of ~~common stock~~the registrant outstanding ~~as of October 30, 2017 was~~ ~~34,972,589.~~.

~~eMagin Corporation~~

~~Form 10-Q~~

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

Table of Contents



		Page
~~Statement Regarding Forward Looking Information~~
PART I - FINANCIAL INFORMATION
Item 1	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2020 (unaudited) and December 31, ~~2016~~2019	45
	Condensed Consolidated Statements of Operations for the ~~Three Months~~three months ended March 31, 2020 and ~~Nine Months ended September 30, 2017 and 2016~~2019 (unaudited)	56
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2020 and 2019 (unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the ~~Nine Months~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (unaudited)	68
	Notes to Condensed Consolidated Financial Statements (unaudited)	79
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1721
Item 3	Quantitative and Qualitative Disclosures About Market Risk	2528
Item 4	Controls and Procedures	2528

PART II - OTHER INFORMATION
Item 1	Legal Proceedings	2628
Item 1A	Risk Factors	2628
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	2629
Item 3	Defaults Upon Senior Securities	2729
Item 4	Mine Safety Disclosures	2729
Item 5	Other Information	2729
Item 6	Exhibits	2830
SIGNATURES
~~CERTIFICATIONS – see Exhibits~~

STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. ~~These statements are only predictions.~~ You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect our results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016 .~~2019, and in this 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~~our ability to ~~successfully develop~~generate sufficient cash flows and ~~market our products~~obtain the additional financing we need in order to ~~customers;~~continue as a going concern;

~~Our~~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 ~~satisfy~~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 maintain our relationships with customers and vendors;

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

~~Our potential exposure to product liability claims; our ability to manufacture suitable products at competitive cost;~~

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

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

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

~~Our anticipated cash needs~~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;

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 original equipment manufacturer (“OEM”) customers for advanced microdisplays, limited availability of suppliers and foundries, high costs of raw materials, pricing pressure brought by the marketplace or governmental customers and other factors that impact the commercial, military and consumer markets in which we operate;

increasing competition;

provisions in certain of our organizational documents, commercial agreements and our ~~estimates regarding~~military contracts that may prevent or delay an acquisition of, partnership with, or investment in, our ~~capital requirements;~~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 needs for additional financing, as well as~~ our ~~ability~~efforts to ~~obtain such financing.~~settle purchase commitments remaining from our consumer night vision business.

The forward-looking statements in this Report represent our views as of the date of this Report. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some

point in the future, we have no current intention of doing so except to the extent required by applicable law. Therefore, these forward-looking statements do not represent our views as of any date other than the date of this Report.

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

ITEM 1. ~~Condensed Consolidated~~ Financial Statements

eMAGIN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(unaudited)



	September 30,		December 31,
	2017		2016		March 31,		December 31,
	(unaudited)				2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	1,964	$	5,241	$	3,138	$	3,515
Accounts receivable, net		3,428		2,834		3,737		3,966
Unbilled accounts receivable		475		1,401		470		155
Inventories		9,080		7,435		8,821		8,832
Prepaid expenses and other current assets		1,132		1,040		1,344		1,130
Total current assets		16,079		17,951		17,510		17,598
Equipment, furniture and leasehold improvements, net		8,802		8,980		7,926		8,100
Operating lease right - of - use assets						3,545		3,729
Intangibles and other assets		241		282		133		160
Total assets	$	25,122	$	27,213	$	29,114	$	29,587

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,272	$	1,432	$	1,577	$	1,302
Accrued compensation		1,285		1,528		1,566		1,778
Revolving credit facility, net		920		1,689		2,191		2,891
Common stock warrant liability						43		23
Other accrued expenses		492		1,069		1,485		1,401
Deferred Revenue		988		445
Deferred revenue						294		277
Operating lease liability - current						791		775
Other current liabilities		566		590		351		342
Total current liabilities		5,523		6,753		8,298		8,789
Finance lease liability - long term						20		24
Operating lease liability - long term						2,863		3,067
Total liabilities						11,181		11,880

Commitments and contingencies (Note 8)
Commitments and contingencies

Shareholders’ equity:
Preferred stock, $.001 par value: authorized 10,000,000 shares:
Series B Convertible Preferred stock, (liquidation preference of $5,659) stated value $1,000 per share, $.001 par value: 10,000 shares designated and 5,659 issued and outstanding as of September 30, 2017 and December 31, 2016		—		—
Common stock, $.001 par value: authorized 200,000,000 shares, issued 35,134,655 shares, outstanding 34,972,589 shares as of September 30, 2017 and issued 31,788,582 shares, outstanding 31,626,516 shares as of December 31, 2016		35		32
Series B Convertible Preferred stock, (liquidation preference of $5,659) stated value $1,000 per share, $.001 par value: 10,000 shares designated and 5,659 issued and outstanding as of March 31, 2020 and December 31, 2019.						—		—
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		50
Additional paid-in capital		246,312		239,915		260,358		258,767
Accumulated deficit		(226,248)		(218,987)		(241,979)		(240,610)
Treasury stock, 162,066 shares as of September 30, 2017 and December 31, 2016		(500)		(500)
Treasury stock, 162,066 shares as of March 31, 2020 and December 31, 2019.						(500)		(500)
Total shareholders’ equity		19,599		20,460		17,933		17,707
Total liabilities and shareholders’ equity	$	25,122	$	27,213	$	29,114	$	29,587



	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2017		2016		2017		2016		2020		2019
Revenues:

Product	$	4,014	$	3,536	$	13,050	$	13,612	$	5,634	$	5,507
Contract		266		769		2,559		2,227		1,097		605
License		—		—		—		1,000
Total revenues, net		4,280		4,305		15,609		16,839		6,731		6,112

Cost of revenues:

Product		3,802		2,545		10,918		9,639		4,790		4,426
Contract		200		478		1,346		1,248		507		350
License		—		—		—		—
Total cost of revenues		4,002		3,023		12,264		10,887		5,297		4,776

Gross profit		278		1,282		3,345		5,952		1,434		1,336

Operating expenses:

Research and development		1,271		1,666		3,782		4,468		980		1,597
Selling, general and administrative		1,970		2,041		6,586		6,044		1,798		1,939
Total operating expenses		3,241		3,707		10,368		10,512		2,778		3,536

Loss from operations		(2,963)		(2,425)		(7,023)		(4,560)		(1,344)		(2,200)

Other income (expense):
Change in fair value of common stock warrant liability										(20)		794
Interest expense, net		(27)		(8)		(249)		(28)		(17)		(33)
Other income, net		(2)		4		11		8		12		—
Total other income (expense)		(29)		(4)		(238)		(20)
Total other (expense) income										(25)		761
Loss before provision for income taxes		(2,992)		(2,429)		(7,261)		(4,580)		(1,369)		(1,439)
Provision for income taxes		—		(1)		—		(1)

Income taxes										—		—
Net loss	$	(2,992)	$	(2,430)	$	(7,261)	$	(4,581)	$	(1,369)	$	(1,439)

Loss per share, basic	$	(0.09)	$	(0.08)	$	(0.22)	$	(0.15)
Loss per share, diluted	$	(0.09)	$	(0.08)	$	(0.22)	$	(0.15)
Loss per share, basic and diluted									$	(0.03)	$	(0.03)

Weighted average number of shares outstanding:

Basic		34,972,589		30,292,166		33,214,262		29,689,458

Diluted		34,972,589		30,292,166		33,214,262		29,689,458
Basic and Diluted										51,638,598		45,161,273


	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		—		—		—		—		43		—		—		43
Public offering of common shares, net of offering costs		—		—		3,730,540		4		1,548		—		—		1,552
Net loss		—		—		—		—		—		(1,369)		—		(1,369)
Balance, March 31, 2020		5,659	$	—		53,980,918	$	54	$	260,358	$	(241,979)	$	(500)	$	17,933


	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


	Three Months Ended
	March 31,
	2020		2019
Cash flows from operating activities:
Net loss	$	(1,369)	$	(1,439)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		482		510
Change in fair value of common stock warrant liability		20		(794)
Stock-based compensation		43		193
Amortization of operating lease right-of-use assets		184		155
Changes in operating assets and liabilities:
Accounts receivable		229		(510)
Unbilled accounts receivable		(315)		155
Inventories		11		(245)
Prepaid expenses and other current assets		(214)		29
Deferred revenues		17		57
Operating lease liabilities		(192)		(159)
Accounts payable, accrued expenses, and other current liabilities		181		(263)
Net cash used in operating activities		(923)		(2,311)
Cash flows from investing activities:
Purchase of equipment		(306)		(188)
Net cash used in investing activities		(306)		(188)
Cash flows from financing activities:
Borrowings (repayments) under revolving line of credit, net		(700)		2,597
Proceeds from public offering, net		1,552		—
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		3,515		3,359
Cash and cash equivalents, end of period	$	3,138	$	3,457

Cash paid for interest	$	22	$	32
Cash paid for income taxes	$	—	$	—

��

Nine Months Ended

September 30,

2017

2016

(unaudited)
Cash flows from operating activities:

Net loss

$
(7,261)

$
(4,581)
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

1,588

1,214
Increase (reduction) in inventory reserve

50

(159)
Stock-based compensation

520

658
Loss on sale of asset

—

1
Changes in operating assets and liabilities:

Accounts receivable

(594)

1,032
Unbilled accounts receivable

926

281
Inventories

(1,695)

(2,967)
Prepaid expenses and other current assets

(92)

(488)
Deferred Revenues

543

(51)
Accounts payable, accrued expenses, and other current liabilities

(895)

(669)
Net cash used in operating activities

(6,910)

(5,729)
Cash flows from investing activities:

Purchase of equipment

(1,157)

(997)
Net cash used in investing activities

(1,157)

(997)
Cash flows from financing activities:

Proceeds from warrant exercise, net

—

4,294
Repayments under revolving line of credit, net

(932)

—
Proceeds from public offering, net

5,811

—
Payment of debt issuance costs

(158)

—
Proceeds from exercise of stock options

69

38
Net cash provided by financing activities

4,790

4,332
Net decrease in cash and cash equivalents

(3,277)

(2,394)
Cash and cash equivalents, beginning of period

5,241

9,273
Cash and cash equivalents, end of period

$
1,964

$
6,879

Cash paid for interest

$
65

$
22
Cash paid for income taxes

$
—

$
1

Note 1:1 – Description of the Business and Summary of Significant Accounting Policies

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

In the opinion of management, the accompanying unaudited 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 ~~Securities and Exchange Commission.~~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, ~~2016.~~2019. The results of operations for the ~~period~~periods ended ~~September 30, 2017~~March 31, 2020 are not necessarily indicative of the results to be expected for the full year. The consolidated ~~condensed~~ financial statements as of December 31, ~~2016~~2019 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~ 2019.

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

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

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

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

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

In accordance with accounting principles generally accepted in the United States of America (“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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The total intangible amortization expense was ~~approximately $14~~$2.0 thousand and ~~$41~~$9.0 thousand for the three months ended March 31, 2020 and ~~nine month periods ended September 30, 2017 and 2016,~~2019 respectively. ~~Estimated future amortization expense as of September 30, 2017 is as follows (in thousands):~~

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

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

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~~For the ~~computation of~~three months ended March 31, 2020 and 2019, the Company reported a net loss and as a result, basic and diluted ~~earnings~~loss per common share are the same. Therefore, in calculating net loss per share ~~(in thousands, except~~amounts, shares underlying the potentially dilutive common stock equivalents were excluded from the calculation of diluted net income per common share ~~and share data) for the three and nine months ended September 30, 2017 and 2016:~~because their effect was anti-dilutive.

The following table sets forth the potentially dilutive common stock equivalents for the three months ended March 31, 2020 and ~~nine month periods ended September, 2017 and 2016~~2019 that were not included in diluted EPS as their effect would be anti-dilutive:

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 asset 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.

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

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

The fair value of the liability for common stock purchase warrants at issuance and at March 31, 2020 was estimated using the Black Scholes option pricing model based on the market value of the underlying common stock at the measurement date. The remaining contractual term of the warrants ranging from 2.2 to 2.8 years, at risk-free interest rates of 0.5%, with no expected dividends, and expected volatility of the price of the underlying common stock of 73.1%.

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

For the three 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 11.0% of net revenues. As of March 31, 2020, three customers accounted for 34.2%, 16.1%, and 10.2% of the Company’s consolidated accounts receivable balance.

The accompanying consolidated financial statements have been prepared on a 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, 2020, the Company incurred a net loss of $1.4 million and used cash in operating activities of $0.9 million. As of March 31, 2020, the Company had $3.1 million of cash, $2.2 million of outstanding indebtedness and borrowing availability of $0.9 million under its ABL Facility. For the three months ended March 31, 2020, the Company raised $1.6 million, net of 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, 2019, the Company incurred a net loss of $4.3 million and used cash in operating activities of $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 is currently seeing delays in product shipments and is expecting slowing economic conditions to adversely affect its 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 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.

The Company’s ABL Facility expires on December 31, 2020, and renews 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 2020 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 first quarter of 2021. However, there can be no assurance the Company’s plans will be achieved, or that the Company will be able to continue to borrow under its ABL Facility, continue to raise funds under its ATM facility, secure additional financing, and/or pursue strategic alternatives on terms acceptable to the Company, or at all.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.

The Company's accounting policies are the same as those described in Note 1 to the Company's consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2019.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) a guidance that 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. The 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 annual period presented in the 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.

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 does not expect the adoption of this ASU to have a significant impact on the 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.

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. 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 sells products directly to military contractors and OEM’s and they use our displays in a diverse range of applications encompassing the military and commercial, including medical and industrial, market sectors. Revenues are classified as either military, commercial, consumer 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 and consumer companies. Product and contract revenues are disclosed on the Consolidated Statements of Operations.

Additional disaggregated revenue information for three months ended March 31, 2020 and 2019 were as follows (in thousands):

Accounts receivable, net of allowances, associated with revenue from customers were approximately $3.7 million and $4.0 million for the three months ended March 31, 2020 and December 31, 2019, respectively.

Unbilled Accounts Receivables (Contract Assets) - Pursuant to the over time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled accounts receivable is recorded to reflect revenue that is recognized when the cost 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.

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):

For the three months ended March 31, 2020 and 2019 the Company recognized $30 thousand and $38 thousand of revenue related to its contract liabilities that existed at December 31, 2019 and 2018, respectively.

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. For the three months ended March 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $1.0 million. The Company expects to recognize revenue on all of its remaining performance obligations over the next 12 months.

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

On December 21, 2016, the Company entered into ~~a revolving credit facility~~the ABL Facility with a lender that provides for up to a maximum amount of $5 million based on a borrowing base equivalent ofto 85% of eligible accounts receivable plus the lesser of $2 million or 50% of eligible ~~inventory, (the “ABL facility”).~~inventory. The interest on the ABL ~~facility~~Facility is equal to the Prime Rate plus 3% but may not be less than 6.5% with a minimum monthly interest payment of $2 thousand. The Company is also obligated to pay the lender a monthly administrative fee of $1 thousand and an annual facility fee equal to 1% of the maximum amount borrowable under the facility.

The ABL ~~facility~~Facility will automatically renew on December 31, ~~2019~~2020 for a one-year term unless written notice to terminate the agreement is provided by either party. In conjunction with entering into the financing, the Company incurred $228 thousand of debt issuance costs including lender and legal costs that will be amortized over the life of the ABL facility. In accordance with recently issued accounting guidance, the revolving credit facility balance is presented net of these unamortized debt issuance costs on the accompanying Consolidated Balance Sheet.

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

The ABL ~~facility~~Facility contains customary representations and warranties, affirmative and negative covenants and events of default. The Company is required to maintain a minimum tangible net worth of $13 million and a minimum working capital balance of $4 million at all times. ~~As of September 30, 2017, we~~For the three months ended March 31, 2020, the Company had $2.2 million in borrowings outstanding, had unused borrowing availability of ~~$3.7~~$0.9 million and ~~were~~was in compliance with all financial debt covenants.

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

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

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

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

The following table summarizes the allocation of non-cash stock-based compensation to our expense categories for the three months ended March 31, 2020 and ~~nine month periods ended September 30, 2017 and 2016~~2019 (in thousands):

At ~~September 30, 2017,~~March 31, 2020, total unrecognized compensation costs related to stock options was approximately ~~$0.7~~$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:

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 ~~dates~~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.

A summary of the Company’s stock option activity for ~~the nine~~three months ended ~~September 30, 2017~~March 31, 2020 is presented in the following table (unaudited):

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock. ~~For the nine months ended September 30, 2017 the~~The aggregate intrinsic value of options exercised was ~~$35 thousand~~zero for the three months ended March 31, 2020. The Company issues new shares of common stock upon exercise of stock options.

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

~~During the nine-month period ended September 30, 2017, options to purchase 46,073 shares were exercised for proceeds of $69 thousand.~~

On May 24, 2017, the Company completed an underwritten offering of 3,300,000 shares of its common stock at an offering price of $2.00 and warrants to purchase up to 1,650,000 shares of common stock and realized net proceeds of $5.8 million dollars after underwriting discounts and offering expenses. The shares and warrants were purchased by a single institutional investor and by Stillwater, LLC, an affiliate of the Company. The Warrants have an exercise price of $2.45 per common share and a term of five years.

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

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

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

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

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

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

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

The Company’s effective tax rate is calculated quarterly based upon current assumptions relating to the full year’s estimated operating results and various tax-related items. The Company’s effective tax rate ~~for the three and nine month periods ended September 30, 2017 and 2016~~ was 0%. for the three months ended March 31, 2020 and 2019. The difference between the effective tax rate of 0% and the U.S. federal statutory rate of ~~34%~~21% for the three months ended March 31, 2020 and ~~nine month periods ended September 30, 2017 and 2016~~2019 was primarily due to recognizing a full valuation allowance on deferred tax assets.

~~As of September 30, 2017, the~~The Company determined that, based on all available evidence, both positive and negative, including the Company’s latest forecasts and cumulative losses in recent years, it was more likely than not that none of its deferred tax assets would be realized and therefore it continued to record a full valuation ~~allowance.~~ allowance as of March 31, 2020.

The Company’s net operating loss ~~carry forward~~carry-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.

The Company has committed to equipment purchases of approximately $0.2 million at ~~September 30, 2017.~~March 31, 2020.

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

~~During 2015,~~In March 2019, the Company received a demand letter seeking payment of $0.9 million of outstanding invoices relating to purchased inventory from ~~an attorney representing~~Suga Electronics Limited, (“Suga”), a ~~former employee claiming damages for age discrimination~~contract manufacturer located in China, which manufactured product sold by our consumer night vision business. The Company has responded to the demand letter, and ~~wrongful termination. In September 2016, this former employee commenced action against~~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 ~~Superior Court~~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 ~~State~~consideration of ~~Washington. In February 2017,~~ the ~~former employee’s counsel sent a discovery request~~claims and counterclaims are expected to run through the ~~Company. In October 2017,~~first quarter of 2021. The parties are permitted to settle at any point during the ~~parties reached a tentative settlement, subject to payment~~arbitration proceedings.

As disclosed in the financial statements of ~~an amount not material to~~our Annual Report on Form 10-K for the year ended December 31, 2018, during the quarter ended June 30, 2018, the Company ~~documentation~~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 the ~~terms~~Company believes that it has adequately accrued for the losses and is in discussions to resolve related claims by the ~~expiration~~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, 2020 if the Company fails to resolve these claims in a ~~revocation period.~~timely and/or favorable manner.

~~The following is a schedule of revenues by geographic location (in thousands):~~Note 9 – Warrants

The ~~following table represents~~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 makes a determination as to their treatment as either equity instruments or a warrant liability based on an analysis of the ~~domestic and international revenues as a percentage of total net revenues:~~underlying warrant agreements.

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

(unaudited)

(unaudited)

Domestic

51
%

66
%

61
%

60
%
International

49
%

34
%

39
%

40
%


	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

The 2015, 2016, and 2019 warrants share similar terms, and the exercise price of 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 ~~purchases principally all of its silicon wafers from two suppliers located in Taiwan and Korea.~~ be required to net cash settle the warrants.

~~For~~Based on the ~~nine months ended September 30, 2017, one customer~~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 ~~10% of net revenues and there were no other single customers accounting~~the exercise price paid by investors for over 10% of net revenues. For the three months ended September 30, 2017, one customer accounted for over 10% of net revenues. As of September 30, 2017, two customers accounted for 15 % and 10%, respectivelypurchase of the ~~Company’s consolidated accounts receivable balance~~pre-funded warrants as additional paid in capital on the accompanying Balance Sheets.

The 2017 and ~~no other single customer accounted for over 10%~~2018 warrants have alternative settlement provisions that, at the option of the ~~consolidated accounts receivable.~~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 in the accompanying 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.

Based on the Black Sholes method the fair value of the Company’s warrants are as follows (in thousands):

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. During the fourth quarter of 2019, the Company signed a two-year extension of this lease that expires on October 31, 2021. The lease agreement does not contain any residual value guarantees or material restrictive covenants.

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.

Future annual minimum lease payments and finance lease commitments as of March 31, 2020 were as follows (in thousands):

On February 13, 2020, the Company entered 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 price up to $2.5 million related to shares that the Company may offer and sell through Wainwright from time to time. The Company intends to use the net proceeds from sales 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.

ITEM 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 Report 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 Part 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.

eMagin Corporation is headquartered in Hopewell Junction, New York, and was incorporated in the state of Delaware in 1996. We are the leader in OLED (organic light emitting diode) on silicon microdisplay technology, OLED microdisplay manufacturing know-how and mobile display systems. eMagin manufactures high-resolution OLED microdisplays and integrates them with magnifying optics to deliver virtual images comparable to large-screen computer and television displays in portable, low-power, lightweight personal displays. eMagin microdisplays provide near-eye imagery in a variety of products for military, industrial, medical and consumer OEMs.Business

We ~~derive the majority of our revenue from sales of our~~design, develop, manufacture and market organic light emitting diode, or OLED ~~microdisplay products~~miniature displays, which we ~~manufacture in our Hopewell Junction, New York, manufacturing facility.~~refer to as OLED-on silicon microdisplays, virtual imaging products that utilize OLED microdisplays, and related products. We also ~~earn revenue from government~~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 original equipment manufacturer, or OEM, customers in the military and commercial ~~development contracts that may complement~~markets to develop and support our internal research and development programs. In addition, we generate sales from optics and microdisplays combined with optics. Our business model also includes licensing our intellectual property to consumer electronics companies for a broad range of applications, although revenues to date have not been material.market improved or new electronic products.

~~Our common stock is traded on the NYSE:American Market under the symbol EMAN.~~

In the third quarter, we delivered display products to over 64 customers in 26 countries and performed contract services for 7 customers. Revenues and gross profit in the quarter were affected by production problems associated with one machine that resulted in fewer displays being produced and sold during the quarter and higher unit material costs. Those production issues have since been resolved. We continue to anticipate a ramp up over the next several quarters from the addition of new military programs awarded over the past year and from shipments not made during the third quarter. As a result of higher bookings towards the end of the third quarter and continuing into the fourth quarter, we believe we will experience greater shipments and higher revenues in the fourth quarter of 2017 than in the quarter ended September 30, 2017.

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

Throughout 2017, we expanded the marketing and commercialization of our handheld and wearable night vision products beyond the direct-to-consumer market to include commercial markets such as first responders and field service. We believe that ~~these~~our OLED microdisplays offer a number of significant advantages over comparable liquid crystal microdisplays, including higher contrast, greater power efficiency, less weight, more compact size, and negligible image smearing. Using our active matrix OLED technology, many computer and electronic system functions can be built directly into the OLED microdisplays silicon backplane, resulting in compact, high resolution and power efficient systems. Already proven in military and commercial ~~marketing efforts, along with~~systems, our ~~consumer marketing initiatives, will lead~~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 ~~a larger customer base~~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 ~~products. During the first nine months of 2017 we incurred expenses associated with the marketing of these products~~customers as well as maintain continuity in our supply chain and ~~utilized working capital to fund the buildup of inventory. Working capital expenditures, along with marketing and promotional expenditures, are expected~~expect to continue ~~during~~our operations throughout the ~~fourth quarter, although at a lower level than~~duration of the pandemic and beyond. To date we have experienced disruptions in ~~earlier quarters, as we continue~~supply, had two employees test positive for the COVID-19 virus and had to ~~assess~~close our facilities for cleaning purposes. There is no assurance that our operations will not be disrupted in the ~~sales potential~~future by additional impacts of ~~these markets.~~

~~New Business~~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 decreased production volumes, which resulted in a lower gross margin and reduced display revenues. Although we began implementing remedial production measures during the fourth quarter of 2018, manufacturing issues continued into the second quarter of 2019, resulting in shipments for the second quarter of fiscal 2019 that were less than forecast and yields and production volumes that were below pre-fourth quarter 2018 levels. As a result, early in the third quarter of ~~2017~~2019 we ~~made significant progress in our negotiations with multiple major consumer electronics companies~~began accelerating the implementation of remedial measures. There can be no assurance as to ~~enter into strategic partnerships~~the ongoing effectiveness of any remedial measures we have implemented or that yields and production volumes will return to ~~develop displays for these companies’ next generation VR/AR applications. We are pursuing what we believe to be~~ the ~~best paths to commercializing our Direct Patterning technology and establishing ourselves as the industry leader in microdisplays for the consumer market.~~ levels previously achieved.

~~Our overarching goal is to secure partnerships with industry leaders in consumer electronics who can help us capitalize on our technology to meet the needs~~As a result of ~~end users from a cost and performance standpoint. Our partnership initiatives encompass scaling our product technology, entering into mass~~these efforts, production ~~agreements with manufacturing companies which possess capital resources and high volume production capability to enable us to manufacture~~yields in the second half of 2019 improved over yields experienced in the first half of 2019 and production volumes ~~required for the consumer market, and securing sales and distribution channels to end users.~~

During the quarter, we began to experience an improvement in booking activity as we made progress towards our goals of securing new, and expanding existing U.S. and foreign military programs while expanding our presence in foreign military, commercial and industrial markets. We expect these efforts to result in greater bookingswere up over 50% during the second half of ~~2017~~2019 as ~~a whole than were achieved during~~compared to the first half of ~~2017. In~~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 2020, 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 reflecting increased bookings during the quarter.

During the fourth quarter of 2019, we also implemented spending reductions and controls to reduce our overall cost structure. These measures lowered our overall spending as evidenced by the reduction during the second quarter of our 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 the 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

reductions in service fees, which are expected to further reduce our expenses going forward.

During the quarter, we ~~booked over 90~~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 year. In addition, we received awards for two-multiyear U.S. helicopter helmet programs, one of which is for a new ~~orders totaling~~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 ~~$6.5 million. Thirty of~~ever before in these ~~orders were for new projects with existing and new customers and over 60 were follow-on/repeat orders with existing customers. Among the orders received were:~~ 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.

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 taken 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 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 our current projections, operational and yield improvements, and the anticipated availability of the ABL Facility, we estimate we will have sufficient liquidity to fund operations through the end of the first quarter of 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 common stock

In addition, ~~during~~even if we successfully generate additional funds through the ~~quarter we received confirmation from two defense prime contractors~~sale of additional equity securities, borrowings or alternative financing, there can be no assurances that wethe revenue or capital infusion will be ~~awarded contracts~~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.

Please refer to the information provided under the heading "Critical Accounting Policies and Estimates" included in the ~~fourth quarter totaling over $5.2 million. These anticipated orders comprise:~~

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

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

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

We believe enhancements to the manufacturing processes for the displays are beginning to improve production yields with the initial goal of raising yields by over 50% from the current level. Equipment which is expected to simplify several process steps to improve yields and reduce cycle time was ordered in the third quarter. Delivery is expected in November 2017 with qualification and implementation anticipated to be completed by second quarter 2018.

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

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

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

Qualification of our 2K x 2K microdisplay is progressing as planned with expected completion in the first quarter 2018. In concert with this effort, we are developing a compact interface for the 2K x 2K microdisplay that will facilitate the integration of the display into optical solutions. This hardware is targeted to be completed and introduced to the market during the second quarter 2018.

~~At September 30, 2017 we had a total of 98 employees, of whom 95 were full-time employees, as compared to a total of 97 employees, of whom 93 were full-time employees, at December 31, 2016.~~

~~A detailed discussion of our business and operations may be found in Part I, “Business,” of our 2016~~Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016, and as~~2019, filed with the ~~Securities and Exchange Commission~~SEC on March ~~28, 2017.~~

Revenue on product sales is recognized when persuasive evidence of an arrangement exists, such as when a purchase order or contract is received from the customer, the price is fixed or determinable, title and risk of loss to the goods has transferred and there is a reasonable assurance of collection of the sales proceeds. We obtain written purchase authorizations from our customers11, 2020, for a ~~specified amount~~discussion of ~~product at a specified price and consider delivery~~our critical accounting policies. There were no material changes to ~~have occurred at~~such policies in the ~~time~~quarter ended March 31, 2020. New accounting policies adopted during the quarter are described in Note 1, "Summary of ~~shipment.~~

Significant Accounting Policies," to our unaudited consolidated financial statements included in this Report.

~~Revenues from research and development activities relating to firm fixed-price contracts and cost-type contracts are generally recognized on the percentage-of-completion method~~

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

~~Revenues from sales or licenses~~Comparative results of ~~intellectual property is recognized when transferred to~~operations for the ~~customer, provided the license~~ ~~has stand-alone value~~three months ended March 31, 2020 and the contract provides the right to use the intellectual property as it exists at the point the license is granted, without further obligations by the Company to update the intellectual property after the license is transferred. If the license does not have standalone value, then the license is combined with other deliverables, such as R&D or manufacturing services into a single unit of account. Revenue from the single unit of account is recognized when earned, typically as the R&D or manufacturing services are performed over the life of the contract.2019(in thousands):

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

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

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

Revenues for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and 2019 were ~~$4.3~~$6.7 million and ~~$15.6~~$6.1 million, ~~respectively~~, ~~as compared to $4.3 million and $16.8 million, respectively, for the three and nine months ended September 30, 2016.~~ respectively.

Product revenue is comprised primarily of sales of displays as well as sales of other hardware. For the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2020 product revenue increased by ~~$0.5~~$0.1 million, ~~and decreased by $0.6 million, respectively,~~from the comparable prior year period. The increase in display revenues during the three months ended March 31, 2020 was primarily due to changes in the mix of display types, resulting in displays shipped at higher average selling prices, as compared to the three ~~and nine~~ months ended ~~September 30, 2016. The increase~~March 31, 2019. Revenues in ~~display revenues~~2019 were impacted by manufacturing challenges that began in the ~~third~~fourth quarter of ~~2017 was primarily due to increased demand by international customers. The decreased revenue~~2018 and continued through the second quarter of 2019, which affected yields and throughput and resulted in lower than planned shipments during the ~~year to date period was primarily due to lower demand from maturing military programs, and a larger proportion~~first six months of sales of displays with lower average unit prices. The 2017 product revenue in the nine months’ period was favorably impacted by saled of $0.3 million of newly developed Direct Patterned displays supported by R&D efforts.2019.

Contract revenue is comprised of revenue from ~~research~~R&D and ~~development (“R&D”), commercial contracts, or~~ non-recurring engineering ~~(“NRE”)~~ contracts. For the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2020, contract revenue ~~decreased~~increased by $0.5 million, ~~and increased by $0.3 million, respectively, as compared to~~from the ~~three and nine months ended September 30, 2016,~~comparable prior year period. The increase in contract revenue was primarily due a project to ~~the addition of commercial contracts with several major consumer electronics companies earlier in 2017.~~

~~License revenue~~design a display for ~~the nine months ended September 30, 2016 was comprised of revenue from~~ a ~~$1.0 million non-exclusive intellectual property license for our virtual reality headset technology. We produced engineering samples of our 2K x 2K pixel full-color displays~~Tier One customer in the ~~fourth quarter of 2016 and expect that the licensee will use our 2K x 2K pixel full-color displays in their headsets upon their successful development.~~consumer space.

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. ~~Cost of contract revenue includes direct and allocated indirect costs associated with performance of deliverables under contracts.~~ Total cost of revenues for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 increased by ~~$1.0~~$0.5 million, ~~and $1.4 million, respectively, as compared~~from the comparable prior year period due to increased revenues in three ~~and nine~~ months ended September 30, 2016. Total cost of revenues as a percentage of revenues was 94% and 79%, respectively, for the three and nine month periods ended September 30, 2017, respectively as compared to 70% and 65% for the three and nine month periods ended September 30, 2016. Revenues for the nine months ended September 30, 2016 included $1.0 million of license revenue that had no associated cost of revenues.March 31, 2020.

The following table outlines product ~~contract~~ and ~~license~~contract total gross profit and related gross margins for the three months ended March 31, 2020 and ~~nine month periods ended September 30, 2017 and 2016~~2019 (dollars in thousands):

Total gross profit is a function of revenues less cost of revenues. ~~The total gross~~Gross profit for the three ~~and nine~~ months ended ~~September 30, 2017 decreased $1.0~~March 31, 2020 increased $0.1 million, ~~and $2.6 million, respectively, as compared to~~from the ~~three and nine months ended September 30, 2016~~comparable prior year period primarily reflecting ~~a decrease in product~~increased contract revenue gross profit in the three ~~and nine month periods. The total~~months ended March 31, 2020. Total gross margin ~~of 7%~~was 21% and 22% for the three months ended March 31, 2020 and 2019, respectively.

The product gross profit for the three months ended ~~September 30, 2017~~March 31, 2020 decreased from ~~gross margin~~the comparable prior year period because of ~~30%~~lower production volumes in the three months ended March 31, 2020compared to the prior year period, ~~primarily due to decreases~~and the resultant decrease of product costs capitalized into finished good inventory. The decrease in product revenues gross margin. The gross margin of 21% for the nine months ended September 30, 2017 as compared to 35% for the prior year period primarily reflects the favorable impact of the $1.0 million of license revenue in the first quarter of 2016 that had no associated costs of goods sold.

~~The product gross profit and~~ gross margins for the three months ended ~~September 30, 2017 decreased compared to~~March 31, 2020, were impacted by the ~~prior year period, lower average selling prices in the 2017 period and higher product costs in the 2017 period related to yield losses and lower~~lowered production ~~volumes. The product gross profit for the nine months ended September 30, 2017, decreased $1.8 million~~volumes as compared to the prior year period. Product gross margins of 16% for the nine months ended September 30, 2017 decreased from 29% in the prior year period due to lower average selling prices for certain product types in the current period and the favorable impacts of higher production volume in the first nine months of 2016.

Contract gross margin is dependent upon the mix of internal versus external third party costs and materials, with the external third party costs and materials causing a lower gross margin and reducing the contract gross profit. For the three months ended ~~September 30, 2017,~~March 31, 2020, contract revenue gross profit was ~~$0.1~~$0.6 million compared to $0.3 million for ~~three months ended September 30, 2016. Contract revenue gross profit of $1.2 million and gross margin of 47% for~~ the ~~nine months ended September 30, 2017 increased from $1.0 million and 44% in the comparable~~ prior year ~~periods.~~period. Increased contract revenue gross profit in the ~~first nine~~three months ~~of 2017~~ended March 31, 2020 was primarily due to the increase in contract revenues related to design work for a ~~higher proportion of commercial contract work performed in the current period and to changes in the nature of both the individual contracts and the work completed during each period.~~Tier One customer.



	Three Months Ended								Nine Months Ended
	September 30,								September 30,								Three Months Ended
	2017			2016			Change		2017			2016			Change		March 31,
	($ in thousands)								($ in thousands)								2020			2019			Change
Research and development expense	$	1,271		$	1,666		$	(395)	$	3,782		$	4,468		$	(686)	$	980		$	1,597		$	(617)
Percentage of net revenue		30	%		39	%				24	%		27	%				15	%		26	%
Selling, general and administrative expense	$	1,970		$	2,041		$	(71)	$	6,586		$	6,044		$	542	$	1,798		$	1,939		$	(141)
Percentage of net revenue		46	%		47	%				42	%		36	%				27	%		32	%
Total operating expenses	$	3,241		$	3,707		$	(466)	$	10,368		$	10,512		$	(144)	$	2,778		$	3,536		$	(758)
Percentage of net revenue		76	%		86	%				66	%		62	%				41	%		58	%

R&D expenses are ~~company-funded~~company funded and ~~include~~are primarily compromised of salaries and related benefits, development materials and other costs specifically allocated to the development of new technologies, ~~and~~ microdisplay products, OLED ~~materials~~technologies and ~~subsystems.~~production processes. R&D related costs associated with fulfilling contracts are categorized as contract cost of revenues. R&D expenses ~~decreased on a percentage basis~~were $1.0 million and $1.6 million for the three months ended March 31, 2020 and ~~nine months ended September 30, 2017, respectively compared the prior year periods.~~2019 respectively. The decrease in R&D costs in the ~~current year reflected a decrease~~first quarter of 2020 reflects increased allocations of R&D expenses to contracts related to the increases in consumer product R&D partially offset by the work performed on the Company’s Direct Patterning technology including product development and process development associated with the manufacture of the Direct Patterned displays. contract revenues.

SG&A expenses consist ~~principally~~primarily of ~~salaries and related benefits,~~personnel expenses, professional services fees, ~~and~~as well as other marketing, general corporate and administrative expenses. SG&A expenses were $1.8 million and $1.9 million for the three ~~and nine~~ months ended ~~September 30, 2017, decreased $0.1 million~~March 31, 2020 and ~~increased $0.5 million, respectively compared~~2019, respectively. The decrease was primarily due to lower spending salaries resulting from a 20% work status reduction implemented in October 2019 and reductions in non-cash compensation related to a reduction in the amount of stock options granted to the ~~comparable prior year periods.~~ Board of Directors that took effect in December 2019.

The increase in SG&A for the nine months ended September 30, 2017 over the prior year periods was largely due to higher spending on professional services, legal, and travel expenses associated with our negotiations with prospective consumer electronics and volume manufacturing partners, and promotional expenses related to our night vision consumer product activities. Other Income (Expense)

~~Other Income (Expense), net~~. Other income (expense), net consists ~~primarily~~ of changes in the fair value of warrant liability as well as interest income earned on cash ~~balances~~balances. Income or expenses related to the change in fair value of warrant liability were $20 thousand and ~~interest expense. Other expense, net~~$0.8 million, for the three ~~and nine~~ months ended ~~September 30, 2017, of $29 thousand~~March 31, 2020 and ~~$238 thousand, respectively, reflects~~2019, respectively. This non-cash income or expense is associated with changes in the ~~write off of $158 thousand of Stillwater~~liability related ~~debt issuance costs~~to registered warrants issued in May 2017 ~~upon~~and January 2018. We are required to revalue warrants classified on our balance sheet as a liability at the ~~termination~~end of ~~this facility.~~each reporting period and reflect a gain or loss from the change in fair value in the period in which the change occurred. We calculate the fair value of the warrants outstanding using the Black-Scholes model.

For the three months ended March 31, 2020, we had $3.1 million in cash, working capital of $9.2 million and borrowings outstanding and borrowing availability under the ABL Facility of $2.2 million and $0.9 million, respectively. This is in comparison with $3.5 million in cash, working capital and $8.8 million and borrowings outstanding and borrowing availability under the ABL Facility of $2.9 million and $1.2 million, respectively, at December 31, 2019.

For the ~~first nine~~three months ~~of 2017, we had~~ended March 31, 2020 cash used in operating activities were $0.9 million, which was attributable to a net loss of ~~$7.3~~$1.4 million and ~~used $8.1 million in operating and investing activities.~~

~~Cash flow used in operating activities during the nine months ended September 30, 2017 was $6.9 million, attributable to net loss of $7.3 million partially offset by a net change~~changes in operating assets and liabilities of ~~$1.8~~$0.3 million, partially offset by non-cash income and~~non-cash~~ expenses of ~~$2.2~~$0.7 million. Cash ~~flow~~ used in operating activities ~~during~~for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2019 was ~~$5.7~~$2.3 million.

For three months ended March 31, 2020 cash used in investing activities ~~during the nine months ended September 30, 2017~~ was ~~$1.2~~$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 ~~September 30, 2017,~~March 31, 2020, we had outstanding commitments to purchase approximately ~~$0.2~~$0.2 million in capital expenditures, and expect to make additional capital expenditures during ~~2017~~the remainder of 2020 to improve our manufacturing and R&D capabilities. Cash used in investing activities during the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2019 was ~~$1.0~~$0.2 million for equipment purchases.

~~Cash~~For 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 ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 was $2.6 million.

For the three months ended March 31, 2020, we incurred a net loss of ~~$4.8~~$1.4 million ~~included net repayments under our credit facility~~and used cash in operating activities of $0.9 ~~million partially offset by $69 thousand from the exercise of stock options, and proceeds of $5.8 million from a public offering. There were no financing activities during the prior year period.~~

If we are not able to reach our anticipated level of profitability and cash flows over the next twelve months, it may be necessary to take actions to maintain our current levels of operations including; additional borrowings under our credit facilities, raising capital though issuance of equity, debt or equity linked securities, or to reduce our current levels of operations and implement cost reductions or restructuring activities. As of September 30, 2017,million. At March 31, 2020, we had cash and cash equivalents of $3.1 million, net working capital of ~~$2.0~~$9.2 million, ~~and $10.6~~$2.2 million ~~respectively,~~of debt outstanding under our ABL Facility and borrowing availability ~~under the ABL facility, net of borrowings~~ of $0.9 ~~million, of $3.7~~ million.

~~Underwritten Public Offering~~Due to continuing losses, the Company’s financial position, uncertainty related to the COVID-19 pandemic described above, 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.

~~On May 24, 2017, we completed an underwritten offering of 3,300,000 shares of its common stock at an offering price of $2.00~~The Company’s ABL Facility expires on December 31, 2020 and warrants to purchase up to 1,650,000 shares of common stock and realized net proceeds of $5.8 million dollars after underwriting discounts and offering expenses. The shares and warrants were purchased by a single institutional investor and by Stillwater, LLC, an affiliate. The Warrants have an exercise price of $2.45 per common share and a term of five years.

~~The underlying shares of common stock and warrants issued in this offering completed the allotment of shares allowable~~renews automatically for ~~issuance~~another year unless terminated pursuant to ~~a shelf registration statement filed in 2014. In June 2017, we filed a replacement shelf registration statement that will provide us~~its terms. Although preliminary renewal discussions with the ~~flexibility, subject~~lender are positive there is no assurance the lender will renew or extend this facility, or continue to ~~certain limitations~~make funds available during 2020 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 result of our current unaffiliated market capitalization, to raise capital over the next three years from the offering of common stock, preferred stock, warrants, units and debt securities, or any combination of these securities, in one or more future offerings.

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

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

~~We raised~~The Company has taken actions to increase revenues and to reduce expenses and is considering financing alternatives, but there can be no assurance that the Company will be successful in sufficiently increasing revenues, mitigating the impact 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 ~~$4.3~~20%, 3) reduce headcount and not replace departed employees, 4) reduce discretionary and other expenses, and 5) considering financing and/or strategic alternatives.

On February 13, 2020, we amended our ATM facility, dated November 22, 2019, with Wainwright. The amendment modifies the agreement to increase the aggregate offering price up to $2.5 million inrelated to shares that we may offer and sell through Wainwright from time to time. The Company intends to use the net proceeds from sales made under the ~~transaction, which was used~~ATM offering for working capital and other general corporate purposes. During the quarter ended March 31, 2020, we raised $1.6 million, net of offering expenses, through the sale of shares under the ATM 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, ~~2019~~2020 for a one-year term unless written notice to terminate the Financing Agreement is provided by either party.

The ABL Facility is secured by a lien on all receivables, property and the proceeds thereof, credit insurance policies and other insurance relating to the collateral, books, records and other general intangibles, inventory and equipment, proceeds of the collateral and accounts, instruments, chattel paper, and documents. The ABL Facility contains customary representations and warranties, affirmative and negative covenants and events of default, including a provision that we maintain a minimum tangible net worth of $13 million and a minimum working capital balance of $4 million. As of ~~September 30, 2017,~~March 31, 2020, we had ~~0.9~~$2.2 million in borrowings, ~~outstanding under the Financing Agreement and~~ had unused borrowing availability of ~~$3.7 million. We~~$0.9 million and were in compliance with all financial debt covenants.

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

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

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

We ~~do not~~ have ~~any~~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.

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

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

During the quarter ended March 31, 2020, there were no changes in our internal ~~controls~~control over financial reporting ~~during the fiscal quarter ended September 30, 2017~~ 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.~~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.

~~During 2015,~~From time to time, we may become subject to various legal proceedings that are incidental to the ~~Company~~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 ~~attorney representing~~answer to Suga’s request for arbitration including a ~~former employee claiming damages for age discrimination~~counterclaim seeking repayment of amounts previously paid to Suga. An arbitrator has been appointed and ~~wrongful termination. In September 2016, this former employee commenced action against the Company in Superior Court~~arbitral proceedings for the State of Washington. In February 2017, the former employee’s counsel sent a discovery request to the Company. In October 2017, the parties reached a tentative settlement, subject to payment of an amount not material to the Company, documentationconsideration of the ~~terms~~claims and counterclaims are expected to run through the ~~expiration~~first quarter of 2021. The parties are permitted to settle at any point during the arbitration proceedings.

As disclosed in the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018, during the quarter ended June 30, 2018, we made a ~~revocation period.~~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 September 30, 2019, if we fail to resolve these claims in a timely and/or favorable manner

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this ~~Quarterly~~ Report ~~on Form 10-Q~~ and the risks discussed below, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our ~~Annual Report on~~2019 Form 10-K. In addition to our discussion in the MD&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, 2016, as filed with~~personal 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 ~~materially~~have 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.

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 or~~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 ~~results.~~as well as our ability to continue as a going concern.

On November 8, 2017, we entered into Change in Control Agreements (the “Change in Control Agreements”) with four of our executive officers, Steve Costello, Amalkumar Ghosh, Olivier Prache and Jeffrey P. Lucas (each an “Executive”). The Agreements provide that if, within the twelve-month period following a Change in Control of the Company (as defined in the Change in Control Agreements), the Executive suffers a Terminating Event (as defined below and in the Change in Control Agreements), he will be entitled to receive a lump sum cash payment in an amount equal to the Executive’s annual base salary in effect immediately prior to the Terminating Event (or the Executive’s annual base salary in effect immediately prior to the Change in Control, if higher), payable in a lump sum on the termination date, provided that the Executive executes and does not revoke a separation agreement and release in favor of us. In addition, if the Executive was participating in our group health plan immediately prior to termination and elects COBRA health continuation, then we will pay the Executive a monthly cash payment for 12 months or the Executive’s COBRA health continuation period, whichever ends earlier, in an amount equal to the monthly employer contribution that we would have made to provide health insurance to the Executive if he had remained employed by us.

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

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

The foregoing description is a summary of the Change in Control Agreements and should be read in conjunction with the full text of the Form of Change in Control Agreement which is attached to this Quarterly Report on Form 10-Q as Exhibit 10.2 and is incorporated herein by reference.None.

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.



	Three Months Ended		Nine Months Ended
	September 30,		September 30,		Three Months Ended
	2017	2016	2017	2016	March 31,
	(unaudited)		(unaudited)		2020	2019
Options	5,142,448	5,010,993	5,142,448	5,010,993	5,183,360	5,160,445
Warrants	5,081,449	3,331,449	5,081,449	3,331,449	19,295,773	9,055,773
Convertible preferred stock	7,545,333	7,545,333	7,545,333	7,545,333	7,545,333	7,545,333
Total potentially dilutive common stock equivalents	17,769,230	15,887,775	17,769,230	15,887,775	32,024,466	21,761,551


	Estimated Fair Value
Balance as of January 1, 2020	$	23
Fair value of warrants issuance during period		-
Change in fair value of warrant liability, net		20
Balance as of March 31, 2020	$	43


	Three Months Ended
	March 31,
	2020		2019
North and South America	$	3,540	$	3,398
Europe, Middle East, and Africa		2,701		2,327
Asia Pacific		490		387
Total	$	6,731	$	6,112


	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



	September 30,		December 31,
	2017		2016		March 31,		December 31,
	(unaudited)				2020		2019
Raw materials	$	4,153	$	3,619	$	2,707	$	2,788
Work in process		1,646		1,576		1,986		1,561
Finished goods		4,832		3,740		5,038		5,248
Total inventories		10,631		8,935		9,731		9,597
Less inventory reserve		(1,551)		(1,500)		(910)		(765)
Total inventories, net	$	9,080	$	7,435	$	8,821	$	8,832


��
	Nine Months Ended
	September 30,
	2017		2016
	(unaudited)
Cash flows from operating activities:
Net loss	$	(7,261)	$	(4,581)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,588		1,214
Increase (reduction) in inventory reserve		50		(159)
Stock-based compensation		520		658
Loss on sale of asset		—		1
Changes in operating assets and liabilities:
Accounts receivable		(594)		1,032
Unbilled accounts receivable		926		281
Inventories		(1,695)		(2,967)
Prepaid expenses and other current assets		(92)		(488)
Deferred Revenues		543		(51)
Accounts payable, accrued expenses, and other current liabilities		(895)		(669)
Net cash used in operating activities		(6,910)		(5,729)
Cash flows from investing activities:
Purchase of equipment		(1,157)		(997)
Net cash used in investing activities		(1,157)		(997)
Cash flows from financing activities:
Proceeds from warrant exercise, net		—		4,294
Repayments under revolving line of credit, net		(932)		—
Proceeds from public offering, net		5,811		—
Payment of debt issuance costs		(158)		—
Proceeds from exercise of stock options		69		38
Net cash provided by financing activities		4,790		4,332
Net decrease in cash and cash equivalents		(3,277)		(2,394)
Cash and cash equivalents, beginning of period		5,241		9,273
Cash and cash equivalents, end of period	$	1,964	$	6,879

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



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


	March 31,		December 31,
(in thousands)	2020		2019
Revolving credit facility	$	2,191	$	2,891



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)		Aggregate Intrinsic Value		Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2016		5,055,741	$	3.00
Outstanding at December 31, 2019										5,404,985	$	2.40
Options granted ~~(1)~~		498,803		2.25						—		—
Options exercised		(46,073)		1.52						—		—
Options forfeited		(50,001)		2.05						—		—
Options cancelled or expired		(316,022)		2.83						(221,625)		3.46
Outstanding at September 30, 2017		5,142,448	$	2.96		3.76	$	986,578
Vested or expected to vest at September 30, 2017		5,125,749	$	2.96		3.75	$	950,550
Exercisable at September 30, 2017		4,307,532	$	3.03		3.45	$	969,126
Outstanding at 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	$	—


	Three Months Ended		Three Months Ended
	March 31, 2020		March 31, 2019
Finance Lease Cost:
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


Other Information
Cash paid for amounts included in the measurement lease liabilities:
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	$	-	$	-


	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%


	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


3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to an appendix to the Company’s Definitive Proxy Statement filed on September 21, 2006).

3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation (incorporated by reference to an appendix to the Company’s Definitive Proxy Statement filed on October 26, 2010).

3.3	Bylaws of the Company (incorporated by reference to exhibit 99.3 to the Company’s Definitive Proxy Statement filed on June 14, 2001).

4.1	Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 of the Registrant’s current report on Form 8-K filed on December 23, 2008).

4.2	Form of Letter Agreement (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 24, 2016).

4.3	Form of common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s current report on Form 8-K filed on December 18, 2015).

4.4	Form of Common Stock Purchase Warrant issued to the Warrant Holders in the Transaction (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 24, 2016).

4.5	Common Stock Purchase Warrant issued on March 24, 2017 to the holder of an unsecured line of ~~credit.~~credit (incorporated by reference to exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed on November 9, 2017). ~~(1)~~

4.6	Form of Common Stock Purchase Warrant issued to the Warrant Holders in conjunction with an issuance of common shares on May 19, 2017 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 24, 2017).

4.8	Description of Registrants Securities

10.1	~~Amended and Restated Employment~~Consulting Agreement, dated ~~July 1, 2016,~~as of January 28, 2020, by and between the Company and ~~Andrew G. Sculley, Jr~~Jeffrey Lucas. (incorporated by reference to ~~Exhibit~~exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on January 28, 2020).

10.2	At Market Offering Agreement, between eMagin Corporation and H.C. Wainwright & Co., LLC (incorporated by reference to exhibit 10.1 to the Company’s Current Report on Form 8-K filed on ~~July 7, 2016)~~February 13, 2020).
~~10.2~~	~~Form of Change in Control Agreement for Certain Officers, approved for use on November 8, 2017.~~
31.1	Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)

31.2	Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)

32.1	Certification by Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(2)

32.2	Certification by Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(2)

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

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



	eMAGIN CORPORATION

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



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