| Significant Accounting Policies | N ote 2 – Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements include the accounts of eMagin Corporation and its wholly owned subsidiary. All intercompany transactions have been eliminated in consolidation. The Company manages its operations on a consolidated, integrated basis in order to optimize its equipment and facilities and to effectively service its global customer base and concludes that it operates in a single business segment. Use of Estimates In accordance with accounting principles generally accepted in the United States of America (“GAAP”), management utilizes certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments related to, allowance for doubtful accounts, warranty reserves, inventory reserves, stock-based compensation expense, deferred tax asset valuation allowances, litigation and other loss contingencies, fair value of common stock warrant liability, and percentage-of-completion revenue recognition method among others. Management bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Revenue and Cost Recognition All of the Company’s revenues are earned from contracts with customers and are classified as either Product or Contract revenues. Contracts include written agreements and purchase orders, as well as arrangements that are implied by customary practices or law. Product revenue is generated primarily from contracts to produce, ship and deliver OLED microdisplays. For product shipped, the Company recognizes revenue at a single point in time when control and risk of loss transfers to our customer. Our customary terms are freight on board (“FOB”) our factory and control is deemed to transfer upon shipment. The Company has elected to treat shipping and other transportation costs charged to customers as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. As customers are invoiced at the time control transfers and the right to consideration is unconditional at that time, the Company does not maintain contract asset balances for product revenue. Additionally, the Company does not maintain contract liability balances for product revenues, as performance obligations are satisfied prior to customer payment for product. The Company offers a one year product warranty, for replacement of product only, and does not allow returns. The Company generally 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 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 . Costs to Obtain and Fulfill a Contract The incidental costs related to obtaining product sales contracts are non-recoverable from customer and, accordingly, are expensed as incurred. The Company capitalizes costs incurred to fulfill its R&D contracts that i) relate directly to a contract or anticipated contract ii) are expected to satisfy the Company’s performance obligation under the contract and iii) are expected to be recovered through revenue generated under the contract. Contact fulfillment costs are expensed to cost of revenue as the related performance obligations are satisfied. Government Funding The Company accounts for awards received from the U.S. government for procurement of capital equipment after analysis of the terms of the underlying award contract, and in accordance with contract and equipment purchase milestones and accounting principles for grant accounting. For awards in which the Company will hold title to the underlying equipment, the Company initially records amounts invoiced to the U.S. government for equipment progress payments on the accompanying Consolidated Balance Sheets as deferred income – government awards – long term and accounts receivable- due from government awards. The Company records said progress payments made to capital equipment vendors in Property, plant and equipment. Amounts recorded in deferred income – government awards – long term will be recognized as other income on the accompanying Consolidated Statement of Operations on a systematic basis as depreciation and other expenses are incurred over the useful life of the capital equipment. See Note 4 of the Notes of the Consolidated Financial Statements for additional details of our government funding. Product Warranty The Company generally offers a one year product replacement warranty. The standard policy is to repair or replace the defective products. The Company accrues for estimated returns of defective products at the time revenue is recognized based on historical activity as well as for specific known product issues. The determination of these accruals requires the Company to make estimates of the frequency and extent of warranty activity and estimate future costs to replace the products under warranty. If the actual warranty activity and/or repair and replacement costs differ significantly from these estimates, adjustments to cost of revenue may be required in future periods. The following table provides a summary of the activity related to the Company's warranty liability, included in other current liabilities, during the years ended December 31, 2022 and 2021 (in thousands): Twelve Months Ended December 31, 2022 2021 Beginning balance $ 519 $ 615 Warranty accruals and adjustments ( 247 ) ( 82 ) Warranty claims ( 58 ) ( 14 ) Ending balance $ 214 $ 519 Research and Development Expenses Research and development costs are expensed as incurred. Cash and Cash Equivalents All highly liquid instruments with an original maturity of three months or less at the date of purchase are considered to be cash equivalents. Restricted Cash The Company accounts for cash received pursuant to U.S. government funding, that is legally restricted for procurement of capital equipment, as Restricted Cash on the accompanying Consolidated Balance Sheets. Restricted Cash amounts are received from the U.S. government in advance of progress payments required for various program related capital equipment purchases and are disbursed by the Company to related equipment vendors. Accounts Receivable The majority of the Company’s commercial accounts receivable are due from Original Equipment Manufacturers ("OEM’s”). Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are payable in U.S. dollars, are due within 30 - 60 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Any account outstanding longer than the contractual payment terms is considered past due. Allowance for Doubtful Accounts The allowance for doubtful accounts reflects an estimate of probable losses inherent in the accounts receivable balance. The allowance is determined based on a variety of factors, including the length of time receivables are past due, historical experience, the customer's current ability to pay its obligation, and the condition of the general economy and the industry as a whole. The Company will record a specific reserve for individual accounts when the Company becomes aware of a customer's inability to meet its financial obligations, deterioration in the customer's operating results or financial position, or deterioration in the customer’s credit history. If circumstances related to customers change, the Company would further adjust estimates of the recoverability of receivables. Account balances, when determined to be uncollectible, are charged against the allowance. Contract Assets and Liabilities Unbilled Accounts Receivables (Contract Assets) - Pursuant to the over time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled accounts receivable is recorded to reflect revenue that is recognized when the cost based input method is applied and such revenue exceeds the amount invoiced to the customer. Unbilled receivables are disclosed on the 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 Consolidated Statements of Operations. Inventories Inventories are stated on a standard cost basis adjusted to approximate the lower of cost (as determined by the first-in, first-out method) or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the production of OLED displays. The standard cost for our products is subject to fluctuation from quarter to quarter, depending primarily on the number of displays produced, fluctuations in manufacturing overhead and labor hours incurred, and the yields experienced in the manufacturing process. Under the principles of full absorption costing, these costs are allocated to each unit of production in work in process and finished goods inventory based on actual use of production facilities. However, in applying this principle, the requirements of Accounting Standards Codification, or ASC 330-10-30-4, “Inventory” require that a company determine the range of normal capacity, or production expected to be achieved over a number of periods or seasons, and limits the amount of fixed production overheads allocated to inventory in periods of abnormally low production. In 2021, in recognition of a shift in product demand toward larger, more complex displays yielding fewer die per wafer, we concluded that measuring output based on the number of wafers produced per quarter is an appropriate measure of production volume. We believe that fully allocating the overhead to work in process and finished goods inventories, results in more accurate inventory valuation and computation of costs of goods sold, in addition to providing better information to management in making pricing decisions. Under this methodology, overhead is fully allocated to products, resulting in an increase in standard costs and inventory values. Property, Plant and Equipment Property, plant and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation on equipment is calculated using the straight-line method of depreciation over the estimated useful life ranging from three to ten years . Amortization of leasehold improvements is calculated by using the straight-line method over the shorter of their estimated useful lives or lease terms. Expenditures for maintenance and repairs are charged to expense as incurred. The Company performs impairment tests on its long-lived assets when circumstances indicate that their carrying amounts may not be recoverable. If required, recoverability is tested by comparing the estimated future undiscounted cash flows of the asset or asset group to its carrying value. Impairment losses, if any, are recognized based on the excess of the assets' carrying amounts over their estimated fair values. No impairment loss was recognized on the Company’s long-lived assets during the year ended December 31, 2022. Intangible Assets – Patents Acquired patents are recorded at purchase price as of the date acquired and amortized over the expected useful life which is generally the remaining life of the patent. Total intangible amortization expense was approximately $ 8 thousand for the years ended December 31, 2022 and 2021, respectively. Leases The Company accounts for leases in accordance with ASC Topic 842: Leases, which we adopted on January 1, 2019. As a lessee, the Company records a right-of-use asset and a lease liability on the Consolidated Balance Sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statement of Operations. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments, and use the implicit rate when readily determinable. The Company estimates its incremental borrowing rate based on a yield curve analysis, utilizing the interest rate derived from the fair value analysis of our credit facility and adjusting it for factors that appropriately reflect the profile of secured borrowing over the expected term of the lease. Some of our leases include the option to extend or terminate the lease. The Company includes these options in the recognition of its right-of-use assets and lease liabilities when it is reasonably certain that the Company will exercise the option. Lease expense is generally recognized on a straight-line basis over the lease term. The Company enters into lease agreements for the use of office space, manufacturing facilities, and phone equipment, under both operating and finance leases. Operating leases are included in Operating lease right-of-use assets, and Operating lease liability – current and Operating lease liability – long term in our Consolidated Balance Sheet. Finance leases are included in Property, plant and equipment, net , Finance lease liability – current and Finance lease liability – long term in our Consolidated Balance Sheet. Advertising Costs related to advertising and promotion of products are charged to sales and marketing expense as incurred. There was no advertising expense for the years ended December 31, 2022 and 2021. Shipping and Handling Fees The Company includes costs related to shipping and handling in cost of goods sold. Income Taxes The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The effect on deferred tax assets and liabilities of changes in tax rates will be recognized as income or expense in the period that the change occurs. The Company recognizes the effect of income tax positions which are more-likely-than-not of being sustained. A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. Changes in circumstances, assumptions and clarification of uncertain tax regimes may require changes to any valuation allowances associated with the Company’s deferred tax assets. Due to the Company’s operating loss carryforwards, all tax years remain open to examination by the major taxing jurisdictions to which the Company is subject. In the event that the Company is assessed interest or penalties at some point in the future, it will be classified in the financial statements as tax expense . For additional details regarding our accounting for income taxes, see Note 11 in the accompanying consolidated financial statements. Earnings per Common Share Basic earnings 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, restricted stock units and convertible preferred stock. Diluted earnings 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 earnings per share. Diluted earnings per share must be calculated under both the treasury stock and two class method, and the calculation that results in the most dilutive earnings per share amount for the common stock is reported. 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. In accordance with the Preferred Stock – Series B agreements, the conversion price was adjusted to $ 0.3022 per share in December 2019, and the resultant, if converted common shares are reflected in the table of anti-dilutive common stock equivalents below. The following table sets forth the computation of basic and diluted earnings per share (in thousands, expect per share and share data) for the years ended December 31, 2022 and 2021: Twelve Months Ended December 31, 2022 2021 Net (Loss) Income $ ( 1,103 ) $ ( 5,206 ) Income allocated to participating securities — — (Loss) income allocated to common shares $ ( 1,103 ) $ ( 5,206 ) Change in fair value of warrant liability $ — $ ( 3,248 ) Loss allocated to common shares - Diluted $ ( 1,103 ) $ ( 8,454 ) Weighted average common shares outstanding - Basic 75,637,340 71,899,057 Dilutive effect of liability classified warrants — 1,280,381 Weighted average common shares outstanding - Diluted (1)(2) 75,637,340 73,179,438 Net (loss) income per share: Basic $ ( 0.01 ) $ ( 0.07 ) Diluted $ ( 0.01 ) $ ( 0.12 ) (1) For the year ended December 31, 2022, weighted average shares used for calculating basic and diluted earnings per share are the same as the inclusion of liability classified warrants, would be anti-dilutive to the earnings per share calculation. (2) For the year ended December 31, 2021, weighted average shares used for calculating diluted earnings per share includes the effect of liability classified warrants as they have a dilutive effect on earnings per share. The following table sets forth the potentially dilutive common stock equivalents for the years ended December 31, 2022 and 2021 that were not included in diluted EPS as their effect would be anti-dilutive: Twelve Months Ended December 31, 2022 2021 Restricted Stock Units 1,725,543 405,453 Options 3,048,725 3,712,868 Warrants 2,909,374 4,780,447 Convertible preferred stock 17,723,362 18,726,009 Total potentially dilutive common stock equivalents 25,407,004 27,624,777 Comprehensive Income (Loss) Comprehensive income (loss) refers to net income (loss) and other revenue, expenses, gains and losses that, under generally accepted accounting principles, are recorded as an element of shareholders’ equity but are excluded from the calculation of net income (loss). The Company's operations did not give rise to any material items includable in comprehensive income (loss), which were not already in net income (loss) for the years ended December 31, 2022 and 2021. Accordingly, the Company's comprehensive income (loss) is the same as its net income (loss) for the periods presented. Fair Value of Financial Instruments Cash, cash equivalents, accounts receivable, short-term investments and accounts payable are stated at cost, which approximates fair value, due to the short-term nature of these instruments. The 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. The payroll protection plan, or PPP loan is presented on the balance sheet, at cost which equals fair market value due to the short term nature of the loan. We have categorized our assets and liabilities that are valued at fair value on a recurring basis into three-level fair value hierarchy in accordance with GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3). Assets and liabilities recorded in the balance sheets at fair value are categorized based on a hierarchy of inputs as follows: Level 1 – Unadjusted quoted prices in active markets of identical assets or liabilities. Level 2 – Quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 – Unobservable inputs for the asset or liability. The common stock warrant liability discussed in Note 12 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 accompanying financial statements as of December 31, 2022, as the warrants are currently exercisable. The following table shows the reconciliation of the Level 3 warrant liability measured and recorded at fair value on a recurring basis, using significant unobservable inputs (in thousands): Estimated Fair Value Balance as of January 1, 2022 $ 1,374 Fair value of warrants issuance during period — Change in fair value of warrant liability, net ( 1,374 ) Balance as of December 31, 2022 $ — The fair value of the liability for common stock purchase warrants at December 31, 2022 was 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. Inputs to the model at December 31, 2022 included remaining contractual terms of the warrants of 0.08 years, at a risk-free interest rate of 0 %, with no expected dividends, and expected volatility of the price of the underlying common stock ranging of 0 %. Stock-based Compensation The Company uses the fair value method of accounting for share-based compensation arrangements. The fair values of stock options are 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. Derivative Financial Instruments The Company evaluates all financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features qualifying as embedded derivatives. For derivative financial instruments accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the Consolidated Statement of Operations. The Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Concentration of Credit Risk The majority of the Company’s products are sold throughout North America, Asia, and Europe. Sales to the Company’s recurring customers are made generally on open account while sales to occasional customers are typically made on a prepaid basis. The Company performs periodic credit evaluations on its recurring customers and generally does not require collateral. An allowance for doubtful accounts is maintained for credit losses. Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and short-term investments. The Company’s cash and cash equivalents are deposited with financial institutions which, at times, may exceed federally insured limits. The Company invests surplus cash in a government money market fund that consists of U.S. government obligations and repurchase agreements collateralized by U.S. government obligations, which are not insured. To date, the Company has not experienced any loss associated with this risk. Concentrations The Company purchases principally all of its silicon wafers, which are a key ingredient in its OLED production process, from two suppliers located in Taiwan and Korea. The Company is experiencing price increases and changes in allocation from one of these vendors and is working to establish additional sources of supply. For the year ended December 31, 2022, one customer of 17.8 % accounted for over 10% of net revenues. As of December 31, 2022, the Company had accounts receivable balances from the one customer of 27.7 %. For year ended December 31, 2021, there was one customer of 28.7 %, who accounted for over 10% of net revenues. Accounts receivable balances from the one customer was 50.3 % . Liquidity and Going Concern 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 contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. For the year ended December 31, 2022, the Company incurred a net loss $ 1.1 million and used cash in operating activities of $ 3.5 million. As of December 31, 2022, the Company had $ 4.3 million of cash, $ 1.0 million of outstanding indebtedness and borrowing availability of $ 1.8 million under its ABL Facility. The Company’s ABL Facility expires on December 31, 2023, and renews automatically for another year unless terminated pursuant to its terms. The ABL Facility agreement contains certain lenders remedies that give the bank the ability to impose discretionary reserves against our borrowing availability or terminate the facility upon events of default. Although our relationship with the lender is positive, there is no assurance the lender will renew or extend this facility or continue to make funds available during 2023 and beyond at present availability levels, or at all. Due to continuing losses, the Company’s financial position, 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. Although demand for the Company’s products has remained steady, due to lingering supply chain issues caused in part by the COVID-19 Pandemic, and also inflationary pressures the Company’s ability to obtain components and other materials or services on a timely basis has resulted in manufacturing delays, and increased costs. If these trends worsen or result in lost orders it could materially and adversely affect our business, financial condition, and results of operations. 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 has taken actions to increase revenues and to reduce expenses and is considering financing alternatives. 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) continue the Work Status Reduction program that began in October 2019 for certain members of senior management pursuant to which their work status is reduced by approximately 20 %, 3) continue to utilize government grants for purchase of capital equipment and funding manufacturing personnel, 4) reduce discretionary and other expenses, 5) seek to enter new markets, 6) sell shares under it’s At the Market or ATM equity facility entered into in November 2021, and 7) consider additional financing and/or strategic alternatives. The Company is reassessing its business plans and forecasts over the next two years. Based on its known cash needs as of March 2023, and the anticipated availability of its ABL facility, the Company has developed plans to extend its liquidity to support its working capital requirements through the first quarter of 2024. However, there can be no assurance the Company’s plans will be achieved and the Company will be able to meet its financial obligations as they become due without obtaining additional financing or sources of capital. 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. Recently Adopted Accounting Pronouncements In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This update requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. This standard is effective beginning after December 15, 2021. The amendments should be applied either (1) prospectively to all transactions within the scope of the amendments that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or (2) retrospectively to those transactions. The Company adopted the guidance on January 1, 2022, on a prospective basis and such adoption did not have a material impact on the Company’s financial statements. Recently Issued and Not Yet Adopted Accounting Pronouncements 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 reasonabl |
