U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2002
[ ] Transition report pursuant section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to ________________
eMAGIN CORPORATION
(Exact name of registrant as specified in its charter)
Commission file number: 000-24757
DELAWARE 56-1764501
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2070 Route 52
Hopewell Junction, New York 12533
(Address of principal executive offices)
(845) 892-1900
(Issuer's telephone number)
___________________
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Not applicable
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 15, 2002 the Registrant had
30,294,980 shares of Common Stock outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one): Yes [ ] No [X]
Index Page Number
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2002 (unaudited)
and December 31, 2001 3
Unaudited Consolidated Statements of Operations For the
Three-Months ended March 31, 2002 and March 31, 2001
and for the period from inception (January 23, 1996)
to March 31, 2002 4
Unaudited Consolidated Statements of Cash Flows for the
Three-Months ended March 31, 2002 and March 31, 2001 and
for the period from inception (January 23, 1996) to
March 31, 2002 5
Selected Notes to Unaudited Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 22
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 26
2
eMAGIN CORPORATION
(a development stage corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 2002 December 31, 2001
-------------- -----------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $1,666,010 $738,342
Contract receivables 166,316 485,021
Unbilled costs and estimated profits on contracts in progress 101,320 293,273
Inventory 65,600 90,720
Prepaid expenses and other current assets 631,002 388,344
--------------- -----------------
Total current assets 2,630,248 1,995,700
Equipment and leasehold improvements, net of accumulated
depreciation of $1,234,014 and $1,122,989, respectively 1,140,229 1,166,509
Goodwill and purchased intangibles, net 1,104,823 1,657,238
Other long-term assets 90,141 94,367
--------------- -----------------
Total assets $ 4,965,441 $ 4,913,814
=============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $4,158,683 $3,731,976
Accrued Payroll 851,708 788,302
Current portion of long-term debt 1,673,528 693,197
Other short-term debt 1,268,709 1,875,000
Advanced payments on contracts to be completed 275,955 289,538
Other current liabilities 356,628 108,805
--------------- -----------------
Total current liabilities 8,585,211 7,486,818
--------------- -----------------
LONG-TERM DEBT 2,337,452 2,305,184
SHAREHOLDERS' EQUITY:
Common Stock, par value $0.001 per share
Shares authorized - 100,000,000
Shares issued and outstanding - 29,012,927 and 25,171,183 29,013 25,171
Additional paid-in capital 119,000,669 114,058,560
Deferred compensation (1,812,838) (2,277,367)
Deficit accumulated during the development stage (123,174,066) (116,684,552)
---------------- -----------------
Total shareholders' equity (5,957,222) (4,878,188)
---------------- -----------------
Total liabilities and shareholders' equity $ 4,965,441 $ 4,913,814
================ =================
See selected notes to financial statements
3
eMAGIN CORPORATION
(a development stage corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Period from
Three-Months Three-Months inception
ended ended (January 23, 1996)
March 31, 2002 March 31, 2001 to March 31, 2002
-------------- -------------- --------------------
CONTRACT REVENUE:
Contract revenue $ 14,108 $ 2,030,201 $ 7,577,352
Product sales 143,919 - 985,632
-----------------------------------------------------------
Total revenue 158,027 2,030,201 $ 8,562,984
-----------------------------------------------------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$26,665, $201,467, $358,760 and $2,910,597, respectively 2,144,766 3,441,105 24,503,875
Amortization of purchased intangibles 552,415 5,851,692 39,371,573
Acquired in-process research and development - - 12,820,000
Write-down of goodwill and purchased intangibles - 32,145,863
Non-cash charge for stock-based compensation 1,336,926 735,978 6,717,757
Selling, general and administrative 1,635,048 1,775,401 14,201,268
----------- ------------ --------------
Total costs and expenses, net 5,669,155 11,804,176 129,760,336
----------- ------------ -------------
Non cash interest expense (936,132) (903,290) (1,839,422)
OTHER (EXPENSE)/ INCOME (42,254) 968,830 (137,292)
----------- ------------ -------------
OTHER (EXPENSE)/ INCOME, net (978,386) 65,540 (1,976,714)
Loss before provision for income taxes (6,489,514) (9,708,435) (123,174,066)
PROVISION FOR INCOME TAXES - - -
------------ ----------- ---------------
Net loss $ (6,489,514) $ (9,708,435) $(123,174,066)
============== =============== ===============
Basic and diluted net loss per common share $ (0.24) $ (0.39)
============= ==============
Basic and diluted weighted average common shares outstanding 26,669,919 25,069,143
============= =============
See selected notes to financial statements.
4
eMAGIN CORPORATION
(a development stage corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three-Months Three-Months
ended ended
March 31, 2002 March 31, 2001
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($6,489,514) ($9,708,435)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 663,440 6,016,929
Write-down of goodwill and purchased intangibles - -
Loss on sale of assets - -
Non-cash charge for stock based compensation 1,336,926 735,978
Non-cash interest related charges 936,132 -
Non-cash charge for services received 307,657 -
Acquired in-process research and development - -
Changes in operating assets and liabilities, net of acquisition:
Contract receivables 318,705 673,980
Unbilled costs and estimated profits on contracts in progress 191,953 (796,010)
Prepaid expenses and other current assets (17,538) (546,863)
Other long-term assets 4,226 -
Advanced payment on contracts to be completed (13,583) -
Accounts payable, accured expenses and accrued payroll 757,605 310,558
-------------------------------------------------
Net cash used in operating activities (2,203,991) (3,313,863)
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (84,745) (152,848)
Net proceeds from acquisition - -
-------------------------------------------------
Net cash used in investing activities (84,745) (152,848)
-------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance costs 2,465,517 (93,878)
Proceeds from exercise of stock options and warrants 887 -
Proceeds from short term debt 1,000,000 -
Proceeds from long term debt - -
Payments of long term debt and capital leases (250,000) -
-------------------------------------------------
Net cash provided by financing activities 3,216,404 (93,878)
-------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENT'S 927,668 (3,560,589)
CASH AND CASH EQUIVALENTS, beginning of period 738,342 7,367,257
-------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 1,666,010 $ 3,806,668
Period from
inception
January 23, 1996
to March 31, 2002
-----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($123,174,066)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 40,606,422
Write-down of goodwill and purchased intangibles 32,145,863
Loss on sale of assets 97,713
Non-cash charge for stock based compensation 6,717,757
Non-cash interest related charges 2,158,694
Non-cash charge for services received 423,808
Acquired in-process research and development 12,820,000
Changes in operationg assets and liabilities, net of acquisition:
Contract receivables (34,459)
Unbilled costs and estimated profits on contracts in progress 518,244
Prepaid expenses and other current assets (390,780)
Other long-term assets (79,690)
Advanced payment on contracts to be completed 384,760
Accounts payable, accured expenses and accrued payroll 2,741,263
------------------
Net cash used in operating activities (25,064,471)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (1,352,607)
Net proceeds from acquisition 1,239,162
------------------
Net cash used in investing activities (113,445)
------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance costs 23,746,517
Proceeds from exercise of stock options and warrants 28,496
Proceeds from short term debt 5,875,000
Proceeds from long term debt -
Payments of long term debt and capital leases (2,806,087)
------------------
Net cash provided by financing activities 26,843,926
------------------
NET INCREASE IN CASH AND CASH EQUIVALENT'S 1,666,010
CASH AND CASH EQUIVALENTS, beginning of period -
------------------
CASH AND CASH EQUIVALENTS, end of period $ 1,666,010
==================
See selected notes to financial statements.
5
eMAGIN CORPORATION
Selected Notes to Unaudited Consolidated Financial Statements
Note 1 - BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Certain information or footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. The results of operations for the
period ended March 31, 2002 are not necessarily indicative of the results to be
expected for the full year.
Note 2 - NATURE OF BUSINESS
Fashion Dynamics Corporation (FDC) was organized January 23, 1996, under the
laws of the State of Nevada. FDC had no active business operations other than to
acquire an interest in a business. On March 16, 2000, FDC acquired FED
Corporation ("FED") (the Merger). The merged company changed its name to eMagin
Corporation (the "Company" or eMagin) (Note 3). eMagin is a developer and
manufacturer of optical systems and microdisplays for use in the electronics
industry. eMagin's wholly-owned subsidiary, Virtual Vision Inc., develops and
markets microdisplay systems and optics technology for commercial, industrial
and military applications. Following the Merger, the business conducted by the
Company is the business conducted by FED prior to the Merger.
The Company continues to be a development stage company, as defined by Statement
of Financial Accounting Standards ("SFAS") No. 7, Accounting and Reporting by
Development Stage Enterprises", as it continues to devote substantially all of
its efforts to establishing a new business, and it has not yet commenced its
planned principal operations. Revenues earned by the Company to date are
primarily related to research and development type contracts and are not related
to the Company's planned principal operations of commercialization of products
using organic light emitting diode (OLED) technology. eMagin Corporation is
attempting to transition to becoming an operating company during 2002 with most
of its future revenue to be based in product sales.
Note 3 - FED ACQUISITION
On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the
terms of the agreement, FDC issued approximately 10.5 million shares of its
common stock and approximately 3.9 million options and warrants to purchase
common stock to FED shareholders. The total preliminary purchase price of the
transaction was approximately $98.5 million, including $73.4 million of value
relating to the shares issued (at a fair value of $7 per share, the value of the
simultaneous private placement transaction of similar securities), $20.9 million
of value relating to the options and warrants exchanged, $0.3 million of
acquisition costs and $3.8 million of assumed liabilities. The transaction was
accounted for using the purchase method of accounting. Under the purchase method
of accounting, the assets and liabilities were recorded based upon their fair
values at the date of acquisition.
Goodwill and other intangible assets acquired were previously amortized over
their estimated useful lives of three years. In accordance with SFAS No. 2,
"Accounting for Research and Development Costs," as clarified by Financial
Accounting Standards Board Interpretation No. 4, amounts assigned to in-process
research and
6
development were charged to expense as part of the allocation of purchase price.
Accordingly, based on the results of an independent appraisal, the Company
recognized a charge of approximately $12.8 million associated with the write-off
of acquired in-process research and technology. The Company recognized this
charge during the quarter ended September 30, 2000.
During the quarter ended September 30, 2001, the Company recorded an
amortization and impairment write-down of its goodwill of approximately $38.0
million to reduce the carrying amount of the goodwill to its estimated fair
value. The goodwill impairment charge was included in the unaudited consolidated
statement of operations for the quarter ended September 30, 2001. An explanation
of the impairment write down is detailed in the Management's Discussion and
Analysis of Financial Condition and Results of Operations under Amortization of
Purchased Intangibles.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method and defines criteria for recognition of acquired intangible
assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives
are no longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that
are not deemed to have indefinite lives will continue to be amortized over their
useful lives (but with no maximum life). The Company adopted the provisions of
SFAS No. 142 effective January 1, 2002 and is in the process of performing the
required transitional fair value impairment test. Identified intangible assets
not deemed to have indefinite lives continue to be amortized over a three year
life. Accordingly, amortization expense of purchased intangibles of
approximately $550,000 is included in the accompanying unaudited consolidated
statement of operations for the three months ended March 31, 2002.
Note 4 - REVENUE AND COST RECOGNITION
The Company has historically earned revenues from certain of its research and
development activities under both firm fixed-price contracts and cost-type
contracts, including some cost-plus-fee contract. Revenues relating to firm
fixed-price contracts are generally recognized on the percentage-of-completion
method of accounting as costs are incurred (cost-to-cost basis). Revenues on
cost-plus-fee contracts include costs incurred plus a portion of estimated fees
or profits based on the relationship of costs incurred to total estimated costs.
Contract costs include all direct material and labor costs and an allocation of
allowable indirect costs as defined by each contract, as periodically adjusted
to reflect revised agreed upon rates.
Note 5 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. To date, activities of
the Company (and its predecessor) have included the performance of research and
development under cooperative agreements with United States Government agencies.
Funding from such research and development contracts is recognized as a
reduction in operating expenses during the period in which the services are
performed and related direct expenses are incurred.
Note 6 - NET LOSS PER COMMON SHARE
In accordance with SFAS No. 128, net loss per common share amounts ("basic EPS")
were computed by dividing net loss by the weighted average number of common
shares outstanding and excluding any potential dilution. Net loss per common
share assuming dilution ("diluted EPS") was computed by reflecting potential
dilution from the exercise of stock options and warrants. Common equivalent
shares have been excluded from the computation of diluted EPS as their effect is
antidilutive.
7
Note 7 - DEBT
On January 14, 2002, the Company entered into a $1.0 million bridge loan
arrangement with a private investor (the "Investor") in connection with a
secured note purchase agreement executed by the Company on November 27, 2001.
This transaction increased the total amount of the secured convertible loan
outstanding under this arrangement to $1,625,000, including amounts previously
made available to the Company in connection with the November 27, 2001 secured
note arrangement, net of repayments of $250,000 to certain investors who elected
not to reinvest. The secured convertible notes accrue interest at a rate of
9.00% per annum and mature on August 30, 2002. Terms of the notes also include a
fixed conversion rate of $0.5264 per share. The Company also granted warrants to
purchase 921,161 shares of common stock with an exercise price of $0.5468 per
share to the Investor. Such warrants are exercisable through January 2005.
Certain investors of the November 27, 2002 financing who elected to remain in
the new bridge loan arrangement received reset provisions of the previous
conversion rate and warrant exercise prices to be equivalent to the terms
granted to the new Investor.
The total of the intrinsic value of the warrants issued to the new Investor and
the incremental intrinsic value of the repriced warrants of certain existing
investors of approximately $480,000 has been recorded as original issue
discount, resulting in a reduction in the carrying value of this debt. The
original issue discount will be amortized into interest expense over the period
of the debt. In the event the debt is converted prior to maturity, the remaining
discount will be amortized into interest expense at the conversion date. For the
three months ended March 31, 2002, approximately $120,000 has been amortized and
is included in non-cash interest expense in the accompanying unaudited
consolidated statements of operations.
In addition, based on the terms of the bridge loan arrangement, the conversion
terms of the debt provide for a beneficial conversion feature. The total value
of the beneficial feature of the new debt and the incremental value of the reset
conversion feature of the existing debt of approximately $780,000 was recorded
as non-cash interest expense in the accompanying unaudited consolidated
statements of operations.
Note 8 - STOCKHOLDERS' EQUITY
The authorized common stock of the Company consists of 100,000,000 shares with a
par value of $0.001 per share.
Prior to the Merger on March 16, 2000, net proceeds of approximately $23.3
million was raised through the private placement issuance of approximately 3.5
million shares of common stock. Additionally, approximately 9.4 million shares
of common stock held by FDC's principal shareholders were cancelled at the time
of the Merger.
On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the
terms of the agreement, FDC issued approximately 10.5 million shares of its
common stock to FED shareholders, and issued approximately 3.9 million options
and warrants in exchange for existing FED options and warrants. The total
purchase price of the transaction was approximately $98.5 million, including
$73.4 million of value relating to the shares issued (at a fair value of $7 per
share, the value of the simultaneous private placement transaction of similar
securities), $20.9 million of value relating to the options and warrants
exchanged, based on the difference between the fair value and the exercise price
of said equity instruments and $3.8 million of assumed liabilities. The
transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the fair value of assets
acquired and liabilities assumed.
8
In January 2002, the Company negotiated settlement of amounts due to a related
party for services previously rendered via issuance of 192,493 shares of common
stock. As such, the Company recorded the fair value of the shares of
approximately $135,000 in selling, general and administrative expenses in the
accompanying unaudited consolidated statement of operations for the three months
ended March 31, 2002.
On February 27, 2002, the Company completed a private placement of securities
with several institutional and individual investors of 3,617,128 shares of
common stock at a price per share of $0.6913, generating gross proceeds of
approximately $2,500,000, less issuance costs of approximately $35,000. In
connection with the financing arrangement, the Company issued to the investors
warrants to purchase 1,446,852 shares of common stock of the Company at an
exercise price of $0.7542 per share. Also, the Company issued to an institution
warrants to purchase 36,164 shares of common stock in connection with a finder
fee arrangement entered into between the two parties. Such warrants are
exercisable through February 2005.
On March 4, 2002, the Company entered into an equity line of credit agreement
with a private equity fund (the "Fund") whereby the Company has the option, but
not the obligation, to sell shares of common stock to the Fund for a three-year
period at a price per share, as defined. The agreement provides for certain
minimum and maximum monthly amounts up to a maximum of $15 million and, in
certain circumstances, up to $20 million.
In connection with the equity line of credit, the Company issued 30,000 shares
of common stock to the Fund as compensation for certain services rendered in
connection with the closing of the line of credit. As such, the Company recorded
the fair value of the shares of approximately $31,000 in selling, general and
administrative expenses for the three months ended March 31, 2002. Also, the
Company granted warrants to purchase up to 150,000 shares of common stock of the
Company at an exercise price of $0.8731 per share. Such warrants are exercisable
through September 2005. The intrinsic value of said warrants of approximately
$140,000 is included in selling, general and administrative expenses for the
three months ended March 31, 2002.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion and analysis should be read in conjunction with the
foregoing unaudited consolidated financial statement and notes thereto.
Statement of Forward-Looking Information
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue," the negative of
such terms, or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those in the
forward-looking statements as a result of various important factors. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, such should not be regarded as a representation by the Company, or
any other person, that such forward-looking statements will be achieved. The
business and operations of the Company are subject to substantial risks, which
increase the uncertainty inherent in the forward-looking statements contained in
this release.
We undertake no duty to update any of the forward-looking statements, whether as
a result of new information, future events or otherwise. Readers are cautioned
not to place undue reliance on the forward-looking statements contained in this
report.
Overview
eMagin Corporation designs, develops, and markets OLED (organic light emitting
diode)-on-silicon microdisplays and related information technology solutions. We
integrate OLED technology with silicon chips to produce high-resolution
microdisplays smaller than one-inch diagonally which, when viewed through a
magnifier, create a virtual image that appears comparable to that of a computer
monitor or a large-screen television. We shipped initial samples of our first
commercial microdisplay product in March 2001. We are now accepting orders for
larger quantities of our first microdisplay product and shipping samples of our
second commercial microdisplay product. These products are being applied or
considered for near-eye and headset applications in products such as
entertainment and gaming headsets, handheld Internet and telecommunication
appliances, viewfinders, and wearable computers to be manufactured by original
equipment manufacturer (OEM) customers. eMagin Corporation is a leading
developer of organic light emitting diode ("OLED") microdisplays, and optics
systems. We currently provide custom video display headsets, in limited
quantities, largely to government customers. We are seeking to transition into
commercial distribution of our products and technology as components to OEM
system manufacturers for near-eye and headset applications in products such as
handheld telecommunication and Internet devices, wearable computers, and
computer and entertainment headsets.
Company History
eMagin Corporation was originally incorporated as Fashion Dynamics Corporation
on January 23, 1996 under the laws of the State of Nevada. For the three years
prior its acquisition of FED Corporation, Fashion Dynamics Corporation had no
active business operations, and sought to acquire an interest in a business with
long-term growth potential. On March 16, 2000, Fashion Dynamics Corporation
acquired FED Corporation (derived from field emissive device), subsequently
changed its name to eMagin
10
Corporation (derived from "electronic imaging") and listed its common stock on
the American Stock Exchange under the "EMA" trading symbol.
At our annual meeting of stockholders held on July 16, 2001, the stockholders
approved the reincorporation of eMagin Corporation as a Delaware corporation.
The reincorporation became effective on July 16, 2001 by merging eMagin
Corporation, a Nevada corporation ("eMagin-Nevada"), into its then wholly owned
subsidiary, eMagin Corporation, a Delaware corporation (formerly known as FED
Corporation as described above) ("eMagin-Delaware"). Upon completion of this
merger, eMagin-Nevada ceased to exist as a corporate entity and eMagin-Delaware
succeeded to the assets and liabilities of eMagin-Nevada. Under the merger
agreement for the reincorporation, each outstanding share of eMagin-Nevada
common stock was automatically converted into one share of eMagin-Delaware
common stock at the time the merger became effective.
Our history has been as a developmental stage company. We are now transitioning
to manufacturing and intend to increase our marketing, sales, and research and
development efforts, and expand our operating infrastructure. Most of our
operating expenses are fixed in the near term. If we are unable to generate
significant revenues, our net losses in any given period could be greater than
expected.
Revenues
Revenues for the three months ended March 31, 2002 were $0.2 million as compared
to $2.0 million respectively, for the three months ended March 31, 2001.
Revenues consist primarily of product sales and contracts funded by certain U.S.
government programs. Product sales increased by $0.1 million and ended the first
quarter with a backlog of over $1 million in short term orders. Government
research and development contract revenues and associated cost recoveries
decreased by $2.0 million and are expected to remain significantly lower in 2002
as the company focuses on ramping into production rather than performing
government research and development contracts.
Costs and Expenses
Research and Development
Research and development expenses include salaries, development materials,
equipment lease and depreciation expenses, electronics, rent, utilities and
costs associated with operating the Company's manufacturing facility. The
Company has received cost sharing awards from certain U.S. government agencies
to fund certain research and development. As of March 31, 2002, the remaining
costs to be incurred and billed on these three active "cost sharing" contracts
totaled $0.3 million. Gross research and development expenses for the three
months ended March 31, 2002 were $2.2 million. For the same period in 2001, the
Company's gross research and development expenses were $3.6 million. Of these
amounts, the Company received $0.2 million in cost sharing from the U.S.
Government for the three months ended March 31, 2001. The $1.4 million decrease
in gross expenses for the three months ended March 31, 2002 reflects a reduction
in staffing and expenditures due to management cost savings efforts,
renegotiated leases, and staff reductions.
Selling, General and Administrative
Selling, general and administrative expenses consist principally of salaries and
fees for professional services, legal fees incurred in connection with patent
filings and related matters, amortization, as well as other marketing and
administrative expenses. Selling, general and administrative expenses, for the
three months ending March 31, 2002 were $1.6 million as compared to $1.8 million
for the three months ended March 31, 2001. The decrease in selling, general and
administrative expenses is primarily due to decreases in marketing activity,
personnel costs, patent filings and legal fees resulting from management cost
savings efforts.
11
Amortization of Purchased Intangibles
Amortization of purchased intangibles expense for the three months ending March
31, 2002 was $0.6 million as compared to $5.9 million for the three months ended
March 31, 2001. The decrease of $5.3 million in these non-cash charges, is the
result of the prior year's write-down of the balance in purchased intangibles
and goodwill and its impact on future year's amortization. The Company's ability
to realize its goodwill is dependent upon its ability to raise sufficient
financing in order to expand the rollout and commercialization of its products.
In the third quarter of 2001, the Company was able to secure a limited amount of
additional financing to fund its operations, however such financing was not in
the amount the Company expected to be able to secure, nor was it enough to
rollout commercialization of its product on a wide scale basis, as had been
contemplated by its business plan. Based on these current factors, the Company
revised its future business plan and evaluated the carrying value of the
goodwill that was a result of its acquisition of FED. Based on this evaluation,
the Company determined that the goodwill was impaired and accordingly, recorded
an adjustment to the carrying value of the goodwill of $32 million based on the
estimated discounted net cash flow to be generated over the remaining life of
the asset.
Non-cash for stock-based compensation amortization
Non-cash stock-based compensation expense for the three months ending March 31,
2002 was $1.3 million as compared to $0.7 million for the three months ended
March 31, 2001. The activity for the three months ending March 31, 2002 reflects
non-cash stock-based compensation costs related to the issuance of stock options
to employees and directors at exercise prices below fair market values in the
first quarter of 2002.
Other Income (Expense)
Other income (expenses) for the three months ending March 31, 2002 was $1.0
million expense as compared to $0.1 income for the three months ended March 31,
2001. The increase of $1.0 million in expense for this non-cash charge was due
primarily to the increase in non-cash interest expense related to beneficial
conversion features of a bridge loan entered into by the company in the first
quarter of 2002 and non-cash interest expense related to the amortization of the
original issue discount value related to warrants issued in connection with the
aforementioned bridge loan.
Liquidity and Capital Resources
Since our inception, we have financed our operations through private placements
of equity securities, research and development contracts and borrowings. Our
cash requirements depend on numerous factors, including completion of our
product development activities, ability to commercialize our products, market
acceptance of our products and other factors. We plan to devote substantial
capital resources to continue our development programs directed at
commercializing our products in our target markets, hire and train additional
staff, expand our research and development activities, develop and expand our
manufacturing capacity and begin production activities. Through March 31, 2002
we have incurred accumulated losses of approximately $123.2 million since our
inception and we anticipate incurring significant losses as we fund our growth.
As of March 31, 2002, we had $1.7 million in cash and cash equivalents and have
a working capital deficit of $6.0 million. Subsequent to March 31,2002, we
received approximately $1.0 million pursuant to an equity financing with a
strategic partner. In December 2001, we took certain actions to reduce our
workforce due to working capital constraints. During the first quarter and early
second quarter of 2002 we rehired approximately 11 of the previously terminated
employees after raising additional capital to pursue production of our products.
A note entered into between the Company and the Travelers Insurance Company
("Travelers") in August 2001 will mature on May 20, 2002. The Company is
currently in negotiations with Travelers to settle this debt with a different
debt or equity security as the Company does not have sufficient funds to pay the
note upon maturity. There can be no assurance that the Company will be able to
negotiate a settlement of the debt.
Net cash used in operating activities was $2.2 million for the three months
ended March 31, 2002. Cash used in operating activities resulted primarily from
our net loss partially offset by increases from non-cash charges. Cash used in
operating activities for the three months ended March 31, 2001 was $3.3 million
resulting primarily from operating losses.
12
Net cash used by investing activities was $0.1 million for the three months
ended March 31, 2002, all of which was used for capital expenditures. Net cash
used by investing activities for the three months ended March 31, 2001 was $0.2
million which was used for capital expenditures.
Net cash provided by financing activities was $3.2 million for the three months
ended March 31, 2002, and consisted primarily of proceeds from sale of equity
and the issuance of debt. Net cash provided by financing activities was $0.1
million for the three months ended March 31, 2001 year, and consisted primarily
of cash payments on long-term debt and capital assets.
We currently anticipate that we will continue to experience significant growth
in our operating expenses for the foreseeable future and that our operating
expenses will be a material use of our cash resources. Staffing for multi-shift
operations, in process inventory, outsourced inventory, and increased sales
efforts are expected to be the principle uses of cash during the remainder of
2002.
We need to raise substantial additional equity or debt financing in the near
future in order to continue as a going concern and to fund our development
growth and commercialization of our products. There can be no assurance that
additional equity or debt financing will be available on acceptable terms or at
all. If we are unable to obtain additional capital, we may be required to reduce
the scope of our planned product development, selling and marketing activities
and expansion of our manufacturing facilities, which would have a material
adverse effect on our business, financial condition and operating results and
our ability to continue as a going concern. In the event that we raise
additional equity financing, further dilution to investors could result.
During the next 12 months, the Company's foreseeable cash requirements are
expected to be met by a combination of existing cash, revenue generated by the
Company's sales, and additional equity or debt financing. The Company is
currently devoting substantial resources to its initial product launch cycles
and plans to continue spending to the establishment of sales and distribution
relationships. The Company believes that it will be able to secure financing in
the near term and that the proceeds from such financings, along with its
remaining cash resources at March 31, 2002, will be sufficient to fund the
Company's operations into the second quarter of 2002 and beyond. However, there
can be no assurance that sufficient capital will be available, when required, to
permit the Company to realize its plan, or even if such capital is available,
that it will be at terms favorable to the Company. Additionally, there can be no
assurance that the Company's efforts to produce a commercially viable product
will be successful, or that the Company will generate sufficient revenues to
provide positive cash flows from operations. These and other factors raise
substantial doubt about the Company's ability to continue as a going concern. To
the extent the Company raises additional capital by issuing equity or securities
convertible into equity, ownership dilution to the Company's shareholders will
result. The accompanying financial statements do not include any adjustments
that might result should the Company be unable to continue in existence.
Factors Which May Affect Future Results
In evaluating our business, prospective investors and shareholders should
carefully consider the following risks. Any of the following risks could have a
material adverse impact on our business, operating results and financial
condition and result in a complete loss of your investment.
13
Risks Related To Our Financial Results
If we cannot operate as a going concern, our stock price will decline and you
may lose your entire investment. Our auditors have included an explanatory
paragraph in their report on our financial statements for the year ended
December 31, 2001 which states that, due to recurring losses from operations
since inception of the Company, there is substantial doubt about our ability to
continue as a going concern. Our financial statements for the three months ended
March 31, 2002 do not include any adjustments that might result from our
inability to continue as a going concern. These adjustments could include
additional liabilities and the impairment of certain assets. If we had adjusted
our financial statements for these uncertainties, our operating results and
financial condition would have been materially and adversely affected.
If we do not obtain additional cash to operate our business, we may not be able
to execute our business plan and may not achieve profitability. In the event
that cash flow from operations is less than anticipated and we are unable to
secure additional funding, in order to preserve cash, we would be required to
further reduce expenditures and effect further reductions in our corporate
infrastructure, either of which could have a material adverse effect on our
ability to continue our current level of operations. Even if we obtain
additional working capital in the near future, to the extent that operating
expenses increase or we need additional funds to make acquisitions, develop new
technologies or acquire strategic assets, the need for additional funding may be
accelerated and there can be no assurances that any such additional funding can
be obtained on terms acceptable to us, if at all. If we are not able to generate
sufficient capital, either from operations or through additional financing, to
fund our current operations, we may not be able to continue as a going concern.
If we are unable to continue as a going concern, we may be forced to
significantly reduce or cease our current operations. This could significantly
reduce the value of our securities, which could result in our de-listing from
the American Stock Exchange and cause investment losses for our shareholders.
We may not maintain The American Stock Exchange (the "Exchange") listing
requirements. To maintain the listing of our common stock on the Exchange, we
are required to meet certain listing requirements, including, in the case of our
common stock selling for a substantial period of time at a low price per share,
effecting a reverse split of such shares within a reasonable time after being
notified by the Exchange that such action is appropriate under all the
circumstances. In its review of whether a share price is too low or whether a
reverse split is appropriate, the Exchange will consider all pertinent factors,
including market conditions in general, the number of shares outstanding, plans
which may have been formulated by management, applicable regulations of the
state of incorporation or of any governmental agency having jurisdiction over
eMagin, and the relationship to other Exchange policies regarding continued
listing. If the Exchange were to determine that our share price is too low and
that we should reverse split our shares but we were unable to comply for any
reason, our common stock may be delisted from the Exchange. Delisting of our
common stock could materially adversely affect the market price, the market
liquidity of our common stock and our ability to raise necessary capital.
Moreover, it would likely be more difficult to trade in or to obtain accurate
quotations as to the market price of our common stock.
We have a history of losses since our inception and expect to incur losses for
the foreseeable future. Accumulated losses excluding non-cash transactions as of
March 31, 2002, were $31.8 million and acquisition related non-cash transactions
were $91.4 million which resulted in an accumulated net loss of $123.3 million,
the majority of which was related to the March 2000 merger and its subsequent
write-down of its goodwill. The non-cash losses were dominated by the
amortization and write-down of goodwill and purchased intangibles and write-down
of acquired in process research and development related to the March 2000
acquisition, and also included some non-cash stock-based compensation. We have
not yet achieved profitability and we can give no assurances that we will
achieve profitability within the foreseeable future as we fund operating and
capital expenditures in areas such as establishment and expansion of markets,
sales and marketing, operating equipment and research and development. We cannot
assure investors that we will ever achieve or sustain profitability or that our
operating losses will not increase in the future.
14
We are presently dependent on U.S. government contracts. The majority of our
revenues to date have been derived from research and development contracts with
the U.S. federal government. We may continue to rely on such contracts for
revenue until volume commercial sales commence. The government at its discretion
may terminate our government contracts. We plan to submit proposals for
additional development contract funding; however, funding is subject to
legislative authorization and even if funds are appropriated such funds may be
withdrawn based on changes in government priorities. No assurances can be given
that our existing contracts will continue, that we will be successful in
obtaining new government contracts, or that programs through which our contracts
are funded will continue to be funded beyond the current fiscal year. Our
inability to obtain revenues from government contracts could have a material
adverse effect on our results of operations.
Risks Related To Our Intellectual Property
We rely on our license agreement with Eastman Kodak for the development of our
products, and the termination of this license, Eastman Kodak's licensing of its
OLED technology to others for microdisplay applications, or the sublicensing by
Eastman Kodak of our OLED technology to third parties, could have a material
adverse impact on our business. Our principal products under development utilize
OLED technology that we license from Eastman Kodak. We rely upon Eastman Kodak
to protect and enforce key patents held by Eastman Kodak, relating to OLED
display technology. Eastman Kodak's patents expire over a range of years from
2002 to 2020. Our license with Eastman Kodak could terminate if we fail to
perform any material term or covenant under the license agreement. Since our
license from Eastman Kodak is non-exclusive, Eastman Kodak could also elect to
become a competitor itself or to license OLED technology for microdisplay
applications to others who have the potential to compete with us. The occurrence
of any of these events could have a material adverse impact on our business.
We may not be successful in protecting our intellectual property and proprietary
rights. We rely on a combination of patents, trade secret protection, licensing
agreements and other arrangements to establish and protect our proprietary
technologies. If we fail to successfully enforce our intellectual property
rights, our competitive position could suffer, which could harm our operating
results. Patents may not be issued for our current patent applications, third
parties may challenge, invalidate or circumvent any patent issued to us,
unauthorized parties could obtain and use information that we regard as
proprietary despite our efforts to protect our proprietary rights, rights
granted under patents issued to us may not afford us any competitive advantage,
others may independently develop similar technology or design around our
patents, our technology may be available to licensees of Eastman Kodak, and
protection of our intellectual property rights may be limited in certain foreign
countries. We may be required to expend significant resources to monitor and
police our intellectual property rights. Any future infringement or other claims
or prosecutions related to our intellectual property could have a material
adverse effect on our business. Any such claims, with or without merit, could be
time consuming to defend, result in costly litigation, divert management's
attention and resources, or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. Protection of intellectual
property has historically been a large yearly expense for eMagin. We have not
been in a financial position to properly protect all of our intellectual
property, and may not be in a position to do so for some time even if sufficient
funding is available for the production and a sales ramp
15
Risks Related To the Microdisplay Industry
The commercial success of the microdisplay industry depends on the widespread
market acceptance of microdisplay systems products. The market for microdisplays
is emerging. Our success will depend on consumer acceptance of microdisplays as
well as the success of the commercialization of the microdisplay market. At
present, it is difficult to assess or predict with any assurance the potential
size, timing and viability of market opportunities for our technology in this
market. The viewfinder microdisplay market sector is well established with
entrenched competitors who we must displace.
The microdisplay systems business is intensely competitive. We do business in
intensely competitive markets that are characterized by rapid technological
change, changes in market requirements and competition from both other suppliers
and our potential OEM customers. Such markets are typically characterized by
price erosion. This intense competition could result in pricing pressures, lower
sales, reduced margins, and lower market share. Our ability to compete
successfully will depend on a number of factors, both within and outside our
control. We expect these factors to include the following: our success in
designing, manufacturing and delivering expected new products, including those
implementing new technologies on a timely basis; our ability to address the
needs of our customers and the quality of our customer services; the quality,
performance, reliability, features, ease of use and pricing of our products;
successful expansion of our manufacturing capabilities; our efficiency of
production, and ability to manufacture and ship products on time; the rate at
which original equipment manufacturing customers incorporate our product
solutions into their own products; the market acceptance of our customers'
products; and product or technology introductions by our competitors. Our
competitive position could be damaged if one or more potential OEM customers
decide to manufacture their own microdisplays, using OLED or alternate
technologies. In addition, our customers may be reluctant to rely on a
relatively small company such as eMagin for a critical component. We cannot
assure you that we will be able to compete successfully against current and
future competition, and the failure to do so would have a materially adverse
effect upon our business, operating results and financial condition.
The display industry is cyclical. The display industry is characterized by
fabrication facilities that require large capital expenditures and long lead
times go construct leading to frequent mismatches between supply and demand. The
OLED microdisplay sector may experience overcapacity if and when all of the
facilities presently in the planning stage come on line leading to a difficult
market in which to sell our products.
Competing products may get to market sooner than ours. Our competitors are
investing substantial resources in the development and manufacture of
microdisplay systems using alternative technologies such as reflective liquid
crystal displays (LCDs), LCD-on-Silicon ("LCOS") microdisplays, active matrix
electroluminescence and scanning image systems, and transmissive active matrix
LCDs. Color LCOS displays are currently in initial production, and may be in
higher volume production a year or more earlier than our microdisplays, which
could have a significant detrimental effect on our market opportunity.
Our competitors have many advantages over us. As the microdisplay market
develops, we expect to experience intense competition from numerous domestic and
foreign companies including well-established corporations possessing worldwide
manufacturing and production facilities, greater name recognition, larger retail
bases and significantly greater financial, technical, and marketing resources
than us, as well as from emerging companies attempting to obtain a share of the
various markets in which our microdisplay products have the potential to
compete.
Our products are subject to lengthy OEM development periods. We plan to sell
most of our microdisplays to OEMs who will incorporate them into products they
sell. OEMs determine during their product development phase whether they will
incorporate our products. The time elapsed between initial sampling of our
products by OEMs, the custom design of our products to meet specific OEM product
requirements, and the ultimate incorporation of our products into OEM consumer
products is significant. If our products fail to meet our OEM customers' cost,
performance or technical requirements or if unexpected technical challenges
arise in the integration of our products into OEM consumer products, our
operating results could be significantly and
16
adversely affected. Long delays in achieving customer qualification and
incorporation of our products could adversely affect our business.
Our products will likely experience rapidly declining unit prices. In the
markets in which we expect to compete, prices of established products tend to
decline significantly over time. In order to maintain our profit margins over
the long term, we believe that we will need to continuously develop product
enhancements and new technologies that will either slow price declines of our
products or reduce the cost of producing and delivering our products. While we
anticipate many opportunities to reduce production costs over time, there can be
no assurance that these cost reduction plans will be successful. We may also
attempt to offset the anticipated decrease in our average selling price by
introducing new products, increasing our sales volumes or adjusting our product
mix. If we fail to do so, our results of operations would be materially and
adversely affected.
17
Risks Related To Manufacturing
We expect to depend on semiconductor contract manufacturers to supply our
silicon integrated circuits and other suppliers of key components, materials and
services. We do not manufacture our silicon integrated circuits on which we
incorporate the OLED. Instead, we expect to provide the design layouts to
semiconductor contract manufacturers who will manufacture the integrated
circuits on silicon wafers. We also expect to depend on suppliers of a variety
of other components and services, including circuit boards, graphic integrated
circuits, passive components, materials and chemicals, and equipment support.
Our inability to obtain sufficient quantities of high quality silicon integrated
circuits or other necessary components, materials or services on a timely basis
could result in manufacturing delays, increased costs and ultimately in reduced
or delayed sales or lost orders which could materially and adversely affect our
operating results.
We have not manufactured OLED-on-silicon products in large commercial quantities
and we do not know if our manufacturing yields or throughput will be
commercially viable. In order for us to be successful as a product or component
manufacturer, our products must be manufactured to meet high quality standards
in commercial quantities at competitive prices. We have not begun quantity
commercial production of any of our OLED-based products and we are not staffed
adequately to run high quantity production. The manufacture of OLED-on-silicon
is new and OLED microdisplays have not been produced in significant volumes. We
expect to begin commercial production during 2002 to meet anticipated demand for
our products. If we are unable to produce our products in sufficient quantity,
we will be unable to attract customers. In addition, we cannot assure you that
once we commence volume production we will attain yields at high throughput that
will result in profitable gross margins or that we will not experience
manufacturing problems which could result in delays in delivery of orders or
product introductions.
We are dependent on a single manufacturing line. We initially expect to
manufacture our products on a single manufacturing line. If we experience any
significant disruption in the operation of our manufacturing facility we may be
unable to supply microdisplays to our customers. For this reason, some OEMs may
also be reluctant to commit a broad line of products to our microdisplays
without a second production facility in place. Interruptions in our
manufacturing could be caused by manufacturing equipment problems, the
introduction of new equipment into the manufacturing process or delays in the
delivery of new manufacturing equipment. Lead-time for delivery of manufacturing
equipment can be extensive. No assurance can be given that we will not lose
potential sales or be unable to meet production orders due to production
interruptions in our manufacturing line. In order to meet the requirements of
certain OEMs for multiple manufacturing sites, we will have to expend capital to
secure additional sites and may not be able to manage multiple sites
successfully.
Risks Related To Our Business
Our success depends in a large part on the continuing service of key personnel.
Changes in management could have an adverse effect on our business. We are
dependent upon the active participation of several key management personnel
including Gary W. Jones, our Chief Executive Officer. We also need to recruit
additional management in order to expand according to our business plan. The
failure to attract and retain additional management or personnel could have a
material adverse effect on our operating results and financial performance.
Our success depends on attracting and retaining highly skilled and qualified
technical and consulting personnel. We must hire highly skilled technical
personnel as employees and as independent contractors in order to develop our
products. The competition for skilled technical employees is intense and we may
not be able to retain or recruit such personnel. We must compete with companies
that possess greater financial and other resources than we do, and that may be
more attractive to potential employees and contractors. To be competitive, we
may have to increase the compensation, bonuses, stock options and other fringe
benefits offered to employees in order to attract and retain such personnel. The
costs of retaining or attracting new
18
personnel may have a materially adverse affect on our business and our operating
results. In addition, difficulties in hiring and retaining technical personnel
could delay the implementation of our business plan.
Our business depends on new products and technologies. The market for our
products is characterized by rapid changes in product, design and manufacturing
process technologies. Our success depends to a large extent on our ability to
develop and manufacture new products and technologies to match the varying
requirements of different customers in order to establish a competitive position
and become profitable. Furthermore, we must adopt our products and processes to
technological changes and emerging industry standards and practices on a
cost-effective and timely basis. Our failure to accomplish any of the above
could harm our business and operating results.
Our microdisplay business may not be successful. The market for microdisplays
may develop later than anticipated by us may therefore limit our sales potential
for the foreseeable future.
We generally do not have long term contracts with our customers. Our business is
operated on the basis of short term purchase orders and we cannot guarantee that
we will be able to obtain long term contracts for some time. In the absence of a
backlog of orders that can only be canceled with penalty, we plan production on
the basis of internally generated forecasts of demand which makes it difficult
to accurately forecast revenues. If we fail to accurately forecast operating
results, out business may suffer and the value of your investment in the Company
may decline.
Our business strategy may fail if we cannot continue to form strategic
relationships with companies that manufacture and use products that could
incorporate our OLED-on-silicon technology. Our prospects will be significantly
affected by our ability to develop strategic alliances with OEMs for
incorporation of our OLED-on-silicon technology into their products. While we
intend to continue to establish strategic relationships with manufacturers of
electronic consumer products, personal computers, chipmakers, lens makers,
equipment makers, material suppliers and/or systems assemblers, there is no
assurance that we will be able to continue to establish and maintain strategic
relationships on commercially acceptable terms, or that the alliances we do
enter in to will realize their objectives. Failure to do so would have a
material adverse effect on our business.
We will need to obtain additional financing, which may not be available on
suitable terms, and as a result our ability to grow or continue existing
operations may be limited. Our future liquidity and capital requirements are
difficult to predict because they depend on numerous factors, including our
success in completing the development of our products, manufacturing and
marketing our products and competing technological and market developments. We
may not be able to generate sufficient cash from our operations to meet
additional working capital requirements, support additional capital expenditures
or take advantage of acquisition opportunities. In addition, substantial
additional capital may be required in the future to fund product development and
product launches. No assurance can be given that additional financing will be
available or that, if available, such financing will be obtainable on terms
favorable to our shareholders or us. To the extent we raise additional capital
by issuing equity or securities convertible into equity, our current
shareholders will suffer dilution in ownership. If needed capital is
unavailable, our ability to continue to operate and grow our business could be
adversely affected. Even if capital is available at acceptable cost, we might
not be able to manage growth effectively.
Our business depends to some extent on international transactions. We purchase
needed materials from companies located abroad and may be adversely affected by
political and currency risk, as well as the additional costs of doing business
with a foreign entity. In addition, many of the OEMs which are the most likely
long term purchasers of our microdisplays are located abroad exposing us to
additional political and currency risk. We may find it necessary to locate
manufacturing facilities abroad to be closer to our customers which could give
expose us to various risks including management of a multi-national
organization, the complexities of complying with foreign law and custom,
political instability and the complexities of taxation in multiple
jurisdictions.
19
Our business may expose us to product liability claims. Our business exposes us
to potential product liability claims. Although no such claim has been brought
against us to date, and to our knowledge no such claim is threatened or likely,
we may face liability to product users for damages resulting from the faulty
design or manufacture of our products. While we maintain product liability
insurance coverage, there can be no assurance that product liability claims will
not exceed coverage limits, fall outside the scope of such coverage, or that
such insurance will continue to be available at commercially reasonable rates,
if at all.
Our business is subject to environmental regulations and possible liability
arising from potential employee claims of exposure to harmful substances used in
the development and manufacture of our products. We are subject to various
governmental regulations related to toxic, volatile, experimental and other
hazardous chemicals used in our design and manufacturing process. Our failure to
comply with these regulations could result in the imposition of fines or in the
suspension or cessation of our operations. Compliance with these regulations
could require us to acquire costly equipment or to incur other significant
expenses. We develop, evaluate and utilize new chemical compounds in the
manufacture of our products. While we attempt to ensure that our employees are
protected from exposure to hazardous materials we cannot assure you that
potentially harmful exposure will not occur or that we will not be liable to
employees as a result.
Risks Related To Our Stock
The substantial number of shares that are or will be eligible for sale could
cause our common stock price to decline even if the Company is successful. Sales
of significant amounts of common stock in the public market, or the perception
that such sales may occur, could materially affect the market price of our
common stock. These sales might also make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. As of May 1, 2002, we have outstanding options to purchase
5,161,280 shares; most are currently locked-up due to contractual restrictions.
The restrictions on the sale of the remaining shares will lapse between February
1, 2002 and January 7, 2003. There are also outstanding warrants to purchase
4,982,906 shares of common stock.
We do not intend to pay dividends; you will not receive funds without selling
shares; and you may lose the entire amount of your investment. We have not paid
any dividends on our common stock and we do not plan to pay cash dividends in
the foreseeable future. We intend to retain our earnings, if any, for use in our
business. We further cannot assure you that you will receive a return on your
investment when you sell your shares or that you will not lose the entire amount
of your investment.
Our principal stockholders, officers and directors will own a significant voting
interest in our voting stock. Current directors and officers of eMagin
Corporation or their affiliates beneficially own a large percentage of our
outstanding common stock. If these shareholders were to vote together, they
could significantly influence the outcome of items that are submitted to a vote
of the shareholders including the election of our directors.
We have a staggered Board of Directors and other anti-takeover provisions which
could inhibit potential investors or delay or prevent a change of control that
may favor you. Our Board of Directors is divided into three classes and our
Board member are elected for terms that are staggered. This could discourage the
efforts by others to obtain control of the company. Some of the provisions of
our certificate of incorporation, our bylaws and Delaware law could, together or
separately, discourage potential acquisition proposals or delay or prevent a
change in control. In particular, our board of directors is authorized to issue
up to 10,000,000 shares of preferred stock (less any outstanding shares of
preferred stock) with rights and privileges that might be senior to our common
stock, without the consent of the holders of the common stock.
We cannot forecast our future performance. We cannot accurately forecast our
revenues because of our limited commercial operating history and because the
OLED microdisplay market is only beginning to emerge. We may experience
significant fluctuations in our quarterly operating results due to many factors
which are outside our control. These factors include: fluctuation in demand and
orders for our products; timing or cost of
20
future supply or equipment deliveries; manufacturing capacity and yields;
variations in product and process development costs; expenses or operational
disruptions resulting from acquisitions; activities of our competitors; adequate
working capital; and general economic conditions. Due to these factors, we
cannot anticipate with any degree of certainty what our revenues, if any, will
be in future periods. You have limited historical financial data and operating
results with which to evaluate our business and our prospects. As a result, you
should consider our prospects in light of the expense, difficulties and delays
frequently encountered by early stage companies formed to pursue development of
new technologies.
Our share price is likely to be highly volatile which may result in substantial
losses for investors. Share price volatility may subject us to securities class
action litigation. Prices and trading volume for technology related stock has
been highly volatile. Accordingly, our stock prices are likely to also be highly
volatile. Shareholders may experience a decrease in the value of their common
stock regardless of our operating performance or prospects. In addition, the
trading price of our common stock could be subject to wide fluctuations in
response to: our perceived prospects; quarter to quarter variations in our
operating results; changes in earnings estimates or recommendations by
securities analysts and market perceptions of our operating results in relation
to those estimates or recommendations; changes in market valuation of companies
in the microdisplay systems industry; announcements of technological innovations
or new products by us or our competitors; economic, political, and issues
associated with our customers, suppliers, partners, accountants, governmental
agencies in the USA and elsewhere, or other parties; sales of shares by other
shareholders; and general conditions in the personal products industries or
stock market conditions. In the past, securities class action litigation has
often been instituted against companies following periods of volatility in their
share price. Those companies, like us, that are involved in rapidly changing
technology markets are particularly subject to this risk. This type of
litigation, if instituted against us, could result in substantial costs and
divert our management's attention and resources, which could cause serious harm
to our business.
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ITEM 3: QUALITATIVE AND QUANTITATIVE Disclosures About Market Risk
Interest Rate Risk
Substantially all of the Company's cash equivalents and investment securities
are at fixed interest rates, and as such, the fair market value of these
instruments is affected by changes in market interest rates. As of March 31,
2002, all of the Company's cash equivalents and investment securities mature
within one year. Accordingly, we believe that the market risk arising from our
holdings of these financial instruments is immaterial. However, in the future,
we may invest in securities with maturities of more than one year, which may
carry greater interest rate risk.
Foreign Currency Exchange Risk
Presently, all of the Company's research and development contract payments are
made in U. S. dollars and, consequently, we believe we have no direct foreign
currency exchange rate risk. However, in the future, we may enter into contracts
in foreign currencies, which may subject the Company to foreign exchange rate
risk. We do not have any derivative instruments and do not presently engage in
hedging transactions.
22
PART II--OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Recent Issuances of Unregistered Securities by eMagin
On January 14, 2002, we entered into certain agreements to facilitate: (i) an
additional funding of $1,000,000 to eMagin by a private investor under the
existing Secured Note Purchase Agreement entered into on November 27, 2001 by
eMagin with five accredited investors, (ii) the repayment (the "Repayment") in
full using the proceeds of such additional funding of three secured convertible
notes issued under and held by certain initial investors under the Secured Note
Purchase Agreement with an aggregate principal amount of $250,000 (such notes
then in default pursuant to a monthly expenditure requirement contained
therein), and (iii) a repricing of both the conversion rate of all of the
outstanding Secured Convertible Notes issued under the Secured Note Purchase
Agreement into our common stock and the exercise price of the warrants held by
certain initial investors not subject to the Repayment (the "Continuing
Investors") and the issuance of certain additional warrants to the Continuing
Investors in return for their consent to certain amendments and waivers. In
return for the additional funding of $1,000,000, the private investor received
two additional Secured Convertible Promissory Notes, with an aggregate principal
amount of $300,000 and $700,000, respectively, and related warrants, each issued
pursuant to the terms of the Secured Note Purchase Agreement. The full amount of
the outstanding secured convertible notes issued under the Secured Note Purchase
Agreement, after giving effect to the January 2002 transactions, have an
aggregate principal amount of $1,625,000, and are all secured by a general
security interest in the assets of eMagin.
The outstanding Secured Convertible Promissory Notes are due August 30, 2002 and
bear interest at 9% per annum (payable at maturity or on the effective date of
an early termination). Pursuant to the January 2002 transactions, the conversion
terms of the outstanding secured notes were adjusted so that the notes are
convertible into our common stock at a rate of $0.5264 per share. The conversion
of the notes into eMagin common stock is mandatory upon certain conditions
including the completion of a next round of financing by eMagin of convertible
debt securities or equity securities in a minimum amount of $10 million. The
holders of the notes may also convert, at their option, the notes and accrued
interest into our common stock. Upon a change of control event, we may also call
and purchase the notes at a purchase price equal to 250% of the principal amount
plus accrued interest. If we do not exercise this call right, the holders may
put the notes to eMagin at similar pricing. Pursuant to the terms of the January
2002 transactions, the exercise price of the outstanding three year warrants
held by the Continuing Investors was adjusted to $0.5469 per share. The Initial
Investors whose secured convertible notes were cancelled pursuant to the
Repayment retained the three-year warrants previously issued to them under the
Purchase Agreement, which have an exercise price of $1.67 per share. All of the
outstanding warrants issued under the Secured Note Purchase Agreement, including
those issued pursuant to the January 2002 transactions described above, are
exercisable for an aggregate of up to 1,954,944 shares of our common stock. We
relied on Section 4(2) of the Securities Act and on Rule 506 of Regulation D in
issuing the securities without registering the offering under the Securities
Act.
Pursuant to the issuance of the notes and warrants under the Secured Note
Purchase Agreement, we also entered into a registration rights agreement
providing for the registration of shares to be issued pursuant to a conversion
of the Secured Convertible Promissory Notes and the shares to be issued pursuant
to the exercise of the warrants issued thereunder. The registration rights
agreement required us to file a registration statement no later than 90 days
after the issuance of the notes and warrants at the initial closing. We are
currently in default of certain of the registration filing obligations under the
registration rights agreement and management is currently finalizing
documentation with the holders of the Secured Convertible Promissory Notes
and/or the warrants to waive and extend the time period for such registration
obligations. Pursuant to a failure by us to use our reasonable best efforts to
cause the registration statement to be declared effective by the Commission
within six months of the
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date of the issuance of the Secured Convertible Promissory Notes and warrants,
the registration rights agreement provides for the payment of liquidated damages
at a rate of five percent (5%) per month (calculated to the nearest calendar
day) of the value of the registrable securities not so declared effective until
such registrable securities shall be declared effective.
We entered into a Securities Purchase Agreement dated as of February 27, 2002
providing for the issuance and sale to eight accredited investors of an
aggregate of (i) 3,617,128 restricted shares of our common stock, and (ii)
warrants exercisable for a period of three (3) years for an aggregate of
1,446,852 shares of our common stock. The warrants have an exercise price of
$0.7542. For the issuance of the shares and warrants, we received an aggregate
gross proceeds of $2,500,519.56, with each share purchased at a purchase price
of $.6913, equal to 110% of the daily volume weighted average closing price per
share of our common stock on the American Stock Exchange for a prescribed five
trading day period. In connection with the sale of the shares and warrants, we
also entered into a registration rights agreement with the investors to register
for resale the shares the investors bought in the transaction and the shares to
be issued pursuant to an exercise of the warrants. The registration rights
agreement requires eMagin to file a registration statement in respect of the
restricted shares and the warrants within forty-five days of the issuance
thereof. eMagin is currently in breach of this filing requirement. Under the
terms of the registration rights agreement, if the registration statement
covering the resale of the shares is not declared effective by the Commission
within ninety days (or one hundred and fifty days in the case of a "full review"
by the Commission) of the date of the issuance and sale of the purchased shares
and the warrants, eMagin will be required to pay to each investor an amount
equal to one percent (1%) per month of (A) the purchase price paid by such
investor for the purchased securities, and (B) the value of any outstanding
warrants held by such investor until such registration default no longer exists.
The accrued penalties payable for a registration default under the registration
rights agreement may be paid in our common shares provided such shares are
registered under the Securities Act. The issuance of the shares and the warrants
was exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of such Securities Act and Regulation D promulgated thereunder.
On March 4, 2002, we entered into a common stock purchase agreement and related
documents with Northwind Associates, Inc., a Cayman Islands corporation (the
"Investor"), pursuant to which we may receive in periodic draw downs at our
option and subject to the terms and conditions of the agreement, up to
$15,000,000 in equity financing (the "Equity Line") over a three year period.
The aggregate amount of the Equity Line may increase to $20,000,000 provided
certain additional conditions regarding our share price, trading volume and
market capitalization are met. The initial closing of the agreement occurred on
Friday, March 22, 2002. Our right to draw down on the Equity Line is subject to
our registering for resale (and the continuing effectiveness of such
registration) with the Commission the shares of eMagin common stock issuable
pursuant to the Equity Line and is also subject to certain other significant
conditions, including limits as to the maximum and minimum draw down amounts as
specified in the common stock purchase agreement. The maximum investment amount
for any draw down is the lesser of (i) $5,000,000, and (ii) 15% of the volume
weighted average price for our common stock (as reported by the American Stock
Exchange) for the 30 trading days immediately prior to the applicable
commencement date for such draw down multiplied by the total aggregate trading
volume in respect of our common stock for such period. Pursuant to a draw down,
the Investor will purchase our shares at a discount to the price of our common
shares on the American Stock Exchange. More specifically, the discounted
purchase price to be paid by the Investor under the Equity Line will generally
equal (i) 88% of the daily volume weighted average price of our common stock on
the American Stock Exchange for a prescribed 10 trading day period provided that
the such stock price is less than $4.00 per share at the time of determination,
(ii) 90% should such stock price at the time of determination exceed $4.00 per
share, and (iii) 92% should such stock price at the time of determination exceed
$6.00 per share. The discounted purchase price may be reduced by an additional
3% pursuant to certain special conditions as set forth in the agreement. The
amount of our shares issued pursuant to draw downs on the Equity Line is also
limited to 19.9% of the issued and outstanding common stock (unless stockholder
approval of any excess amount is received) and no draw down shall be made to the
extent that it would result in the Investor and its affiliates beneficially
owning more than 9.9% of our outstanding common stock. The agreement also limits
our ability to enter into any other equity line type of
24
financing during the term of the agreement and provides to the Investor a right
of first refusal for subsequent sales by eMagin of its securities.
Additionally, in consideration for the Investor's purchase commitment under the
Equity Line and certain costs associated therewith, we issued to the Investor
30,000 unregistered shares of eMagin's common stock and warrants to purchase up
to 150,000 shares of our common stock at an exercise price equal to 115% of the
daily volume weighted average price of the common stock for the fifteen trading
days preceding the date of the delivery of the warrant by eMagin or $0.8731.
Each warrant is exercisable for a period of three years commencing six months
from the date of their delivery by eMagin. The issuance of the shares and the
warrants was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) of such Securities Act and Regulation D promulgated
thereunder.
In connection with the Equity Line, we also entered into a registration rights
agreement dated as of March 4, 2002 with the Investor that requires eMagin to
file, obtain and maintain the effectiveness of a registration statement on an
appropriate form with the Commission in order to register the sale and public
resale of shares of the common stock acquired by the Investor under the
agreement and upon the exercise of the warrants. Under the terms of the
registration rights agreement, eMagin must file such registration statement
within sixty days of the date of the agreement. eMagin is currently in default
of this filing obligation.
As previously announced by a press release dated April 3, 2002, eMagin entered
into a Strategic Securities Purchase Agreement with ROHM Co., Ltd. ("ROHM")
dated as of April 1, 2002 (the "ROHM Closing Date") providing for the issuance
and sale to ROHM of (i) an aggregate of 1,282,051 shares of our common stock,
par value $.001 and (ii) warrants exercisable for a period of three (3) years
from the ROHM Closing Date for 512,820 shares of our common stock (subject to
certain customary anti-dilution adjustments). The shares were purchased for a
purchase price equal to $0.78 per share, an amount equal to 110% of the daily
volume weighted average closing price per share of our common stock on the
American Stock Exchange for the five trading days immediately preceding the ROHM
Closing Date. The exercise price of the warrants on a per share basis is $0.85,
an amount equal to 120% of the daily volume weighted average closing price per
share of our common stock on the American Stock Exchange for the five trading
days immediately preceding the ROHM Closing Date. The gross proceeds received by
eMagin pursuant to the issuance and sale of the shares and the warrants was
approximately $1.0 million. The proceeds are to be used by eMagin for general
and working capital purposes.
Under the Strategic Securities Purchase Agreement, eMagin and ROHM also agreed
to enter into a partnership agreement, upon mutually agreeable terms, within 180
days of the ROHM Closing Date pursuant to which they will work collaboratively
to develop and market certain Organic Light Emitting Diode technologies and will
enter into certain non-competition provisions.
In connection with the sale of the shares and warrants, eMagin also entered into
a registration rights agreement with ROHM to register for resale the shares ROHM
bought in the private placement transaction and the shares of our common stock
to be issued pursuant to an exercise of the warrants. Under the terms of the
registration rights agreement, if the registration statement covering the resale
of the shares is not declared effective by the Securities and Exchange
Commission within ninety days (or one hundred and fifty days in the case of a
"full review" by the Securities and Exchange Commission) of the date of the
issuance of the purchased shares and the warrants, eMagin will be required to
pay ROHM an amount equal to one percent (1%) per month of (A) the purchase price
paid by ROHM for the purchased securities, and (B) the value of any outstanding
warrants (valued at the difference between the average current market price
during the applicable month and the exercise price of the warrants multiplied by
the number of shares of our common stock the warrants are exercisable into) held
by ROHM until such registration default no longer exists.
The issuance of the shares and the warrants under the ROHM transactions was
exempt from the registration requirements of the Securities Act of 1933 pursuant
to Section 4(2) of such Securities Act and Regulation D
25
promulgated thereunder based upon the representations of ROHM that it was an
"accredited investor" (as defined under Rule 501 of Regulation D) and that it
was purchasing such securities without a present view toward a distribution of
the securities. In addition, there was no general advertisement conducted in
connection with the sale of the securities.
Item 5. Other Information
A note entered into between the Company and the Travelers Insurance Company
("Travelers") in August 2001 will mature on May 20, 2002. The Company is
currently in negotiations with Travelers to settle this debt with a different
debt or equity security as the Company does not have sufficient funds to pay the
note upon maturity. There can be no assurance that the Company will be able to
negotiate a settlement of the debt.
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
The Company filed three reports on form 8-K during the quarter ended March 31,
2002. Information regarding the items reported on is as follows:
DATE OF EVENT
EARLIEST EVENT
REPORTED DESCRIPTION
January 14, 2002 On Form 8-K, under Item 5, eMagin reported an additional
funding of $1,000,000 under the existing Secured Note
Purchase Agreement dated as of November 27, 2001.
February 27, 2002 On Form 8-K, under Item 5, eMagin reported entering into a
Securities Purchase Agreement and related transaction
documents with a group of several accredited institutional
and individual investors.
March 4, 2002 On Form 8-K, under Item 5, eMagin reported entering into a
Common Stock Purchase Agreement with Northwind Associates,
Inc., providing for an equity line of credit.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
eMAGIN CORPORATION
Dated: May 15, 2002 By: /s/ Edward V. Flynn
-------------------------------------
Edward V. Flynn
Chief Financial Officer, Treasurer