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, 2001
[ ] 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 small business issuer as specified in its charter)
Commission file number: 000-24757
NEVADA 88-0378451
(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, 2001 the Registrant had
25,069,143 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, 2001 (unaudited) and
December 31, 2000 1
Unaudited Consolidated Statements of Operations For the Three-Months
ended March 31, 2001 and March 31, 2000 and for the period from
inception (January 23, 1996) to March 31, 2001 2
Unaudited Consolidated Statements of Cash Flows for the Three-Months
ended March 31, 2001 and March 31, 2000 and for the Period from
Inception (January 23, 1996) to March 31, 2001 3
Selected Notes to Unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURE 10
eMAGIN CORPORATION
(a development stage corporation)
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 2001 2000
------------- -------------
(unaudted)
CURRENT ASSETS:
Cash and cash equivalents $ 3,806,668 $ 7,367,257
Contract receivables 151,753 825,733
Unbilled costs and estimated profits on contracts in progress 1,423,357 627,347
Prepaid expenses and other current assets 1,212,084 665,222
------------- -------------
Total current assets 6,593,862 9,485,559
Equipment and leasehold improvements, net of accumulated
depreciation of $721,602, and $556,365, respectively 1,255,915 1,268,304
Goodwill and purchased intangibles, net of accumulated
amortization of $26,784,012 and $20,932,320 respectively 45,838,247 51,689,938
Other long-term assets 105,394 105,394
------------- -------------
Total assets $ 53,793,418 $ 62,549,195
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,513,576 $ 1,096,771
Accrued Payroll 1,479,162 1,376,888
Current portion of long-term debt 201,624 313,074
Other current liabilities 247,290 455,812
------------- -------------
Total current liabilities 3,441,652 3,242,545
------------- -------------
LONG-TERM DEBT 140,556 122,984
SHAREHOLDERS' EQUITY:
Common Stock, par value $0.001 per share
Shares authorized - 76,350,000
Shares issued and outstanding - 25,069,143 25,069 25,069
Additional paid-in capital 116,559,331 116,622,811
Deferred compensation (8,466,938) (9,266,397)
Deficit accumulated during the development stage (57,906,252) (48,197,817)
------------- -------------
Total shareholders' equity 50,211,210 59,183,666
------------- -------------
Total liabilities and shareholders' equity $ 53,793,418 $ 62,549,195
============= =============
See selected notes to financial statements
1
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, 2001 March 31, 2000 to March 31, 2001
-------------- -------------- ------------------
CONTRACT REVENUE:
Contract revenue $ 2,030,201 $ 12,266 $ 4,587,788
------------ ------------ -------------
Total revenue 2,030,201 12,266 4,587,788
------------ ------------ -------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$201,467, $358,760 and $1,529,588, respectively 3,441,105 623,030 13,076,053
Amortization of purchased intangibles 5,851,692 1,186,698 26,784,012
Acquired in-process research and development -- -- 12,820,000
Non-cash charge for stock-based compensation 735,978 254,946 3,275,806
Selling, general and administrative 1,775,401 241,657 6,955,914
------------ ------------ -------------
Total costs and expenses, net 11,804,176 2,306,331 62,911,785
------------ ------------ -------------
OTHER INCOME 65,540 36,909 417,745
------------ ------------ -------------
Loss before provision for income taxes (9,708,435) (2,257,156) (57,906,252)
PROVISION FOR INCOME TAXES -- -- --
------------ ------------ -------------
Net loss $ (9,708,435) $ (2,257,156) $ (57,906,252)
============ ============ =============
Basic and diluted net loss per common share $ (0.39) $ (0.17)
============ ============
Basic and diluted weighted average common shares outstanding 25,069,143 13,312,240
============ ============
See selected notes to financial statements.
2
eMAGIN CORPORATION
(a development stage corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Period from
Three-Months Three-Months inception
ended ended January 23 1996
March 31, 2001 March 31, 2000 to March 31, 2000
--------------- --------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 9,708,435) ($ 2,257,156) ($57,906,252)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 6,016,929 1,213,923 27,506,450
Loss on sale of assets 97,713
Non-cash charge for stock based compensation 735,978 254,946 3,275,806
Acquired in-process research and development 12,820,000
Changes in operationg assets and liabilities, net of acquisition:
Contract receivables 673,980 (12,696) (19,790)
Unbilled costs and estimated profits on contracts in progress (796,010) (803,793)
Prepaid expenses and other current assets (546,863) (58,792) (906,369)
Other long-term assets (94,943)
Accounts payable, accured expenses and other current liabilities 310,558 (6,224) 673,409
------------ ------------ ------------
Net cash used in operating activities (3,313,863) (865,999) (15,357,769)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (152,848) (35,001) (955,881)
Net proceeds from acquisition -- 1,239,162 1,239,162
------------ ------------ ------------
Net cash used in investing activities (152,848) 1,204,161 283,281
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance costs (93,878) 21,250,000 21,281,000
Payments of long term debt and capital leases -- 49,224 (2,399,844)
------------ ------------ ------------
Net cash provided by financing activities (93,878) 21,299,224 18,881,156
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (3,560,589) 21,637,386 3,806,668
CASH AND CASH EQUIVALENTS, beginning of period 7,367,257 -- --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 3,806,668 $ 21,637,386 $ 3,806,668
============ ============ ============
See selected notes to financial statements.
3
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, 2001 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). FED is a developer and
manufacturer of optical systems and microdisplays for use in the electronics
industry. FED'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.
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.
4
The purchase price was allocated as follows:
Deferred compensation $13,025,000
In-process research and development 12,820,000
Fixed assets 1,215,000
Other intangible assets 16,805,000
Goodwill 54,635,000
-----------
$98,500,000
===========
Goodwill and other intangible assets acquired are amortized over their estimated
useful lives of three years. The Company recorded approximately $5.9 million in
amortization expense related to purchased intangibles and goodwill for the three
months ended March 31, 2001. 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
development will be 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. This charge was
recognized by the company during the quarter ended September 30, 2000 and is
included in the accompanying statement of operations for the period from
inception (January 23, 1996) to March 31, 2001.
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.
5
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.
Note 7 - STOCKHOLDERS' EQUITY
The authorized common stock of the Company consists of 76,350,000 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.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
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 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.
The Company has produced several preliminary prototype versions of the OLED
microdisplay, including monochromatic and color display devices. The Company
expects to continue funding the development of prototype and demonstration
versions of products incorporating OLED microdisplay and optics technology at
least through 2001. Future revenues, profits and cash flow and the Company's
ability to achieve its strategic objectives will depend on a number of factors
including acceptance of the OLED technology by various industries and OEMs,
market acceptance of products incorporating the OLED technology, and the
technical performance of such products. The Company expects to continue to incur
significant operating losses until such time that it is selling its products in
commercial quantities.
7
THREE MONTHS ENDED MARCH 31, 2001
COMPARED TO
THREE MONTHS ENDED MARCH 31, 2000 (Pro Forma).
Prior to the acquisition of FED Corporation (the "Predecessor"), the Company had
no operations. Management believes that the comparison of eMagin's financial
results to that of the Predecessor provides the most meaningful comparative
information to the reader. Accordingly, the following comparative information
reflects the operating results of eMagin Corporation for the three months ended
March 31, 2001 and it should be read in conjunction with the consolidated
interim financial statements and notes thereto in Part 1 Item 1 of this
Quarterly Report. The comparison of financial information below for the period
ended March 31, 2000 reflects pro forma results of eMagin for the period
January 1, 2000 through March 31, 2000 and the Predecessor for the period
January 1, 2000 to March 15, 2000, on a combined basis, such that the amounts
presented and discussed reflect the full three months of operations for each
period. Reference is made to the Company's consolidated financial statements
that are included herein for further detail on the results of eMagin and the
Predecessor for their respective periods of ownership.
Three-Months Ended
Pro Forma (1)
March 31, 2001 March 31, 2000
--------------- ---------------
CONTRACT REVENUE:
Contract revenue $ 2,030,201 $ 580,750
------------ ------------
Total revenue 2,030,201 580,750
------------ ------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of $201,467
and $533,750, respectively $ 3,441,105 $ 2,803,549
Selling, general and administrative 1,775,401 912,312
Amortization of purchased intangibles 5,851,692 1,511,793
Non-cash charge for stock-based compensation 735,978 8,033,796
------------ ------------
Total costs and expenses, net 11,804,176 13,261,450
------------ ------------
INTEREST, (EXPENSE)/INCOME $ 65,540 $ (2,931,505)
------------ ------------
Net Loss $ (9,708,435) $(15,612,205)
============ ============
(1) Represents the Pro Forma results of eMagin Corporation for the three months
ended March 31, 2000 and FED Corporation for the period January 1 to March 15,
2000.
Revenues
Revenues for the three months ended March 31, 2001 were $2.0 million as compared
to $0.6 million respectively, for the three months ended March 31, 2000.
Revenues consist primarily of contracts funded by certain U.S. government
programs. The amount of revenues earned in any period is dependent upon, among
other factors, the execution of new government contracts and funding issues, and
may not be predictable or consistent from period to period but remains subject
to unpredictable government funding issues.
8
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 and, historically, the Predecessor, have received cost sharing awards
from certain U.S. government agencies to fund certain research and development.
As of March 31, 2001, the remaining costs to be incurred and billed on these
three active "cost sharing" contracts totaled $1.4 million. Gross research and
development expenses for the three months ended March 31, 2001 were $3.6
million. For the same period in 2000, the Company's gross research and
development expenses were $3.3 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 and $0.5 million for the same period in 2000. The $0.3 million
increase in gross expenses for the three months ended March 31, 2001 reflects
the additional costs associated with equipment leases and material costs
resulting from increased research and development activities and equipment
additions at the Company's manufacturing facility.
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, 2001 were $1.8 million as compared to $0.9 million
for the three months ended March 31, 2000. The increase in selling, general and
administrative expenses is primarily due to increases in marketing activity,
personnel costs, patent filings and legal fees.
Amortization of Purchased Intangibles
Amortization of purchased intangibles expense for the three months ending March
31, 2001 was $5.9 million as compared to $1.5 million for the three months ended
March 31, 2000. The increase in amortization for purchased intangibles expense
is the result of a full quarter's charge of the non-cash charges related to the
amortization of goodwill created by the Merger.
Non-cash for stock-based compensation amortization
Non-cash stock-based compensation expense for the three months ending March 31,
2001 were $0.7 million as compared to $8.0 million for the three months ended
March 31, 2000. The activity for the three months ending March 31, 2001 reflects
amortization of deferred compensation costs related to the issuance of stock
options at below fair market values in the first quarter of 2000. The activity
for the three months ending March 31, 2000 primarily reflects a one-time charge
of $7.8 million of repriced options and warrants by the Predecessor prior to the
Merger.
Liquidity and Capital Resources
Since inception we have financed our operations primarily through private
placements of equity securities and research and development contracts.
Net cash used in operating activities was $3.3 million for the three months
ended March 31, 2001. Cash used in operating activities resulted primarily from
our net loss offset by increases from non-cash charges.
Net cash used in investing activities was $0.2 million for the three months
ended March 31, 2001. This represented capital expenditures of $0.2 million.
9
Net cash used in financing activities was $.01 million for the three months
ended March 31, 2001, and consisted primarily of cash payments on long-term debt
and capital leases. As of March 31, 2001, we had $3.8 million in cash and cash
equivalents.
Need for Additional Financing
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 the establishment of sales and
distribution relationships and its initial product launch cycles. 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, 2001, will be sufficient to fund the Company's operations into the first
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.
Item 3. Quantitative and Qualitative Disclosures About Marked Risk
N/A
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K., during the quarter ended March 31, 2001
None.
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, 2001 By: /s/ Andrew P. Savadelis
-----------------------------
Andrew P. Savadelis
Executive Vice President, Finance
and Chief Financial Officer
10