10-Q 1 c995-20160630x10q.htm 10-Q EMAN 2016 Q2_Taxonomy2016

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

 

 

Form 10-Q 

 





(Mark One)

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

 For the quarterly period ended June 30, 2016

 or

 

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

 

 For the transition period from  to

 

Commission file number 001-15751 

 

eMAGIN CORPORATION 

(Exact name of registrant as specified in its charter) 





 

Delaware

56-1764501

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

2070 Route 52, Hopewell Junction, NY  12533

(Address of principal executive offices) 

 

(845)  838-7900 

(Registrant’s telephone number, including area code) 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months ).     Yes      No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.   (Check one): 

 

Large accelerated filer                Accelerated filer                Non-accelerated filer                Smaller reporting company  

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act)     Yes      No 

 

The number of shares of common stock outstanding as of July 31,  2016 was 29,388,104.



  

  

 

  


 

 

  

 

 

 

eMagin Corporation 

Form 10-Q

For the Quarter ended June 30, 2016

 

Table of Contents



 

 

 

 

 

 

 

Page

PART I   FINANCIAL INFORMATION

 

Item 1

Condensed Consolidated Financial Statements

 

 

Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015

3

 

Condensed Consolidated Statements of Operations for the Three Months and Six Months ended June 30, 2016 and 2015 (unaudited)

4

 

Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2016 and 2015 (unaudited)

5

 

Notes to Condensed Consolidated Financial Statements (unaudited)

6

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3

Quantitative and Qualitative Disclosures About Market Risk  

21

Item 4

Controls and Procedures

22

 

 

PART II   OTHER INFORMATION

 

Item 1

Legal Proceedings

23

Item 1A

Risk Factors

23

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

23

Item 3

Defaults Upon Senior Securities 

23

Item 4

Mine Safety Disclosures

23

Item 5

Other Information

23

Item 6

Exhibits

24

SIGNATURES

 

CERTIFICATIONS

 

 



  

 

 

2 

 

 


 

 

ITEM 1.  Condensed Consolidated Financial Statements 

 

eMAGIN CORPORATION 

CONDENSED CONSOLIDATED BALANCE SHEETS 

(In thousands, except share data)





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

 

 

 



 

June 30, 2016

 

 

December 31, 2015

 



 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,100 

 

 

$

9,273 

 

Accounts receivable, net

 

 

3,455 

 

 

 

3,508 

 

Unbilled accounts receivable

 

 

1,383 

 

 

 

1,445 

 

Inventories, net

 

 

5,272 

 

 

 

3,901 

 

Prepaid expenses and other current assets

 

 

706 

 

 

 

489 

 

Total current assets

 

 

16,916 

 

 

 

18,616 

 

Equipment, furniture and leasehold improvements, net

 

 

8,806 

 

 

 

9,131 

 

Intangibles and other assets

 

 

309 

 

 

 

336 

 

Total assets

 

$

26,031 

 

 

$

28,083 

 



 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,571 

 

 

$

1,636 

 

Accrued compensation

 

 

1,354 

 

 

 

1,246 

 

Other accrued expenses

 

 

1,044 

 

 

 

1,193 

 

Other current liabilities

 

 

546 

 

 

 

602 

 

Total current liabilities

 

 

4,515 

 

 

 

4,677 

 



 

 

 

 

 

 

 

 

Commitments and contingencies  (Note 8)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $.001 par value: authorized 10,000,000 shares:

 

 

 

 

 

 

 

 

Series B Convertible Preferred stock, (liquidation preference of $5,659,000) stated value $1,000 per share, $.001 par value:  10,000 shares designated and 5,659 issued and outstanding as of June 30, 2016 and December 31, 2015

 

 

 —

 

 

 

 —

 

Common stock, $.001 par value: authorized 200,000,000 shares, issued 29,550,170 shares as of June 30, 2016 and December 31, 2015

 

 

30 

 

 

 

30 

 

Additional paid-in capital

 

 

235,074 

 

 

 

234,814 

 

Accumulated deficit

 

 

(213,088)

 

 

 

(210,938)

 

Treasury stock, 162,066 shares as of June 30, 2016 and December 31, 2015

 

 

(500)

 

 

 

(500)

 

Total shareholders’ equity

 

 

21,516 

 

 

 

23,406 

 

Total liabilities and shareholders’ equity

 

$

26,031 

 

 

$

28,083 

 



See notes to Condensed Consolidated Financial Statements.



3 

 

 


 





 eMAGIN CORPORATION 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

(In thousands, except share and per share data) 

(unaudited) 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended 

 

Six Months Ended



 

June 30,

 

June 30,



 

2016

 

 

2015

 

2016

 

 

2015

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

4,781 

 

 

$

5,426 

 

$

10,076 

 

 

$

10,530 

Contract

 

 

752 

 

 

 

1,608 

 

 

1,458 

 

 

 

2,493 

License

 

 

 —

 

 

 

 —

 

 

1,000 

 

 

 

 —

Total revenues, net

 

 

5,533 

 

 

 

7,034 

 

 

12,534 

 

 

 

13,023 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

3,807 

 

 

 

3,533 

 

 

7,094 

 

 

 

6,585 

Contract

 

 

391 

 

 

 

893 

 

 

770 

 

 

 

1,470 

License

 

 

 —

 

 

 

 —

 

 

 —

 

 

 

 —

Total cost of revenues

 

 

4,198 

 

 

 

4,426 

 

 

7,864 

 

 

 

8,055 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

1,335 

 

 

 

2,608 

 

 

4,670 

 

 

 

4,968 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,499 

 

 

 

1,028 

 

 

2,802 

 

 

 

2,013 

Selling, general and administrative

 

 

1,993 

 

 

 

1,640 

 

 

4,003 

 

 

 

2,686 

Total operating expenses

 

 

3,492 

 

 

 

2,668 

 

 

6,805 

 

 

 

4,699 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

(2,157)

 

 

 

(60)

 

 

(2,135)

 

 

 

269 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(10)

 

 

 

(11)

 

 

(20)

 

 

 

(21)

Other income, net

 

 

 

 

 

 

 

 

 

 

Total other income (expense), net

 

 

(7)

 

 

 

(6)

 

 

(15)

 

 

 

(15)

Income (loss) before provision for income taxes

 

 

(2,164)

 

 

 

(66)

 

 

(2,150)

 

 

 

254 

Provision for income taxes

 

 

 —

 

 

 

 —

 

 

 —

 

 

 

 —



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,164)

 

 

$

(66)

 

$

(2,150)

 

 

$

254 

Less net income allocated to participating securities

 

 

 —

 

 

 

 —

 

 

 —

 

 

 

59 

Net income (loss) allocated to common shares 

 

$

(2,164)

 

 

$

(66)

 

$

(2,150)

 

 

$

195 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per share, basic

 

$

(0.07)

 

 

$

 —

 

$

(0.07)

 

 

$

0.01 

Income (loss) per share, diluted

 

$

(0.07)

 

 

$

 —

 

$

(0.07)

 

 

$

0.01 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

29,388,104 

 

 

 

25,142,371 

 

 

29,388,104 

 

 

 

25,091,875 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

29,388,104 

 

 

 

25,142,371 

 

 

29,388,104 

 

 

 

25,759,778 

 

See notes to Condensed Consolidated Financial Statements.

4 

 

 


 



 

 

eMAGIN CORPORATION 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(In thousands) 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 



 

Six Months Ended June 30,

 



 

2016

 

2015

 



 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,150)

 

 

$

254 

 

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

814 

 

 

 

703 

 

Reduction in provision for doubtful accounts

 

 

 —

 

 

 

(473)

 

Reduction in inventory reserve

 

 

(171)

 

 

 

(17)

 

Stock-based compensation

 

 

260 

 

 

 

316 

 

Loss on sale of asset

 

 

 

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

53 

 

 

 

303 

 

Unbilled accounts receivable

 

 

62 

 

 

 

(520)

 

Inventories, net

 

 

(1,200)

 

 

 

(861)

 

Prepaid expenses and other current assets

 

 

(217)

 

 

 

57 

 

Accounts payable, accrued expenses, and other current liabilities

 

 

(162)

 

 

 

(92)

 

Net cash used in operating activities

 

 

(2,710)

 

 

 

(330)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of equipment

 

 

(463)

 

 

 

(547)

 

Maturities of investments

 

 

 —

 

 

 

750 

 

Net cash provided by (used in) investing activities

 

 

(463)

 

 

 

203 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

 —

 

 

 

266 

 

Net cash provided by financing activities

 

 

 —

 

 

 

266 

 

Net increase (decrease) in cash and cash equivalents

 

 

(3,173)

 

 

 

139 

 

Cash and cash equivalents, beginning of period

 

 

9,273 

 

 

 

5,290 

 

Cash and cash equivalents, end of period

 

$

6,100 

 

 

$

5,429 

 



 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

$

 

Cash paid for income taxes

 

$

 —

 

 

$

 —

 



 

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Non-cash equipment purchases

 

$

 —

 

 

$

456 

 

 

See notes to Condensed Consolidated Financial Statements.

  

 

5 

 

 


 

 

  

  

  

eMAGIN CORPORATION 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 (unaudited) 

 

Note 1:   Summary of Significant Accounting Policies 

 

The Business 

 

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

 

Basis of Presentation 

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of eMagin Corporation and its subsidiary reflect all adjustments, including normal recurring accruals, necessary for a fair presentation.  All significant intercompany balances and transactions have been eliminated in consolidation.  Certain information and footnote disclosure normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the Securities and Exchange Commission.  The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited condensed consolidated financial statements are read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.  The results of operations for the period ended June 30, 2016 are not necessarily indicative of the results to be expected for the full year.  The consolidated condensed financial statements as of December 31, 2015 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. 

 

Use of estimates 



In accordance with accounting principles generally accepted in the United States of America, management utilizes certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments related to, among others, allowance for doubtful accounts, warranty reserves, inventory reserves, stock-based compensation expense, deferred tax asset valuation allowances, litigation and other loss contingencies. Management bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. 



Reclassifications



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



Revenues and Cost Recognition 

  

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

 

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



6 

 

 


 

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



Recently issued accounting standards



In March 2016, the Financial Accounting Standards Board (FASB) issued guidance which changes the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification in the Consolidated Statement of Cash Flows. The guidance is effective January 1, 2017 and early adoption is permitted.  The Company is currently evaluating the impact of the new guidance.



In February 2016, the FASB issued guidance which changes the accounting for leases. The guidance requires lessees to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term and, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis for all leases (with the exception of short-term leases). The guidance is effective January 1, 2019 and early adoption is permitted. The Company is currently evaluating the impact of the new guidance and the date of adoption. The Company’s operating lease commitments were $3.2 million at December 31, 2015. 



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



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



In April 2015, the FASB issued guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a services contract. All software licenses recognized under this guidance will be accounted for consistent with other licenses of intangible assets. The guidance was effective January 1, 2016 and the Company adopted it on a prospective basis. The guidance did not have a material impact on the Company’s financial statements.



In November 2014, the FASB issued guidance to eliminate the diversity in practice for the accounting for hybrid financial instruments issued in the form of a share.  The guidance requires management to consider all terms and features, whether stated or implied, of a hybrid instrument when determining whether the nature of the instrument is more akin to a debt instrument or an equity instrument. Embedded derivative features, which are accounted for separately from host contracts, should also be considered in the analysis of the hybrid instrument. The Company adopted the guidance effective January 1, 2016 and it did not have an impact on its financial statements.



In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers, which will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles (GAAP) when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. In July 2015, the FASB voted to defer the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods) and permitted early adoption of the standard, but not before the original effective date of December 15, 2016.  The Company expects the updated standard to become effective for it in the first quarter of fiscal 2018. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its financial statements.



7 

 

 


 

Unbilled Accounts Receivable



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



Intangible Assets – Patents



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



The total intangible amortization expense was approximately $13 thousand and $27 thousand for the three and six months ended June 30, 2016, respectively.  Estimated future amortization expense as of June 30, 2016 is as follows (in thousands):







 

 

 

 



 

 

 

 

Fiscal Years ending December 31,

 

 

 

Total Amortization



 

 

 

(unaudited)



 

 

 

 

2016 (six months remaining)

 

 

$

27 

2017

 

 

 

54 

2018

 

 

 

54 

2019

 

 

 

32 

2020

 

 

 

Later years

 

 

 

40 



 

 

$

216 



Product warranty

 

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



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









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

Six Months Ended



 

June 30,

 

 

June 30,



 

2016

 

 

2015

 

 

2016

 

 

2015



 

 

(unaudited)

 

 

 

(unaudited)

Beginning balance

 

$

555 

 

 

$

403 

 

 

$

599 

 

 

$

663 

Warranty accruals

 

 

105 

 

 

 

276 

 

 

 

108 

 

 

 

289 

Warranty usage

 

 

(120)

 

 

 

(114)

 

 

 

(167)

 

 

 

(387)

Ending balance

 

$

540 

 

 

$

565 

 

 

$

540 

 

 

$

565 



Net Income per Common Share   

 

Basic income (loss) per share is computed using the weighted average number of common shares outstanding during the period, and excludes any dilutive effects of common stock equivalent shares such as stock options, warrants, and convertible preferred stock. Diluted income (loss) per share is computed using the weighted average number of common shares outstanding and potentially dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive. 



8 

 

 


 

The Company’s Series B Convertible Preferred stock (“Preferred Stock – Series B”) is considered a participating security as the preferred stock participates in dividends with the common stock, which requires the use of the two-class method when computing basic and diluted earnings per share.  The Preferred Stock – Series B is not required to absorb any net loss. Although the Company paid a one-time special dividend in 2012, the Company does not expect to pay dividends on its common or preferred stock in the near future.   



The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share and share data) for the three and six months ended June 30, 2016 and 2015:







 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

 

Six Months Ended



June 30

 

 

June 30



(unaudited)

 

 

(unaudited)



2016

 

 

2015

 

 

2016

 

 

2015



 

 

 

 

 

 

 

 

 

 

 

 

Net Income

$

(2,164)

 

$

(66)

 

 

$

(2,150)

 

$

254 

Income allocated to participating securities

 

 —

 

 

 —

 

 

 

 —

 

 

59 

Income allocated to common shares

$

(2,164)

 

$

(66)

 

 

$

(2,150)

 

$

195 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - Basic

 

29,388,104 

 

 

25,142,371 

 

 

 

29,388,104 

 

 

25,091,875 

Dilutive effect of stock options

 

 —

 

 

 —

 

 

 

 —

 

 

667,903 

Weighted average common shares outstanding - Diluted

 

29,388,104 

 

 

25,142,371 

 

 

 

29,388,104 

 

 

25,759,778 



 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

$

(0.07)

 

$

 -

 

 

$

(0.07)

 

$

0.01 

   Diluted

$

(0.07)

 

$

 -

 

 

$

(0.07)

 

$

0.01 



 

 

 

 

 

 

 

 

 

 

 

 







The following table sets forth the potentially dilutive common stock equivalents for the three and six month periods ended June 30, 2016 and 2015 that were not included in diluted EPS as their effect would be anti-dilutive:





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,



 

2016

 

2015

 

2016

 

2015



 

(unaudited)

 

(unaudited)

Options

 

3,966,089 

 

4,154,689 

 

3,966,089 

 

3,306,545 

Warrants

 

2,600,000 

 

7,545,333 

 

2,600,000 

 

 —

Total potentially dilutive common stock equivalents

 

6,566,089 

 

11,700,022 

 

6,566,089 

 

3,306,545 





 

9 

 

 


 



Note 2:  Accounts Receivable, net 

  

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

 

Accounts receivable consisted of the following (in thousands):





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

 

 

 



 

June 30,  2016

 

 

December 31, 2015

 



 

(unaudited)

 

 

 

 

Accounts receivable

 

$

3,582 

 

 

$

3,635 

 

Less allowance for doubtful accounts

 

 

(127)

 

 

 

(127)

 

Accounts receivable, net

 

$

3,455 

 

 

$

3,508 

 

 



Note 3:  Inventories, net 

 

The components of inventories are as follows (in thousands): 





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

June 30,    2016

 

 

December 31, 2015

 



 

(unaudited)

 

 

 

 

Raw materials 

 

$

3,286 

 

 

$

2,595 

 

Work in process

 

 

1,514 

 

 

 

1,369 

 

Finished goods 

 

 

1,850 

 

 

 

1,486 

 

Total inventories

 

 

6,650 

 

 

 

5,450 

 

Less inventory reserve

 

 

(1,378)

 

 

 

(1,549)

 

Total inventories, net

 

$

5,272 

 

 

$

3,901 

 

 

  

Note 4:  Line of Credit 

 

On September 1, 2015, the Company renewed its credit facility with is existing lender, under which the Company may borrow up to a maximum of $3 million based on a borrowing base equivalent of 75% of eligible accounts receivable.  The terms are:  interest on outstanding borrowings is Prime plus 4% but not less than 7.25%, the minimum monthly interest payment of $1,000 and early termination fee of $6,000.  The Company is in discussions with its lender regarding possible modifications to the credit facility and the parties have agreed that an automatic renewal provision originally scheduled on September 1, 2016 is no longer in effect.  The Company’s obligations under the credit facility are secured by its assets.  For the three and six months ended June 30, 2016 and 2015, the Company had not drawn on its line of credit.

   

10 

 

 


 



Note 5:  Stock-based Compensation 

 

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



The following table summarizes the allocation of non-cash stock-based compensation to our expense categories for the three and six month periods ended June 30, 2016 and 2015 (in thousands): 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 



 

For the Three Months Ended

 

 

For the Six Months Ended

 



 

June 30,

 

 

June 30,

 



 

2016

 

 

2015

 

 

2016

 

 

2015

 



 

 

(unaudited)

 

 

 

(unaudited)

 

Cost of revenues

 

$

 

 

$

13 

 

 

$

10 

 

 

$

36 

 

Research and development

 

 

 

 

 

26 

 

 

 

33 

 

 

 

62 

 

Selling, general and administrative

 

 

85 

 

 

 

60 

 

 

 

217 

 

 

 

218 

 

Total stock compensation expense

 

$

93 

 

 

$

99 

 

 

$

260 

 

 

$

316 

 

  

At June 30, 2016, total unrecognized compensation costs related to stock options was approximately  $0.2  million, net of estimated forfeitures.  Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of approximately 1.5 years.   

 

The following key assumptions were used in the Black-Scholes option pricing model to determine the fair value of stock options granted: 







 

 

 

 

 

 



 

 

 

 

 

 



 

For the Six Months Ended

 



 

June 30,

 



2016

 

2015

 



 

(unaudited)

Dividend yield

 

 %

 

 %

Risk free interest rates

 

0.71 - 1.01

 %

 

0.841.56

 %

Expected  volatility

 

51.3 to 53.5

 %

 

57.8 to 63.9

 %

Expected term (in years)

 

3.5 to 5.0

 

 

3.5 to 5.0    

 





 

The Company does not expect to pay dividends in the near future.   Therefore, the Company used an expected dividend yield of 0%.  The risk-free interest rate used in the Black-Scholes option pricing model is based on yield available at dates of option grant, on U.S. Treasury securities with an equivalent term.  Expected volatility is based on the weighted average historical volatility of the Company’s common stock for the equivalent term.  The expected term of the options represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience and vesting schedules of similar awards. 

  



11 

 

 


 

A summary of the Company’s stock option activity for the six months ended June 30, 2016 is presented in the following table (unaudited): 





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Number of Shares

 

 

Weighted Average Exercise Price

 

Weighted Average Remaining Contractual Life (In Years)

 

Aggregate Intrinsic Value

Outstanding at December 31, 2015

 

 

4,218,139 

 

 

$

3.75 

 

 

 

 

 

 

Options granted

 

 

295,065 

 

 

 

1.74 

 

 

 

 

 

 

Options exercised

 

 

 —

 

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

(49,980)

 

 

 

2.02 

 

 

 

 

 

 

Options cancelled or expired

 

 

(497,135)

 

 

 

7.66 

 

 

 

 

 

 

Outstanding at June 30, 2016

 

 

3,966,089 

 

 

$

3.13 

 

 

3.76 

 

$

607,968 

Vested or expected to vest at June 30, 2016

 

 

3,961,104 

 

 

$

3.13 

 

 

3.76 

 

$

607,888 

Exercisable at June 30, 2016

 

 

3,716,914 

 

 

$

3.14 

 

 

3.73 

 

$

603,968 

 (1) The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total unvested options. 

 

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock.  For the three and six months ended June 30, 2016, there were no options exercised.   The Company issues new shares of common stock upon exercise of stock options. 





Note 6:  Shareholders’ Equity 



Preferred Stock - Series B Convertible Preferred Stock (“the Preferred Stock – Series B”) 



As of June 30, 2016 and December 31, 2015, there were 5,659 shares of Preferred Stock – Series B  issued and outstanding



Common Stock 



There were no stock options or warrants exercised during the three or six month periods ended June 30, 2016



Warrants



At June 30, 2016, there were 2.6 million warrants to purchase shares of common stock outstanding and exercisable at an exercise price of $2.05 with an expiration date of June 23, 2021. 



  

Note 7:  Income Taxes    

 

The Company’s effective tax rate is calculated quarterly based upon current assumptions relating to the full year’s estimated operating results and various tax-related items. The Company’s effective tax rate for the three month periods ended June 30, 2016 and 2015 was 0%.  The difference between the effective tax rate of 0% and the U.S. federal statutory rate of 34% for the three months ended June 30, 2016 and 2015 was primarily due to recognizing a full valuation allowance on deferred tax assets.  



As of June 30, 2016, the Company determined that based on all available evidence, both positive and negative, including the Company’s latest forecasts and cumulative losses in recent years, it was more likely than not that none of its deferred tax assets would be realized and therefore it continued to record a full valuation allowance.  



The Company’s net operating loss carry forward amounts expire through 2037 and are subject to certain limitations that may occur due to change in ownership provisions under Section 382 of the Internal Revenue Code and similar state provisions.



Due to the Company’s operating loss carryforwards, all tax years remain open to examination by the major taxing jurisdictions to which the Company is subject. In the event that the Company is assessed interest or penalties at some point in the future, it will be classified in the financial statements as tax expense.  

 

12 

 

 


 

 

Note 8:  Commitments and Contingencies 

 

Equipment Purchase Commitments 

  

The Company has committed to equipment purchases of approximately $0.8 million at June 30, 2016.



Future Sales Concessions



In the first quarter of 2014, the Company received a notification to stop shipments to three of its customers regarding a possible wire bonding problem in some of the microdisplays shipped to these customers. Shipments to two of the three customers resumed in 2014.   As the third customer (“this Customer”) was not interested in continuing to use eMagin’s standard commercial microdisplay which was originally shipped, eMagin has been working, at this Customer’s request, on a more mechanically robust display configuration.  This Customer provided a proposal to eMagin which the Company countered that included concessions to this Customer predicated on future business.  On June 16, 2016, the Company obtained a formal release from this Customer for any future concessions and from any liabilities or obligations arising from the matter.



Litigation



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



On May 5, 2015, Kimchuk, Inc. (“Kimchuk”), a former supplier, commenced action against the Company in the U.S. District Court, District of Connecticut, asserting breach of contract and seeking to recover approximately $389,000 in alleged damages. The Company filed its response and counter-complaint on August 11, 2015 wherein the Company denied the material allegations asserted by Kimchuk and sought approximately $3.5 million in damages from Kimchuk.  On June 1, 2016, the Company entered into a settlement agreement with Kimchuk whereby, for consideration of approximately $227,000, Kimchuk agreed to dismiss the matter, provide parts and material to eMagin and settle outstanding accounts payable.  The Company recorded an accrual for the litigation in the quarter ended September 30, 2015, and did not incur any additional settlement expense during the current quarter ended June 30, 2016 associated with the matter.



   

13 

 

 


 



Note 9:  Concentrations    

 

The following is a schedule of revenues by geographic location (in thousands): 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

Six Months Ended



 

June 30,

 

 

June 30,



 

2016

 

 

2015

 

 

2016

 

 

2015



 

(unaudited)

 

 

(unaudited)

North and South America

 

$

2,890 

 

 

$

4,999 

 

 

$

7,173 

 

 

$

8,723 

Europe, Middle East, and Africa

 

 

2,149 

 

 

 

1,430 

 

 

 

4,336 

 

 

 

3,591 

Asia Pacific

 

 

494 

 

 

 

605 

 

 

 

1,025 

 

 

 

709 

Total

 

$

5,533 

 

 

$

7,034 

 

 

$

12,534 

 

 

$

13,023 





The following table represents the domestic and international revenues as a percentage of total net revenues:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

Six Months Ended

 



 

June 30,

 

 

June 30,

 



 

2016

 

 

2015

 

 

2016

 

 

2015

 



 

(unaudited)

 

 

(unaudited)

 

Domestic

 

 

52 

%

 

 

71 

%

 

 

57 

%

 

 

66 

%

International

 

 

48 

%

 

 

29 

%

 

 

43 

%

 

 

34 

%





The Company purchases principally all of its silicon wafers from two suppliers located in Taiwan and Korea.   



For the three months ended June 30, 2016,  two customers accounted for 14% and 11% of net revenues.  For the six months ended June 30, 2016,  one customer accounted for 10% of net revenues.   For the three months ended June 30, 2015,  three customers accounted for 15%, 14% and 12% of net revenues.  For the six months ended June 30, 2015,  two customers accounted for 14% and 10% of net revenues.     As of June 30, 2016, one customer accounted for 10% of the Company’s consolidated accounts receivable balance.

 

14 

 

 


 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

Statement of Forward-Looking Information 

 

In this quarterly report, references to "eMagin Corporation," "eMagin," "Virtual Vision," "the Company," "we," "us," and "our" refer to eMagin Corporation and its wholly owned subsidiary, Virtual Vision, Inc. 

 

Except for the historical information contained herein, some of the statements in this Report contain forward-looking statements that involve risks and uncertainties. These statements are found in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors." They include statements concerning: our business strategy; expectations of market and customer response; liquidity and capital expenditures; future sources of revenues; expansion of our proposed product line; and trends in industry activity generally. In some cases, you can identify forward-looking statements by words such as "may," "will," "should," "expect," "plan," "could," "anticipate," "intend," "believe," "estimate," "predict," "potential," "goal," or "continue" or similar terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including, but not limited to, the risks outlined under the heading "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2015, and in this Quarterly Report on Form 10-Q, that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For example, assumptions that could cause actual results to vary materially from future results include, but are not limited to: our ability to successfully develop and market our products to customers; our ability to successfully implement resolutions related to customer stop orders; our ability to generate customer demand for our products in our target markets; the development of our target markets and market opportunities; our ability to manufacture suitable products at competitive cost; our ability to successfully launch new equipment on our manufacturing line; market pricing for our products and for competing products; the extent of increasing competition; technological developments in our target markets and the development of alternate, competing technologies in them; and sales of shares by existing shareholders. Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Unless we are required to do so under federal securities laws or other applicable laws, we do not intend to update or revise any forward-looking statements. 



Business



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



We derive the majority of our revenue from sales of our OLED microdisplay products which we manufacture in our Hopewell Junction, NY clean rooms and manufacturing facility. We also earn revenue from government and commercial development contracts that may complement and support our internal research and development programs. In addition, we generate sales from optics and microdisplays combined with optics. 



The Company’s stock is traded on the NYSE under the symbol EMAN.

 

Overview 



In the second quarter, eMagin delivered display products to over 72 customers in 23 countries and performed R&D contract services for 4 customers.  Over the first six months of 2016, eMagin grew its active global customer base by over 10%.  Towards the end of the second quarter, the Company’s production and sales volume were hampered by the breakdown of a major piece of equipment.  The replacement of the machine was contemplated in the capital raise in December 2015 and the order was placed in the first quarter 2016.  In light of the time required to design, build and qualify the custom-built machine to our unique manufacturing processes, we do not anticipate that it will enter production until fourth quarter of 2016.  The original machine has been repaired and is currently in operation.  As a result of the production issue combined with committed machine time dedicated to scheduled R&D work, the volume of production during the second quarter was lower than planned and the previous quarter, resulting in higher unit costs and a lower profit margin on display sales.





Despite the equipment breakdown in the second quarter, the Company continues to make progress on its multi-year yield improvement initiative by strengthening production resources, making key process engineering hires, and ordering production equipment with the objectives of achieving greater efficiencies, lower unit costs and higher production capacity. This initiative will

15 

 

 


 

position us to meet customer demand and provide better response time to customer orders.



During the first six months of 2016, and accelerating during the second quarter, the Company has been developing handheld and wearable products for the consumer markets and has been working with suppliers and contract manufacturers to establish the supply chain. Two products are scheduled for release to the marketplace during fourth quarter 2016.  The wearable devices will utilize eMagin’s advanced OLED microdisplay technology to deliver an extraordinary user experience at an attractive price.  During the second quarter the Company incurred expenses associated with the development of these products and utilized working capital to fund the buildup of inventory and pay amounts to contract manufacturers, vendors and third party logistic providers in anticipation of the products’ release.  The development expenses and working capital expenditures are expected to continue in the third quarter.





New Business



In the second quarter, the Company achieved the following new business highlights:



·

Received the first production order for a display upgrade to a United States Army training system. 

·

Received an $825 thousand order from an existing customer to upgrade displays in their medical device equipment.  This represents the largest single order eMagin has received from a customer in the medical device industry.

·

Completed a review of current and potential new business and realigned sales and marketing personnel to expand the existing customer base and penetrate newly identified markets.

·

Sold Design Reference Kits and displays to 22 customers to facilitate development and prototyping of new systems.

·

Delivered sample displays for over twenty new projects including major military and commercial avionics applications.



New Technology Development



We are making steady progress in our development of very high brightness full-color microdisplays. Our recent improvements and optimization of the processes have led to a brightness level that crosses the luminence threshold for military see-through and many consumer applications including augmented reality.



During the second quarter we continued to advance our ultra-high brightness color display technology with a second-generation WUXGA (1920 x 1200 resolution) full color display that can show pictures or video at a brightness of over 4,000 nits (cd/meter squared).  These displays are particularly well suited for augmented and virtual reality applications and for aviation.  They were completed during the second quarter and engineering samples are being provided to select consumer and military prime contractors for evaluation.



New Product Development



Our product development efforts on the 2K x 2K display project that was initiated in the fourth quarter of 2015 continued in the current quarter.  This project is on track to produce engineering samples for select customers beginning in the fourth quarter including the customer with whom we entered into the license agreement in December 2015.  General availability is scheduled for the first quarter of 2017.



Additionally, we are investigating the development of a prototype display that is 35 x 35 millimeters with a resolution of up to 4,000 x 4,000 pixels. We are working with potential partners interested in developing and supporting the infrastructure needed to productize the display, and will bring the proposed design to several commercial customers who are seeking displays of this size and features.



Employees



At July 31, 2016 we had a total of 89 employees, of whom 85 were full-time employees, as compared to a total of 88 employees, of whom 85 were full-time employees, at December 31, 2015.   

 

A detailed discussion of our business and operations may be found in Part I, “Business,” of our 2015 Annual Report on Form 10-K for the year ended December 31, 2015, and as filed with the Securities and Exchange Commission on March 17, 2016. 



CRITICAL ACCOUNTING POLICIES 

 

Revenue and Cost Recognition 

  

Revenue on product sales is recognized when persuasive evidence of an arrangement exists, such as when a purchase order or contract

16 

 

 


 

is received from the customer, the price is fixed or determinable, title and risk of loss to the goods has transferred and there is a reasonable assurance of collection of the sales proceeds. We obtain written purchase authorizations from our customers for a specified amount of product at a specified price and consider delivery to have occurred at the time of shipment.

 

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



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





Income Taxes 

 

We evaluate out deferred tax assets and their potential realizability each quarter to determine if we should make  any changes to the valuation allowance.  As of June 30, 2016,  we determined that based on all available evidence, both positive and negative, including the Company’s latest forecasts and cumulative losses in recent years, it was more likely than not that none of our deferred tax assets would be realized and therefore, we continued to record a full valuation allowance.  



Other critical accounting policies, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, relate to product warranty, use of estimates, fair value of financial instruments and stock-based compensation, and additional information on accounting for income taxes. 

17 

 

 


 

RESULTS OF OPERATIONS 

 

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2016 COMPARED TO THREE AND SIX MONTHS ENDED, JUNE 30, 2015



Revenues 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

Six Months Ended 



 

June 30,

 

 

June 30,



 

2016

 

 

2015

 

Change

 

 

2016

 

 

2015

 

Change



 

(in thousands)

 

 

(unaudited)



 

 

 

 

(in thousands)

Product

 

$

4,781 

 

 

$

5,426 

 

$

(645)

 

 

$

10,076 

 

 

$

10,530 

 

$

(454)

Contract

 

$

752 

 

 

$

1,608 

 

$

(856)

 

 

$

1,458 

 

 

$

2,493 

 

$

(1,035)

License

 

$

 —

 

 

$

 —

 

$

 —

 

 

$

1,000 

 

 

$

 —

 

$

1,000 

Total revenue, net

 

$

5,533 

 

 

$

7,034 

 

$

(1,501)

 

 

$

12,534 

 

 

$

13,023 

 

$

(489)



Revenues for the three and six months ended June 30, 2016 were approximately $5.5 million and $12.5 million respectively,