Attached files
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EX-5.1 - EXHIBIT 5.1 - EMAGIN CORP | ex51.htm |
EX-23.2 - EXHIBIT 23.2 - EMAGIN CORP | ex232.htm |
As filed with the Securities and
Exchange Commission on November 23,
2009
Registration
No. 333- 160147
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON
D.C. 20549
AMENDMENT
NO. 1
TO
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
eMagin
Corporation
(Name of
small business issuer in its charter)
Delaware
|
3679
|
56-1764501
|
||
(State
or other Jurisdiction of
|
(Primary
Standard Industrial
|
(I.R.S.
Employer
|
||
Incorporation
or Organization)
|
Classification
Code Number)
|
Identification
No.)
|
3006
Northup Way, Suite 103,
Bellevue,
WA 98004
(425)-284-5200
(Address
and telephone number of principal executive offices and principal place of
business)
Andrew G.
Sculley, Chief Executive Officer
eMagin
Corporation
3006
Northup Way, Suite 103,
Bellevue,
WA 98004
(425)-284-5200
(Name,
address and telephone number of agent for service)
Copies
to:
Richard A. Friedman,
Esq.
Sichenzia
Ross Friedman Ference LLP
61 Broadway, 32nd Flr.
New
York, New York 10006
(212)
930-9700
(212)
930-9725 (fax)
APPROXIMATE
DATE OF PROPOSED SALE TO THE PUBLIC:
From time
to time after this Registration Statement becomes effective.
If any
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: o
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. o
Indicate by check mark whether
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large
accelerated filer
|
o
|
Accelerated
Filer
|
o
|
|
Non-accelerated
filer
|
o
|
Smaller
reporting company
|
x
|
1
Title of each class
of securities to be
registered
|
Amount
to be
registered
|
Proposed
maximum
offering
price
per
share
|
Proposed
maximum
aggregate
offering
price
(1)
|
Amount
of
registration
fee (2)
|
||||||||||||
Common
Stock, $0.001 par value per share, issuable upon exercise of
Warrants
|
1,682,502
|
$
|
1.80
|
$
|
3,028,504
|
$
|
169.00
|
|||||||||
Total
|
1,682,502
|
1.80
|
$
|
3,028,504
|
$
|
169.00
|
(1)
|
Estimated
solely for purposes of calculating the registration fee in accordance with
Rule 457(c) and Rule 457(g) under the Securities Act of 1933, using the
average of the sale prices as reported on the OTCBB on November 11, 2009
which was $1.80 per share.
|
|
(2)
|
The
registrant previously paid a filing fee in the amount of
$284.00
|
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration shall
thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
eMagin
Corporation
1,682,502
SHARES OF
COMMON
STOCK
This
prospectus relates to the resale by the selling stockholders of up to 1,682,502
shares of our common stock issuable upon the exercise of common stock purchase
warrants. The selling stockholders may sell common stock from time to time in
the principal market on which the stock is traded at the prevailing market price
or in negotiated transactions. We will pay the expenses of registering these
shares.
Our
common stock is listed on the Over-The-Counter Bulletin Board under the symbol
“EMAN”. The last reported sales price per share of our common stock as reported
by the Over-The-Counter Bulletin Board on November 11, 2009 was
$1.84.
Investing
in these securities involves significant risks. See “Risk Factors” beginning on
page 8.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this Prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
You should read this prospectus carefully before you invest.
The date
of this prospectus is November __,
2009.
The
information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by eMagin
Corporation with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
2
TABLE
OF CONTENTS
Page
|
||
Prospectus
Summary
|
4
|
|
Risk
Factors
|
7
|
|
Forward
Looking Statements
|
15
|
|
Use
of Proceeds
|
15
|
|
Market
For Equity and Related Stockholder Matters
|
15
|
|
Selected
Financial Data
|
16
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
17
|
|
Business
|
26
|
|
Description
of Property
|
35
|
|
Legal
Proceedings
|
35
|
|
Management
|
36
|
|
Executive
Compensation
|
39
|
|
Security
Ownership of Certain Beneficial Owners and Management
|
49
|
|
Indemnification
for Securities Act Liabilities
|
51
|
|
Plan
of Distribution
|
51
|
|
Description
of Securities
|
53
|
|
Selling
Stockholders
|
53
|
|
Transactions
With Related Persons, Promoters and Certain Control
Persons
|
55
|
|
Legal
Matters
|
58
|
|
Experts
|
58
|
|
Available
Information
|
58
|
|
Index
to Financial Statements
|
59
|
3
The
following summary highlights selected information contained in this prospectus.
This summary does not contain all the information you should consider before
investing in the securities. Before making an investment decision, you should
read the entire prospectus carefully, including the “risk factors” section, the
financial statements and the notes to the financial statements.
We
design, develop, manufacture, and market OLED (organic light emitting diode) on
silicon microdisplays, virtual imaging products which utilize OLED
microdisplays, and related products. We also perform research in the OLED field.
Our virtual imaging products integrate OLED technology with silicon chips to
produce high-resolution microdisplays smaller than one-inch diagonally which,
when viewed through a magnifier, create virtual images that appear comparable in
size to that of a computer monitor or a large-screen television. Our products
enable our original equipment manufacturer (“OEM”) customers to develop and
market improved or new electronic products. We believe that virtual imaging will
become an important way for increasingly mobile people to have quick access to
high resolution data, work, and experience new more immersive forms of
communications and entertainment.
Our first
commercial product, the SVGA+ (Super Video Graphics Array of 800x600 picture
elements plus 52 added columns of data) OLED microdisplay was initially offered
for sampling in 2001, and our first SVGA-3D (Super Video Graphics Array plus
built-in stereovision capability) OLED microdisplay was shipped in early 2002.
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 OEM customers for military, medical, industrial, and
consumer applications. We market our products globally.
In 2006
we introduced our OLED-XL technology, which provides longer luminance half life
and enhanced efficiency of eMagin's SVGA+ and SVGA-3D product lines. We are in
the process of completing development of 2 additional OLED microdisplays, namely
the SVGA 3DS (SVGA 3D shrink, a smaller format SVGA display with a new cell
architecture with embedded features) and an SXGA (1280 x 1024 picture
elements).
In
January 2005 we announced the world's first personal display system to combine
OLED technology with head-tracking and 3D stereovision, the Z800 3DVisor(tm),
which was first shipped in mid-2005. This product was recognized as a Digital
Living Class of 2005 Innovators, and received the Consumer Electronics
Association’s coveted Consumer Electronics Show (CES) 2006 Best of Innovation
Awards for the entire display category as well as a Design and Innovations Award
for the electronic gaming category. In February 2007 the Z800 3DVisor, as
integrated in Chatten Associates’ head-aimed remote viewer, was recognized as
one of Advanced Imaging's Solutions of the Year.
We
believe that our OLED microdisplays offer a number of significant advantages
over the more widely used liquid crystal displays, including greatly increased
power efficiency, less weight and wider viewing angles. Using our active matrix
OLED technology, many computer and electronic system functions can be built
directly into the OLED microdisplay, resulting in compact, high resolution,
power efficient systems. We have developed our own intellectual property and
accumulated over 6 years of manufacturing know-how to create high performance
OLED microdisplays.
As the
first to exploit OLED technology for microdisplays, and with the support of our
partners and the development of our intellectual property, we believe that we
enjoy a significant advantage in the commercialization of microdisplays for
virtual imaging. We believe we are currently the only company to sell active
matrix small molecule OLED-on-silicon microdisplays.
eMagin
Corporation was created through the merger of Fashion Dynamics Corporation
("FDC"), which was organized on January 23, 1996 under the laws of the State of
Nevada and FED Corporation ("FED"), a developer and manufacturer of optical
systems and microdisplays for use in the electronics industry. FDC had no active
business operations other than to acquire an interest in a business. On March
16, 2000, FDC acquired FED. The merged company changed its name to eMagin
Corporation. Following the merger, the business conducted by eMagin is the
business conducted by FED prior to the merger.
Our
website is located at www.emagin.com and
our e-commerce site is www.3dvisor.com. The
contents of our website are not part of this Prospectus.
4
Common
stock offered by selling stockholders
|
Up
to 1,682,502 shares, consisting of the
following:
|
|||
·
up to 312,502 shares of common stock issuable upon the
exercise of common stock purchase warrants at an exercise price of $1.13
per share;
|
||||
·
up to 1,000,000 shares of common stock issuable upon the
exercise of common stock purchase warrants at an exercise price of $1.50
per share;
|
||||
Common
Stock to be outstanding after the offering
|
18,644,404
shares assuming the full exercise of the warrants of the underlying shares
of which are included in this prospectus.*
|
|||
Use of Proceeds |
We
will not receive any proceeds from the sale of the common stock; however,
we will receive proceeds from the exercise of our
warrants.
|
|||
Over-The-Counter Bulletin Board Symbol
|
EMAN
|
|||
*The information above regarding the common stock to be outstanding after
the offering is based on 16,961,902 shares of the Company’s common stock
outstanding as of November 11, 2009.
|
5
The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”. The
statements of operations data for the years ended December 31, 2008, 2007, and
2006 and the balance sheet data at December 31, 2008 and 2007 are derived from
our audited financial statements which are included elsewhere in this
registration statement. The statements of operations data for the
years ended December 31, 2005 and 2004 and the balance sheet data at December
31, 2006, 2005 and 2004 are derived from our audited financial statements which
are not included in this registration statement. The statements
of operations data for the nine months ended September 30, 2009 and 2008
and the balance sheet data at September 30, 2009 are derived from our
unaudited condensed consolidated interim financial statements filed with the
Securities and Exchange Commission on November 12, 2009 which are included
elsewhere in the registration statement. The balance sheet data at September 30,
2008 was derived from our unaudited condensed consolidated interim financial
statements filed with the Securities and Exchange Commission on November 14,
2008. The historical results are not necessarily indicative of results to
be expected for future periods. The following information is presented in
thousands, except per share data.
Consolidated
Statements of Operations Data:
Year
Ended December 31,
|
Nine
Months Ended September 30,
|
|||||||||||||||||||||||||||
2008
|
2007
|
2006
|
2005
|
2004
|
2009
|
2008
|
||||||||||||||||||||||
(thousands)
|
||||||||||||||||||||||||||||
Revenue
|
$ | 18,739 | $ | 17,554 | $ | 8,169 | $ | 3,745 | $ | 3,593 | $ | 17,103 | $ | 13,469 | ||||||||||||||
Cost
of goods sold
|
10,673 | 12,628 | 11,359 | 10,219 | 5,966 | 7,345 | 8,110 | |||||||||||||||||||||
Gross
profit (loss)
|
8,066 | 4,926 | (3,190 | ) | (6,474 | ) | (2,373 | ) | 9,758 | 5,359 | ||||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||||||
Research
and development
|
2,081 | 2,949 | 4,406 | 4,020 | 898 | 1,376 | 1,614 | |||||||||||||||||||||
Selling,
general and administrative
|
6,254 | 6,591 | 8,860 | 6,316 | 4,428 | 5,083 | 4,797 | |||||||||||||||||||||
Total
operating expenses
|
8,335 | 9,540 | 13,266 | 10,336 | 5,326 | 6,459 | 6,411 | |||||||||||||||||||||
(Loss)
income from operations
|
(269 | ) | (4,614 | ) | (16,456 | ) | (16,810 | ) | (7,699 | ) | 3,299 | (1,052 | ) | |||||||||||||||
Other
(expense) income, net
|
(1,590 | ) | (13,874 | ) | 1,190 | 282 | (5,012 | ) | (376 | ) | (1,383 | ) | ||||||||||||||||
Net
(loss) income
|
$ | (1,859 | ) | $ | (18,488 | ) | $ | (15,266 | ) | $ | (16,528 | ) | $ | (12,711 | ) | $ | 2,923 | $ | (2,435 | ) | ||||||||
(Loss)
income per share, basic
|
$ | (0.13 | ) | $ | (1.59 | ) | $ | (1.52 | ) | $ | (1.94 | ) | $ | (1.98 | ) | $ | 0.18 | $ | (0.18 | ) | ||||||||
(Loss)
income per share, diluted
|
$ | (0.13 | ) | $ | (1.59 | ) | $ | (1.52 | ) | $ | (1.94 | ) | $ | (1.98 | ) | $ | 0.12 | $ | (0.18 | ) | ||||||||
Weighted
average number of shares outstanding:
|
||||||||||||||||||||||||||||
Basic
|
14,175 | 11,633 | 10,058 | 8,541 | 6,428 | 16,134 | 13,855 | |||||||||||||||||||||
Diluted
|
14,175 | 11,633 | 10,058 | 8,541 | 6,428 | 24,471 | 13,855 |
Consolidated
Balance Sheet Data:
December
31,
|
September
30,
(unaudited)
|
|||||||||||||||||||||||||||
2008
|
2007
|
2006
|
2005
|
2004
|
2009
|
2008
|
||||||||||||||||||||||
(thousands)
|
||||||||||||||||||||||||||||
Cash
and cash equivalents
|
$
|
2,404
|
$
|
713
|
$
|
1,415
|
$
|
6,727
|
$
|
13,457
|
$
|
3,709
|
$
|
1,272
|
||||||||||||||
Working
capital (deficit)
|
$
|
3,300
|
$
|
(4,708
|
)
|
$
|
(305
|
)
|
$
|
8,868
|
$
|
14,925
|
$
|
7,296
|
$
|
(3,555
|
)
|
|||||||||||
Total
assets
|
$
|
10,104
|
$
|
6,648
|
$
|
7,005
|
$
|
14,142
|
$
|
18,436
|
$
|
11,814
|
$
|
9,191
|
||||||||||||||
Long-term
obligations
|
$
|
---
|
$
|
60
|
$
|
2,229
|
$
|
56
|
$
|
22
|
$
|
---
|
$
|
38
|
||||||||||||||
Total
shareholders’ equity (capital deficit)
|
$
|
3,661
|
$
|
(4,170
|
)
|
$
|
(1,164
|
)
|
$
|
10,401
|
$
|
16,447
|
$
|
8,243
|
$
|
(2,888
|
)
|
6
You
should carefully consider the following risk factors and the other information
included herein as well as the information included in other reports and filings
made with the SEC before investing in our common stock. The following factors, as well as other
factors affecting our operating results and financial condition, could cause our
actual future results and financial condition to differ materially from those
projected. The trading price of our common stock could decline due to any of
these risks, and you may lose part or all of your investment.
RISKS
RELATED TO OUR FINANCIAL RESULTS
We have a history of losses since
our inception and may incur losses in the future.
Our
accumulated losses are $198 million as of September 30, 2009. We have
not yet achieved profitability on a full year basis. We had two profitable
quarters in 2008 and three profitable quarters in 2009. We can give no
assurances that we will continue to be profitable in the future. We cannot
assure investors that we will sustain profitability or that we will not incur
operating losses in the future.
We
may not be able to execute our business plan due to a lack of cash from
operations.
Historically,
we have not produced positive cash flows from operations. However, we have
generated positive cash flows the past five quarters. We anticipate that our
cash from operations will be sufficient to meet our requirements over the next
twelve months. In the event that cash flow from operations is less than
anticipated and we are unable to secure additional funding to cover our
expenses, in order to preserve cash, we may have to reduce expenditures and
effect reductions in our corporate infrastructure, either of which could have a
material adverse effect on our ability to continue our current level of
operations. No assurance can be given that if additional financing is necessary,
that it will be available, or if available, will be on acceptable
terms.
We
may be subject to fines, sanctions, and/or penalties of an indeterminable nature
as a result of potential violations of federal securities laws.
In July
2006, we entered into a Note Purchase Agreement with Stillwater LLC
(“Stillwater”), which provided for the purchase and sale of a 6% senior secured
convertible note in principal amount of up to $500,000 (the “Stillwater Note”)
and a warrant to purchase 70% of the number of shares issuable upon conversion
of the Stillwater Note, at our sole discretion by delivery of a notice to
Stillwater on December 14, 2006. We then filed a registration
statement on Form S-3 to register the resale by Stillwater of up to 41,088,445
shares of our common stock. In July 2007, we amended the agreements
with Stillwater. Amending the Stillwater agreements without first
withdrawing the Registration Statement on Form S-3 may be inconsistent with
Section 5 of the Securities Act of 1933, as amended (the “Act”), and we may be
subject to fines, sanctions and/or penalties of an indeterminable nature as a
result of potential violations of federal securities laws. If we are
assessed fines and penalties our business will be materially
affected.
The
issuance of shares of common stock in connection with the conversion of the
Notes may have not have been in compliance with certain state and federal
securities laws and any damages that we may have to pay as a result of such
issuance could have a material adverse effect on our revenues, profits, results
of operations, financial condition and future prospects.
Our
operating results have significant fluctuations.
In
addition to the variability resulting from the short-term nature of commitments
from our customers, other factors contribute to significant periodic quarterly
fluctuations in results of operations. These factors include, but are not
limited to, the following:
·
|
the
receipt and timing of orders and the timing of delivery of
orders;
|
·
|
the
inability to adjust expense levels or delays in adjusting expense levels,
in either case in response to lower than expected revenues or gross
margins;
|
·
|
the
volume of orders relative to our manufacturing
capacity;
|
·
|
product
introductions and market acceptance of new products or new generations of
products;
|
·
|
changes
in cost and availability of labor and components;
|
·
|
product
mix;
|
·
|
variation
in operating expenses; regulatory requirements, foreign currency
fluctuations and changes in duties and tariffs;
|
·
|
pricing
and availability of competitive products and services;
and
|
·
|
changes,
whether or not anticipated, in economic
conditions.
|
Accordingly,
the results of any past periods should not be relied upon as an indication of
our future performance.
7
RISKS
RELATED TO MANUFACTURING
The manufacture of active matrix OLED microdisplays is
new and could result in manufacturing issues or delays.
Ours is
an evolving technology and we are pioneers in this active matrix OLED
microdisplay manufacturing technique. We cannot assure you that we will be able
to produce our products in sufficient quantity and quality to maintain existing
customers and attract new customers. In addition, we cannot assure you 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
currently manufacture our products on a single manufacturing line. If we
experience any significant disruption in the operation of our manufacturing
facility or a serious failure of a critical piece of equipment, 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. However, we try to maintain product
inventory to fill the requirements under such circumstances. 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.
We
rely on key sole source and limited source suppliers.
We depend
on a number of sole source or limited source suppliers for certain raw
materials, components, and services. These include circuit boards, graphic
integrated circuits, passive components, materials and chemicals, and equipment
support. We maintain several single-source supplier relationships,
either because alternative sources are not available or because the relationship
is advantageous due to performance, quality, support, delivery, capacity, or
price considerations. Even where alternative sources of supply are available,
qualification of the alternative suppliers and establishment of reliable
supplies could result in delays and a possible loss of sales, which could be
detrimental to operating results. We do not manufacture the silicon
integrated circuits on which we incorporate our OLED technology. Instead, we
provide the design layouts to a sole semiconductor contract manufacturer who
manufactures the integrated circuits on silicon wafers. Our inability to obtain
sufficient quantities of components and other 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.
Our
results of operations, financial condition, and business would be harmed if we
were unable to balance customer demand and capacity.
As
customer demand for our products, particularly new products, changes we must be
able to ramp up or adjust our production capacity to meet demand. We are
continually taking steps to address our manufacturing capacity needs for our
products. If we are not able to increase our capacity or if we increase our
capacity too quickly, our business and results of operations could be adversely
impacted. If we experience delays or unforeseen costs associated with adjusting
our capacity levels, we may not be able to achieve our financial targets. For
some of our products, vendor lead times exceed our customers’ required delivery
time causing us to order to forecast rather than order based on actual demand.
Ordering raw material and building finished goods based on forecasts exposes us
to numerous risks including potential inability to service customer demand in an
acceptable timeframe, holding excess inventory or having unabsorbed
manufacturing overhead.
Variations
in our production yields impact our ability to reduce costs and could cause our
margins to decline and our operating results to suffer.
All of
our products are manufactured using technologies that are highly complex. The
number of usable items, or yield, from our production processes may fluctuate as
a result of many factors, including but not limited to the
following:
·
|
variability
in our process repeatability and control;
|
·
|
contamination
of the manufacturing environment or equipment;
|
·
|
equipment
failure, power outages, or variations in the manufacturing
process;
|
·
|
lack
of consistency and adequate quality and quantity of piece parts and other
raw materials;
|
·
|
defects
in packaging either within or outside our
control; and
|
·
|
any
transitions or changes in our production process, planned or
unplanned.
|
8
We
maintain several single-source supplier relationships, either because
alternative sources are not available or because the relationship is
advantageous due to performance, quality, support, delivery, capacity, or price
considerations. If the supply of a critical single-source material or
component is delayed or curtailed, we may not be able to ship the related
product in desired quantities and in a timely manner. Even where
alternative sources of supply are available, qualification of the alternative
suppliers and establishment of reliable supplies could result in delays and a
possible loss of sales, which could harm operating results.
RISKS
RELATED TO OUR INTELLECTUAL PROPERTY
We have
a license agreement with Eastman Kodak regarding the manufacture of
OLED microdisplays.
We rely
upon Eastman Kodak to protect and enforce key patents held by Eastman Kodak,
relating to OLED display technology that we have licensed. Some of Eastman
Kodak's key patents have expired and others expire at various times in the
future. 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. On April 30, 2007, the
U.S. Supreme Court, in KSR
International Co. vs. Teleflex, Inc., mandated a more expansive and
flexible approach towards a determination as to whether a patent is obvious and
invalid, which may make it more difficult for patent holders to secure or
maintain existing patents. 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 properly protect our position or stay ahead of
competition in new research and the protecting of the resulting intellectual
property.
In
addition to patent protection, we also rely on trade secrets and other
non-patented proprietary information relating to our product development and
manufacturing activities. We try to protect this information through appropriate
efforts to maintain its secrecy, including requiring employees and third parties
to sign confidentiality agreements. We cannot be sure that these efforts will be
successful or that the confidentiality agreements will not be breached. We also
cannot be sure that we would have adequate remedies for any breach of such
agreements or other misappropriation of our trade secrets or that our trade
secrets and proprietary know-how will not otherwise become known or be
independently discovered by others.
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. As an OEM supplier, our customer's products must also
be well accepted. 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.
9
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 service;
|
·
|
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.
|
The display industry may be
cyclical.
Our
business strategy is dependent on OEM manufacturers building and selling
products that incorporate our OLED displays as components into those products.
Industry-wide fluctuations could cause significant harm to our business. 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.
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. 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.
Our
products are subject to lengthy OEM development periods.
We 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 often with a duration of between one and three years. 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 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, that we will
have the resources to fund the expenditures necessary to implement certain
cost-saving measures, or that our costs can be reduced as quickly as any
reduction in unit prices. 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.
10
RISKS
RELATED TO OUR BUSINESS
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 attracting
and retaining new personnel may have a materially adverse affect on our business
and our operating results.
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 and will 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.
The
ineffectiveness of our internal control over financial reporting could result in
a loss of investor confidence in our financial reports and have an adverse
effect on our stock price.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), and the rules
and regulations promulgated by the SEC to implement Section 404, we included in
our Form 10-K an annual report by our management regarding the effectiveness of
our internal control over financial reporting. The report includes,
among other things, an assessment of the effectiveness of our internal control
over financial reporting as of the end of our fiscal year. Our
assessment is that although we have made substantial improvements in our
internal control over financial reporting, we continue to have material
weaknesses. Management will continue to make improvements in this
regard.
As of
September 30, 2009, even though we made significant improvement, our internal
control over financial reporting was ineffective due to the presence of material
weaknesses, as more fully described in Item 4T of the Form 10-Q filed with the
SEC on November 12, 2009. This could result in a loss of investor
confidence in the accuracy and completeness of our financial reports, which may
have an adverse effect on our stock price.
Our
operating results are substantially dependent on the development and acceptance
of new products and technology innovations.
Our
future success may depend on our ability to develop new and lower cost solutions
for existing and new markets and for customers to accept those solutions. We
must introduce new products in a timely and cost-efficient manner, and we must
secure production orders for those products from our customers. The development
of new products is a highly complex process, and we historically have
experienced delays in completing the development and introduction of new
products. Some or all of those technologies or products may not successfully
make the transition from the research and development lab. Even when we
successfully complete a research and development effort with respect to a
particular product or technology, it may fail to gain market
acceptance. The successful development and introduction of these
products depends on a number of factors, including the following:
·
|
achievement
of technology breakthroughs required to make commercially viable
devices;
|
·
|
the
accuracy of our predictions of market requirements;
|
·
|
acceptance
of our new product designs;
|
·
|
acceptance
of new technology in certain markets;
|
·
|
the
availability of qualified research and development and product development
personnel;
|
·
|
our
timely completion of product designs and development;
|
·
|
our
ability and available resources to expand sales;
|
·
|
our
ability to develop repeatable processes to manufacture new products in
sufficient quantities and at low enough costs for commercial
sales;
|
·
|
our
customers’ ability to develop competitive products incorporating our
products; and
|
·
|
acceptance
of our customers’ products by the
market.
|
If any of
these or other factors become problematic, we may not be able to develop and
introduce these new products in a timely or cost-effective manner.
11
If
government agencies discontinue or curtail their funding for our research and
development programs our business may suffer.
Changes
in federal budget priorities could adversely affect our contract revenue.
Historically, government agencies have funded a significant part of our research
and development activities. When the government changes budget priorities, such
as in time of war or for other reasons, our funding has the risk of being
redirected to other programs. Government contracts are also subject to the risk
that the government agency may not appropriate and allocate all funding
contemplated by the contract. In addition our government contracts generally
permit the contracting authority to terminate the contract for the convenience
of the government. The full value of the contracts would not be realized if they
were prematurely terminated. We may be unable to incur sufficient allowable
costs to generate the full estimated contract values. Furthermore, the research
and development and product procurement contracts of the customers we supply may
be similarly impacted. If the government funding is discontinued or reduced, our
ability to develop or enhance products could be limited and our business results
or operations and financial conditions could be adversely affected.
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
business has primarily operated on the basis of short-term purchase
orders. We receive some longer term purchase agreements, and
procurement contracts, but we cannot guarantee that we will continue to do so.
Our current purchase agreements can be cancelled or revised without penalty,
depending on the circumstances. We plan production primarily on the basis of
internally generated forecasts of demand based on communications with customers,
and available industry data which makes it difficult to accurately forecast
revenues. If we fail to accurately forecast operating results, our business may
suffer and the value of your investment in eMagin 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
active matrix OLED technology.
Our
prospects could be significantly affected by our ability to develop strategic
alliances with OEMs for incorporation of our active matrix OLED microdisplay
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 could have a material adverse effect on our
business.
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 foreign entities. Some customers in other countries have
longer receivable periods or warranty periods. In addition, many of the foreign
OEMs that are the most likely long-term purchasers of our microdisplays expose
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 expose
us to various risks, including management of a multi-national organization, the
complexities of complying with foreign laws and customs, political instability
and the complexities of taxation in multiple jurisdictions.
Our
business may expose us to product liability claims.
Our
business may expose us to potential product liability claims. Although no such
claims have 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 plan
to 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.
12
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.
Current
adverse economic conditions may adversely impact our business, operating results
and financial condition.
The
current economic conditions and market instability may affect our customers and
suppliers. Any adverse financial or economic impact to our customers
may impact their ability to pay timely, or result in their inability to
pay. It may also impact their ability to fund future purchases, or
increase the sales cycles which could lead to a reduction in revenue and
accounts receivable. Our suppliers may increase their prices or may
be unable to supply needed raw materials on a timely basis which could result in
our inability to meet customers’ demand or affect our gross
margins. Our suppliers may, also, impose more stringent payment terms
on us. The timing and nature of any recovery in the credit and
financial markets remains uncertain, and there can be no assurance that market
conditions will improve in the near future or that our results will not be
materially and adversely affected.
The
substantial number of shares that are or will be eligible for sale could cause
our common stock price to decline even if eMagin 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 November 11, 2009, we have outstanding common shares of
16,961,902 plus (i) options to purchase 2,822,916 shares, (ii) warrants to
purchase 9,267,821 shares and (iii) convertible preferred stock convertible into
7,652,000 shares of common stock.
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 members are elected for
terms that are staggered. This could discourage the efforts by others to obtain
control of eMagin. 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.
Changes
in internal controls or accounting guidance could cause volatility in our stock
price.
Guidance
regarding implementation and interpretation of the provisions of
Section 404 continues to be issued by the standards-setting regulators. As
a result of the ongoing interpretation of new guidance and the audit testing to
be completed in the future, our internal controls over financial reporting may
include an unidentified material weakness which would result in receiving an
adverse opinion on our internal controls over financial reporting from our
independent registered public accounting firm. This could result in significant
additional expenditures responding to the Section 404 internal control
audit, heightened regulatory scrutiny and potentially an adverse effect to the
price of our stock.
In
addition, due to increased regulatory scrutiny surrounding publicly traded
companies, the possibility exists that a restatement of past financial results
could be necessitated by an alternative interpretation of present accounting
guidance and practice. Although management does not currently anticipate that
this will occur, a potential result of such interpretation could be an adverse
effect on our stock price.
13
The
market price of our common stock may be volatile.
The
market price of our common stock has been subject to wide fluctuations. During
our four most recently completed fiscal quarters, the closing price of our stock
ranged from $0.34 to $1.95 and decreased to a low of $0.21 on October 10, 2008.
The market price of our common stock in the future is likely to continue to be
subject to wide fluctuations in response to various factors, including, but not
limited to, the following:
·
|
variations
in our operating results and financial conditions;
|
·
|
actual
or anticipated announcements of technical innovations, new product
developments, or design wins by us or our competitors;
|
·
|
general
conditions in the semiconductor and flat panel display industries;
and
|
·
|
worldwide
economic and financial conditions.
|
14
We and
our representatives may from time to time make written or oral statements that
are “forward-looking,” including statements contained in this prospectus and
other filings with the Securities and Exchange Commission, reports to our
stockholders and news releases. All statements that express expectations,
estimates, forecasts or projections are forward-looking statements. In addition,
other written or oral statements which constitute forward-looking statements may
be made by us or on our behalf. Words such as “expects,” “anticipates,”
“intends,” “plans,” “believes,” “seeks,” “estimates,” “projects,” “forecasts,”
“may,” “should,” variations of such words and similar expressions are intended
to identify forward-looking statements. These statements are not guarantees of
future performance and involve risks, uncertainties, and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in or suggested by such
forward-looking statements. Among the important factors on which such statements
are based are assumptions concerning our ability to obtain additional funding,
our ability to compete against our competitors, our ability to integrate our
acquisitions and our ability to attract and retain key employees.
USE
OF PROCEEDS
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholders. We will not receive any proceeds
from the sale of shares of common stock in this offering. However, we will
receive the sale price of any common stock we sell to the selling stockholders
upon exercise of the warrants owned by the selling stockholders. We expect to
use the proceeds received from the exercise of the warrants, if any, for general
working capital purposes. We have not declared or paid any dividends and do not
currently expect to do so in the near future.
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our
common stock is quoted on the OTC Bulletin Board under the symbol “EMAN.OB.” The
following table sets forth the high and low sales prices as reported by the
NASDAQ Bulletin Board Market for the periods indicated.
High
|
Low
|
|||||||
Fiscal
2006
|
||||||||
First
Quarter
|
$ | 7.10 | $ | 4.60 | ||||
Second
Quarter
|
$ | 5.70 | $ | 2.50 | ||||
Third
Quarter
|
$ | 3.80 | $ | 1.80 | ||||
Fourth
Quarter
|
$ | 2.50 | $ | 1.01 | ||||
Fiscal
2007
|
||||||||
First
Quarter`
|
$ | 1.08 | $ | 0.26 | ||||
Second
Quarter
|
$ | 0.85 | $ | 0.42 | ||||
Third
Quarter
|
$ | 1.64 | $ | 0.65 | ||||
Fourth
Quarter
|
$ | 1.75 | $ | 0.85 | ||||
Fiscal
2008
|
||||||||
First
Quarter
|
$ | 1.47 | $ | 0.88 | ||||
Second
Quarter
|
$ | 1.05 | $ | 0.63 | ||||
Third
Quarter
|
$ | 0.83 | $ | 0.52 | ||||
Fourth
Quarter
|
$ | 0.75 | $ | 0.21 | ||||
Fiscal
2009
|
||||||||
First
Quarter
|
$ | 0.85 | $ | 0.32 | ||||
Second
Quarter
|
$ | 1.40 | $ | 0.60 | ||||
Third
Quarter
|
$ | 2.08 | $ | 0.97 | ||||
Fourth
Quarter (as of November 11, 2009)
|
$ | 2.00 | $ | 1.55 |
As of
November 11, 2009, there were 503 holders of record of our common stock. Because
brokers and other institutions hold many of the shares on behalf of
shareholders, we are unable to determine the actual number of shareholders
represented by these record holders.
Dividends
We have
never declared or paid cash dividends on our common stock. We currently
anticipate that we will retain all future earnings to fund the operation of our
business and do not anticipate paying dividends on our common stock in the
foreseeable future.
15
Consolidated
Statements of Operations Data:
Year
Ended December 31,
|
Nine
Months Ended September 30,
|
|||||||||||||||||||||||||||
2008
|
2007
|
2006
|
2005
|
2004
|
2009
|
2008
|
||||||||||||||||||||||
(thousands)
|
||||||||||||||||||||||||||||
Revenue
|
$ | 18,739 | $ | 17,554 | $ | 8,169 | $ | 3,745 | $ | 3,593 | $ | 17,103 | $ | 13,469 | ||||||||||||||
Cost
of goods sold
|
10,673 | 12,628 | 11,359 | 10,219 | 5,966 | 7,345 | 8,110 | |||||||||||||||||||||
Gross
profit (loss)
|
8,066 | 4,926 | (3,190 | ) | (6,474 | ) | (2,373 | ) | 9,758 | 5,359 | ||||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||||||
Research
and development
|
2,081 | 2,949 | 4,406 | 4,020 | 898 | 1,376 | 1,614 | |||||||||||||||||||||
Selling,
general and administrative
|
6,254 | 6,591 | 8,860 | 6,316 | 4,428 | 5,083 | 4,797 | |||||||||||||||||||||
Total
operating expenses
|
8,335 | 9,540 | 13,266 | 10,336 | 5,326 | 6,459 | 6,411 | |||||||||||||||||||||
(Loss)
income from operations
|
(269 | ) | (4,614 | ) | (16,456 | ) | (16,810 | ) | (7,699 | ) | 3,299 | (1,052 | ) | |||||||||||||||
Other
(expense) income, net
|
(1,590 | ) | (13,874 | ) | 1,190 | 282 | (5,012 | ) | (376 | ) | (1,383 | ) | ||||||||||||||||
Net
(loss) income
|
$ | (1,859 | ) | $ | (18,488 | ) | $ | (15,266 | ) | $ | (16,528 | ) | $ | (12,711 | ) | $ | 2,923 | $ | (2,435 | ) | ||||||||
(Loss)
income per share, basic
|
$ | (0.13 | ) | $ | (1.59 | ) | $ | (1.52 | ) | $ | (1.94 | ) | $ | (1.98 | ) | $ | 0.18 | $ | (0.18 | ) | ||||||||
(Loss)
income per share, diluted
|
$ | (0.13 | ) | $ | (1.59 | ) | $ | (1.52 | ) | $ | (1.94 | ) | $ | (1.98 | ) | $ | 0.12 | $ | (0.18 | ) | ||||||||
Weighted
average number of shares outstanding:
|
||||||||||||||||||||||||||||
Basic
|
14,175 | 11,633 | 10,058 | 8,541 | 6,428 | 16,134 | 13,855 | |||||||||||||||||||||
Diluted
|
14,175 | 11,633 | 10,058 | 8,541 | 6,428 | 24,471 | 13,855 |
Consolidated
Balance Sheet Data:
December
31,
|
September
30,
(unaudited)
|
|||||||||||||||||||||||||||
2008
|
2007
|
2006
|
2005
|
2004
|
2009
|
2008
|
||||||||||||||||||||||
(thousands)
|
||||||||||||||||||||||||||||
Cash
and cash equivalents
|
$
|
2,404
|
$
|
713
|
$
|
1,415
|
$
|
6,727
|
$
|
13,457
|
$
|
3,709
|
$
|
1,272
|
||||||||||||||
Working
capital (deficit)
|
$
|
3,300
|
$
|
(4,708
|
)
|
$
|
(305
|
)
|
$
|
8,868
|
$
|
14,925
|
$
|
7,296
|
$
|
(3,555
|
)
|
|||||||||||
Total
assets
|
$
|
10,104
|
$
|
6,648
|
$
|
7,005
|
$
|
14,142
|
$
|
18,436
|
$
|
11,814
|
$
|
9,191
|
||||||||||||||
Long-term
obligations
|
$
|
---
|
$
|
60
|
$
|
2,229
|
$
|
56
|
$
|
22
|
$
|
---
|
$
|
38
|
||||||||||||||
Total
shareholders’ equity (capital deficit)
|
$
|
3,661
|
$
|
(4,170
|
)
|
$
|
(1,164
|
)
|
$
|
10,401
|
$
|
16,447
|
$
|
8,243
|
$
|
(2,888
|
)
|
16
Introduction
The
following discussion should be read in conjunction with the Financial Statements
and Notes thereto. Our fiscal year ends December 31. This document contains
certain forward-looking statements including, among others, anticipated trends
in our financial condition and results of operations and our business strategy.
(See Part I, Item 1A, "Risk Factors "). These forward-looking statements are
based largely on our current expectations and are subject to a number of risks
and uncertainties. Actual results could differ materially from these
forward-looking statements. Important factors to consider in evaluating such
forward-looking statements include (i) changes in external factors or in our
internal budgeting process which might impact trends in our results of
operations; (ii) unanticipated working capital or other cash requirements; (iii)
changes in our business strategy or an inability to execute our strategy due to
unanticipated changes in the industries in which we operate; and (iv) various
competitive market factors that may prevent us from competing successfully in
the marketplace.
Overview
We design
and manufacture miniature displays, which we refer to as
OLED-on-silicon-microdisplays, and microdisplay modules for virtual imaging,
primarily for incorporation into the products of other manufacturers.
Microdisplays are typically smaller than many postage stamps, but when viewed
through a magnifier they can contain all of the information appearing on a
high-resolution personal computer screen. Our microdisplays use organic light
emitting diodes, or OLEDs, which emit light themselves when a current is passed
through the device. Our technology permits OLEDs to be coated onto silicon chips
to produce high resolution OLED-on-silicon microdisplays.
We
believe that our OLED-on-silicon microdisplays offer a number of advantages in
near to the eye applications over other current microdisplay technologies,
including lower power requirements, less weight, fast video speed without
flicker, and wider viewing angles. In addition, many computer and video
electronic system functions can be built directly into the OLED-on-silicon
microdisplay, resulting in compact systems with lower expected overall system
costs relative to alternate microdisplay technologies.
Since our
inception in 1996 through 2004, we derived the majority of our revenues from
fees paid to us under research and development contracts, primarily with the
U.S. federal government. We have devoted significant resources to the
development and commercial launch of our products. We commenced limited initial
sales of our SVGA+ microdisplay in May 2001 and commenced shipping samples of
our SVGA-3D microdisplay in February 2002. As of November 11, 2009, we have a
backlog of approximately $4.6 million in products ordered for delivery through
June 30, 2010. This backlog consists of non-binding purchase orders and purchase
agreements. These products are being applied or considered for near-eye and
headset applications in products such as thermal imagers, night vision goggles,
entertainment headsets, handheld Internet and telecommunication appliances,
viewfinders, and wearable computers to be manufactured by original equipment
manufacturer (OEM) customers. We have also shipped a limited number of our Z800
3DVisor personal display systems. In addition to marketing OLED-on-silicon
microdisplays as components, we also offer microdisplays as an integrated
package, which we call Microviewer that includes a compact lens for viewing the
microdisplay and electronic interfaces to convert the signal from our customer's
product into a viewable image on the microdisplay.
We hold a
license from Eastman Kodak for use of their OLED related technology and we have
developed a strong portfolio of our own patents, manufacturing know-how and
technology to create high performance OLED-on-silicon microdisplays and related
optical systems. We believe our technology and intellectual property portfolio,
gives us a leadership position in OLED and OLED-on-silicon microdisplay
technology. We believe that we are the only company to demonstrate publicly and
market full-color small molecule OLED-on-silicon microdisplays.
Company
History
We began
as a developmental stage company. As of January 1, 2003, we were no longer
classified as a development stage company. We have transitioned to manufacturing
our product and intend to significantly increase our marketing, sales, and
research and development efforts, and expand our operating infrastructure.
Currently, most of our operating expenses are labor related and therefore
semi-fixed. If we are unable to generate significant revenues, our net losses in
any given period could be greater than expected.
Critical
Accounting Policies
The
Securities and Exchange Commission ("SEC") defines "critical accounting
policies" as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods. Not all of the accounting policies require management to
make difficult, subjective or complex judgments or estimates. However, the
following policies could be deemed to be critical within the SEC
definition.
17
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 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. We record a reserve for estimated sales returns, which is reflected as
a reduction of revenue at the time of revenue
recognition. Products sold directly to consumers have a thirty
day right of return. Revenue on consumer products is deferred until
the right of return has expired.
Revenues
from research and development activities 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 from research and development
activities relating to 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. These rates are
subject to audit by the other party.
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. 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.
Fair
Value of Financial Instruments
eMagin’s
cash, cash equivalents, accounts receivable, short-term investments, accounts
payable and debt are stated at cost which approximates fair value due to the
short-term nature of these instruments.
Stock-based
Compensation
eMagin
maintains several stock equity incentive plans. The 2005 Employee
Stock Purchase Plan (the “ESPP”) provides our employees with the opportunity to
purchase common stock through payroll deductions. Employees purchase
stock semi-annually at a price that is 85% of the fair market value at certain
plan-defined dates. As of November 11, 2009, the number of shares of
common stock available for issuance was 300,000. As of November 11, 2009,
the plan had not been implemented.
The 2003
Stock Option Plan (the”2003 Plan”) provides for grants of shares of common stock
and options to purchase shares of common stock to employees, officers, directors
and consultants. Under the 2003 plan, an ISO grant is granted
at the market value of our common stock at the date of the grant and a non-ISO
is granted at a price not to be less than 85% of the market value of the common
stock. These options have a term of up to 10 years and vest over a
schedule determined by the Board of Directors, generally over a five year
period. The amended 2003 Plan provides for an annual increase in common
stock available for issuance by 3% of the diluted shares outstanding on January
1 of each year for a period of 9 years which commenced January 1,
2005.
The 2008
Incentive Stock Plan (“the 2008 Plan”) adopted and approved by the Board of
Directors on November 5, 2008 provides for shares of common stock and options to
purchase shares of common stock to employees, officers, directors and
consultants. The 2008 Plan has an aggregate of 2,000,000 shares. As
of November 11, 2009, there were 498,533 shares of common stock issued to
consultants and there were 1,278,841 options granted from the
plan.
The
Company accounts for the measurement and recognition of compensation expense for
all share-based payment awards made to employees and directors by estimating the
fair value of stock awards 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.
18
The
following table presents certain financial data as a percentage of total revenue
for the periods indicated. Our historical operating results are not necessarily
indicative of the results for any future period.
Year
Ended December 31,
|
Nine
Months Ended September 30,
|
|||||||||||||||||||
2008
|
2007
|
2006
|
2009
|
2008
|
||||||||||||||||
(Unaudited)
|
||||||||||||||||||||
Revenue
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||
Cost
of goods sold
|
57 | 72 | 139 | 43 | 60 | |||||||||||||||
Gross
profit (loss)
|
43 | 28 | (39 | ) | 57 | 40 | ||||||||||||||
Operating
expenses:
|
||||||||||||||||||||
Research
and development
|
11 | 17 | 54 | 8 | 12 | |||||||||||||||
Selling,
general and administrative
|
33 | 38 | 109 | 29 | 36 | |||||||||||||||
Total
operating expenses
|
44 | 55 | 163 | 37 | 48 | |||||||||||||||
(Loss)
income from operations
|
(1 | ) | (27 | ) | (202 | ) | 21 | (8 | ) | |||||||||||
Other
(expense) income, net
|
(9 | ) | (78 | ) | 15 | (1 | ) | (10 | ) | |||||||||||
Net
(loss) income
|
(10 | )% | (105 | )% | (187 | )% | 19 | % | (18 | )% |
The
following table presents certain financial data for the periods indicated.
Our historical operating results are not necessarily indicative of the results
for any future period.
Year
ended December 31,
|
Nine
Months Ended
September
30,
|
|||||||||||||||||||
2008
|
2007
|
2006
|
2009
|
2008
|
||||||||||||||||
(Unaudited)
|
||||||||||||||||||||
(In
thousands, except per share data)
|
||||||||||||||||||||
Revenue
|
$
|
18,739
|
$
|
17,554
|
$
|
8,169
|
$
|
17,103
|
$
|
13,469
|
||||||||||
Cost
of goods sold
|
10,673
|
12,628
|
11,359
|
7,345
|
8,110
|
|||||||||||||||
Gross
profit (loss)
|
8,066
|
4,926
|
(3,190
|
)
|
9,758
|
5,359
|
||||||||||||||
Operating
expenses:
|
||||||||||||||||||||
Research
and development
|
2,081
|
2,949
|
4,406
|
1,376
|
1,614
|
|||||||||||||||
Selling,
general and administrative
|
6,254
|
6,591
|
8,860
|
5,083
|
4,797
|
|||||||||||||||
Total operating expenses
|
8,335
|
9,540
|
13,266
|
6,459
|
6,411
|
|||||||||||||||
(Loss)
income from operations
|
(269
|
)
|
(4,614
|
)
|
(16,456
|
)
|
3,299
|
(1,052
|
)
|
|||||||||||
Other
(expense) income, net
|
(1,590
|
)
|
(13,874
|
)
|
1,190
|
(376
|
)
|
(1,383
|
)
|
|||||||||||
Net
(loss) income
|
$
|
(1,859
|
)
|
$
|
(18,488
|
)
|
$
|
(15,266
|
)
|
$
|
2,923
|
$
|
(2,435
|
)
|
||||||
Net
(loss) income per share, basic
|
$
|
(0.13
|
)
|
$
|
(1.59
|
)
|
$
|
(1.52
|
)
|
$
|
0.18
|
$
|
(0.18
|
)
|
||||||
Net
(loss) income per share, diluted
|
$
|
(0.13
|
)
|
$
|
(1.59
|
)
|
$
|
(1.52
|
)
|
$
|
0.12
|
$
|
(0.18
|
)
|
19
THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER30, 2009 COMPARED TO THREE MONTHS AND NINE
MONTHS ENDED SEPTEMBER30, 2008
Revenues
Revenues
for the three and nine months ended September 30, 2009 were approximately
$6.1 million and $17.1 million, respectively, as compared to approximately $5.2
million and $13.5 million for the three and nine months ended September 30,
2008, respectively, an increase of approximately 18% and 27%,
respectively. Higher revenue for the three and nine month periods was
due to increased customer demand and product availability.
For the
three and nine months ended September 30, 2009, product revenue increased
approximately $1.1 million and $3.4 million, respectively, as compared to the
three and nine months ended September 30, 2008. The increase was due
to higher customer demand and increased product availability for our OLED
displays in the first nine months of 2009 as compared to the first nine months
of 2008. For the three months ended September 30, 2009, contract revenue
decreased approximately $0.2 million as compared to the three months ended
September 30, 2008 and for the nine months ended September 30, 2009 increased
approximately $0.2 million as compared to the nine months ended September 30,
2008. The change in revenue is a result of fluctuations in contract
activity.
Cost
of Goods Sold
Cost of
goods sold includes direct and indirect costs associated with
production. Cost of goods sold for the three and nine months ended
September 30, 2009 were approximately $2.6 million and $7.3 million as compared
to approximately $2.8 million and $8.1 million for the three and nine months
ended September 30, 2008, a decrease of approximately $0.2 million and $0.8
million, respectively. Cost of goods sold as a percentage of revenues
improved from 54% for the three months ended September 30, 2008 to 43% for the
three months ended September 30, 2009. Cost of goods sold as a percentage of
revenues improved from 60% for the nine months ended September 30, 2008 to 43%
for the nine months ended September 30, 2009. Cost of goods is comprised
primarily of material and labor cost. The labor portion of cost of goods is
mostly fixed. Improved manufacturing yield, lower royalty expense and lower
warranty expense resulted in a lower cost of goods sold
percentage.
The
following table outlines product, contract and total gross profit and related
gross margins for the three and nine months ended September 30, 2009 and
2008 (dollars in thousands):
|
Three months ended
September 30,
|
Nine months ended
September
30,
|
||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
(unaudited)
|
(unaudited)
|
||||||||||||||
Product
revenue gross profit
|
|
$
|
3,264
|
|
$
|
1,769
|
|
$
|
8,743
|
|
$
|
4,109
|
|
|||
Product
revenue gross margin
|
|
62
|
%
|
42
|
%
|
60
|
%
|
37
|
%
|
|||||||
Contract
revenue gross profit
|
|
$
|
236
|
|
$
|
615
|
|
$
|
1,015
|
|
$
|
1,250
|
|
|||
Contract
revenue gross margin
|
|
28
|
%
|
61
|
%
|
40
|
%
|
54
|
%
|
|||||||
Total
gross profit
|
|
$
|
3,500
|
|
$
|
2,384
|
|
$
|
9,758
|
|
$
|
5,359
|
|
|||
Total
gross margin
|
|
57
|
%
|
46
|
%
|
57
|
%
|
40
|
%
|
|||||||
|
The
gross profit for the three and nine months ended September 30, 2009 was
approximately $3.5 million and $9.8 million as compared to approximately $2.4
million and $5.4 million for the three and nine months ended September 30, 2008,
an increase of $1.1 million and $4.4 million, respectively. Gross
margin was 57% for the three months ended September 30, 2009 up from 46% for the
three months ended September 30, 2008. Gross margin was 57% for the
nine months ended September 30, 2009 up from 40% for the nine months ended
September 30, 2008. The increase was mainly attributed to the fuller
utilization of our fixed production overhead due to improved yields and a
reduction in royalty and warranty expenses. See Note 11 to the
September 30, 2009 Condensed Consolidated Financial Statements - Commitments and
Contingencies for further discussion on the royalty
payments.
20
The
product gross profit for the three and nine months ended September 30, 2009
was approximately $3.3 million and $8.7 million as compared to approximately
$1.8 million and $4.1 million for the three and nine months ended September 30,
2008, an increase of $1.5 million and $4.6 million,
respectively. Product gross margin was 62% for the three months ended
September 30, 2009 up from 42% for the three
months
ended September 30, 2008. Product gross margin was 60% for the nine
months ended September 30, 2009 up from 37% for the nine months ended September
30, 2008. The increase was attributed to the fuller utilization of
our fixed production overhead due to improved yields and a reduction in royalty
and warranty expenses. See Note 11 to the September 30, 2009 Condensed
Consolidated Financial Statements - Commitments and Contingencies for further
discussion on the royalty payments.
The
contract gross profit for the three and nine months ended September 30,
2009 was approximately $0.2 million and $1.0 million as compared to
approximately $0.6 million and $1.3 million for the three and nine months ended
September 30, 2008, a decrease of $0.4 million and $0.3 million,
respectively. Contract gross margin was 28% for the three months
ended September 30, 2009 down from 61% for the three months ended September 30,
2008. Contract gross margin was 40% for the nine months ended
September 30, 2009 down from 54% for the nine months ended September 30,
2008. The contract gross margin is dependent upon the mix of costs,
internal versus external third party costs, with the external third party costs
causing a lower gross margin and reducing the contract gross
profit.
Operating
Expenses
Research and
Development. Research and development expenses include salaries,
development materials and other costs specifically allocated to the development
of new microdisplay products, OLED materials and subsystems. Research
and development expenses for the three and nine months ended September
30, 2009 were approximately $0.5 million and $1.4 million, respectively, as
compared to $0.3 million and $1.6 million for the three and nine months ended
September 30, 2008, an increase of approximately $0.2 million and a decrease of
approximately $0.2 million, respectively. The increase of $0.2 million was
primarily due to the lower allocation of research and development resources and
expenses related to contracts to cost of goods sold offset by the reduction in
expense due to the streamlining of the research and development effort in the
subsystems area. The decrease of $0.2 million was primarily related
to the reduction in expense due to the streamlining of the research and
development effort in the subsystems area.
Selling, General and
Administrative. Selling, general and administrative
expenses consist principally of salaries, fees for professional services
including legal fees, as well as other marketing and administrative
expenses. Selling, general and administrative expenses for the three
and nine months ended September 30, 2009 were approximately $1.8 million and
$5.1 million, respectively, as compared to approximately $1.3 million and
$4.8 million for the three and nine months ended September 30, 2008, an increase
of approximately $0.5 million and $0.3 million, respectively. The
increase of $0.5 million for the three months is primarily related to an
increase of personnel costs, non-cash compensation, and professional
services. The increase of $0.3 million for the nine months is
primarily related to an increase in personnel costs, non-cash compensation, and
tradeshow costs, offset by a decrease in reserve for allowance for bad
debts.
Other Income (Expense), net.
Other income (expense), net consists primarily of interest income earned on
investments, interest expense related to the secured debt, and income from the
licensing of intangible assets.
For the
three and nine months ended September 30, 2009, interest expense was
approximately $76 thousand and $417 thousand, respectively, as compared to
$508 thousand and $1.7 million, respectively, for the three and nine months
ended September 30, 2008. For the three and nine months ended
September 30, 2009, the interest expense associated with debt was $7 thousand
and $48, respectively, loan fees associated with the new line of credit was $7
thousand, and the amortization of the deferred costs associated with the debt
was $62 thousand and $362 thousand, respectively. The breakdown of
the interest expense for the three and nine month period in 2008 was as
follows: interest expense associated with debt of approximately $177
thousand and $501 thousand, respectively; the amortization of the deferred costs
and waiver fees associated with the debt of approximately $331 thousand and $1.2
million, respectively; and the amortization of the debt discount associated with
the debt of approximately $0 and $25 thousand, respectively. The
decrease in interest expense for the three and nine months ended September 30,
2009 as compared to the three and nine months ended September 30, 2008 was
primarily a result of carrying a lower balance on our line of credit, the
repayment and conversion of the 8% Senior Secured Convertible Notes in December
2008, and lower deferred debt issuance costs.
Other
income for the three and nine months ended September 30, 2009 was approximately
$1 thousand and $41 thousand, respectively, as compared to $84 thousand and $294
thousand, respectively, for the three and nine months ended September 30,
2008. The other income for the three and nine months ended September 30,
2009 was interest income of approximately $1 thousand and $3 thousand,
respectively, and for a settlement of a liability, $0 and $38 thousand,
respectively. Other income for the three and nine months ended September 30,
2008 was interest income of approximately $2 thousand and $6 thousand,
respectively; $142 thousand and $396 thousand, respectively, was income from a
gain on the license of intangible assets; $0 and $18 thousand, respectively, of
income from equipment salvage; and is offset by approximately $60 thousand and
$126 thousand, respectively, of expense from registration payment
arrangements. See Note 11 to the September 30, 2009
Condensed Consolidated Finance Statements: Commitments and
Contingencies – Royalty Payments for additional information.
21
Revenues
Revenues
increased by approximately $1.1 million to a total of approximately $18.7
million for the year ended December 31, 2008 from approximately $17.6 million
for the year ended December 31, 2007, representing an increase of 7%. This
increase was primarily due to increased contract revenue from research and
development projects. Our contract revenue increased approximately $1.6 million
while our product revenue decreased approximately $0.5 million. Our current
expectation is that total revenue will continue to grow in 2009 if we
successfully execute our business plan.
Cost
of Goods Sold
Cost of
goods sold includes direct and indirect costs associated with production of our
products. Cost of goods sold for the years ended December 31, 2008 and 2007 was
approximately $10.7 million and $12.6, respectively, a decrease of $1.9
million. The decrease included an inventory write-off of
approximately $0.4 million in 2007 related to a non-recurring production issue
that occurred during the fourth quarter of 2007. An increase in yield in 2008
accounted for the remaining difference.
Cost of
goods sold as a percentage of revenues improved from 72% in 2007 to 57% in 2008.
Cost of goods is comprised primarily of material and labor cost. The labor
portion of cost of goods is mostly fixed. Increased display production output
volume and improved manufacturing yield results in a lower cost of goods sold
percentage.
The gross
profit was approximately $8.1 million for the year ended December 31, 2008 and
the gross profit was approximately $4.9 million for the year ended December 31,
2007. The gross margin was 43% for the year ended December 31, 2008
as compared to the gross margin of 28% for the year ended December 31,
2007. The gross margin improvement was attributed primarily to
improved manufacturing yield.
Research
and Development Expenses
Research
and development expenses include salaries, development materials and other costs
specifically allocated to the development of new microdisplay products, OLED
materials and subsystems. Research and development expenses for the
year ended December 31, 2008 were approximately $2.1 million as compared to
approximately $2.9 million for the year ended December 31, 2007, a decrease of
$0.8 million. The 29% decrease was due to the re-deployment of
research and development personnel to production contract services which are
included in cost of goods sold and to a streamlining of the research and
development effort in the subsystems area which resulted in expense
reductions.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses consist primarily of salaries and related
expenses for employees in the functional areas of business development, finance,
information technology, quality assurance and other corporate expenses. This
includes fees for professional services, such as audit and legal fees associated
with audit, SEC filings, and other public company related matters, as well as
other marketing and administrative expenses. General and
administrative expenses decreased by approximately $0.3 million to a total of
approximately $6.3 million for the year ended December 31, 2008 from $6.6
million for the year ended December 31, 2007. The 5% decrease was primarily
related to a reduction of marketing expenses, personnel costs and other cost
reductions.
Other
(Expense) Income
Other
(expense) income, net consists primarily of interest income earned on
investments, interest expense related to the secured debt, loss from the change
in the derivative liability, loss on the extinguishment of debt and other income
from the licensing of intangible assets.
For the
year ended December 31, 2008, interest expense was approximately $2.0 million as
compared to $3.1 million for the year ended December 31,
2007. Interest expense for the year ended December 31, 2008 was
comprised of interest associated with debt of approximately $0.7 million; the
amortization of the deferred costs associated with debt of approximately $1.3
million; the amortization of the debt discount associated with debt of $25
thousand; and other expenses of approximately $2 thousand. Interest
expense for 2007 consisted of interest expense associated with debt of
approximately $744 thousand; the amortization of the deferred costs associated
with debt of approximately $418 thousand; and the amortization of the debt
discount associated with the debt of approximately $1.9 million. The
majority of the decrease in interest expense in 2008 as compared to 2007 was a
reduction in the amortization of debt discount associated with debt of $1.9
million offset by an increase in the amortization of deferred costs associated
with debt of $0.9 million.
22
For the
year ended December 31, 2008, the change in the derivative liability was $0
compared to a loss of approximately $853 thousand for the year ended December
31, 2007. The loss on extinguishment of debt was $0 for the year ended December
31, 2008 as compared to a loss of $10.7 million for the year ended December 31,
2007. Other income for the year ended December 31, 2008
was approximately $400 thousand which consisted of interest income of
approximately $11 thousand; approximately $18 thousand of income from
equipment salvage; gain on the license of intangibles of $557 thousand; and
offset by approximately $186 thousand of liquidated damages expense related to
registration payment arrangements as compared to approximately $815 thousand for
the year ended December 31, 2007 which consisted of interest income of
approximately $43 thousand, a gain on the license of intangible assets of $869
thousand, offset by a write-off of a miscellaneous receivable of $103 thousand,
and other income of $7 thousand.
Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenues
Revenues
increased by approximately $9.4 million to a total of approximately $17.6
million for the year ended December 31, 2007 from approximately $8.2 million for
the year ended December 31, 2006, representing an increase of 115%. This
increase was due to increased microdisplay demand and increased production
capabilities. Contract revenue increased approximately $1.2 million while our
product revenue increased approximately $8.2 million. Average price per unit for
microdisplays was $371 in 2007 and $386 in 2006.
Cost
of Goods Sold
Cost of
goods sold includes direct and indirect costs associated with production of our
products. Cost of goods sold for the years ended December 31, 2007 and 2006 was
approximately $12.6 million and $11.4, respectively, an increase of $1.3
million. The increase included an inventory write-off of approximately $0.4
million and an increase in our warranty return reserve of approximately $0.6
million, both related to a non-recurring production issue that occurred during
the fourth quarter of 2007. The non-recurring production issue involved changing
a production procedure without adequate testing prior to implementation. The
Company has taken steps to ensure any procedural changes in the production
process will be thoroughly tested prior to implementation.
Cost of
goods sold as a percentage of revenues improved from 139% in 2006 to 72% in
2007. Cost of goods is comprised primarily of material and labor cost. The labor
portion of cost of goods is mostly fixed. Increased volume results in a lower
cost of goods sold percentage. The improvement in cost of goods sold in 2007 was
due primarily to both a streamlining of the Company’s workforce in mid-2006 that
had a significant full year effect on the fixed portion of cost of goods sold in
2007 and the effect of the revenue increase.
The gross
profit was approximately $4.9 million for the year ended December 31, 2007 and
the gross loss was approximately ($3.2) million for the year ended December 31,
2006. The gross margin was 28% for the year ended December 31, 2007 as compared
to the gross loss of (39%) for the year ended December 31, 2006. The gross
margin improvement was attributed to fuller utilization of our fixed production
overhead due to higher unit production volume.
Research
and Development Expenses
Research
and development expenses included salaries, development materials and other
costs specifically allocated to the development of new microdisplay products,
OLED materials and subsystems. Research and development expenses for
the year ended December 31, 2007 were approximately $2.9 million as compared to
approximately $4.4 million for the year ended December 31, 2006. The
decrease was primarily due to a decrease in research and development personnel
and related expenses.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses consist primarily of salaries and related
expenses for employees in the functional areas of business development, finance,
information technology, quality assurance and other corporate expenses. This
includes fees for professional services, such as audit and legal fees associated
with audit, SEC filings, and other public company related matters, as well as
other marketing and administrative expenses. General and
administrative expenses decreased by approximately $2.3 million to a total of
approximately $6.6 million for the year ended December 31, 2007 from $8.9
million for the year ended December 31, 2006. The decrease in selling, general
and administrative expenses was due primarily to a reduction of personnel and
related expenses and a decrease in marketing expenses.
23
Other
(Expense) Income
Other
(expense) income, net consists primarily of interest income earned on
investments, interest expense related to the secured debt, loss from the change
in the derivative liability, loss on the extinguishment of debt and other income
from the licensing of intangible assets.
For the
year ended December 31, 2007, interest expense was approximately $3.1 million as
compared to $1.3 million for the year ended December 31,
2006. Interest expense for 2007 consisted of interest expense
associated with debt of approximately $744 thousand; the amortization of the
deferred costs associated with debt of approximately $418 thousand; and the
amortization of the debt discount associated with the debt of approximately $1.9
million. Interest expense for the year ended December 31, 2006 was
comprised of interest associated with debt of approximately $124 thousand; the
amortization of the deferred costs associated with the notes payable of
approximately $221 thousand; and the amortization of the debt discount
associated with the debt of approximately $956 thousand. The increase
of $1.8 million of interest expense in 2007 as compared to 2006 was comprised of
an increase in the interest expense associated with debt of $0.6 million, an
increase in the amortization of deferred costs associated with debt of $0.2
million and an increase in the amortization of the debt discount associated with
debt of $0.9 million and was a result of higher debt balances in
2007.
For the
year ended December 31, 2007, the change in the derivative liability was a loss
of approximately $853 thousand as compared to a gain of approximately $2.4
million ended December 31, 2006.The loss on extinguishment of
debt was $10.7 million for the year ended December 31, 2007 as compared to $0
for the year ended December 31, 2006.
Other
income for the year ended December 31, 2007 was approximately $815 thousand
which consisted of interest income of approximately $43 thousand, a gain on the
license of intangible assets of $869 thousand, offset by a write-off of a
miscellaneous receivable of $103 thousand, and other income of $7 thousand as
compared to $91 thousand for the year ended December 31,
2006.
As of
September 30, 2009, we had approximately $3.7 million of cash and investments as
compared to $2.4 million as of December 31, 2008. The change in cash
and investments was primarily due to cash provided by operations of
approximately $3.5 million offset by cash used for financing and investing
activities of approximately $2.2 million.
Year
ended December 31,
|
Nine
Months Ended
September30,
|
|||||||||||||||||||
2008
|
2007
|
2006
|
2009
|
2008
|
||||||||||||||||
Cash
flow data:
|
(unaudited)
|
|||||||||||||||||||
Net
cash provided by (used in) operating activities
|
$
|
138
|
$
|
(1,943
|
)
|
$
|
(10,389
|
)
|
$
|
3,451
|
$
|
(1,908
|
)
|
|||||||
Net
cash provided by (used in) investing activities
|
(311
|
)
|
61
|
(257
|
)
|
(492
|
)
|
(236
|
)
|
|||||||||||
Net
cash provided by (used in) financing
activities
|
1,864
|
1,180
|
5,334
|
(1,654
|
)
|
2,703
|
||||||||||||||
Net
increase in cash and cash equivalents
|
1,691
|
(702
|
)
|
(5,312
|
)
|
1,305
|
559
|
|||||||||||||
Cash
and cash equivalents, beginning of period
|
713
|
1,415
|
6,727
|
2,404
|
713
|
|||||||||||||||
Cash
and cash equivalents, end of period
|
$
|
2,404
|
$
|
713
|
$
|
1,415
|
$
|
3,709
|
$
|
1,272
|
Cash flow
provided by operating activities during the nine months ended September 30, 2009
was approximately $3.5 million, attributable to our net income of approximately
$2.9 million, non-cash expenses of $1.1 million offset by approximately $0.6
million from the change in operating assets and liabilities. Cash flow used
in operating activities during the nine months ended September 30, 2008 was
approximately $1.9 million primarily attributable to our net loss of $2.4
million and an increase in accounts receivable of $1.9 million offset by
non-cash expenses of $2.5 million.
Cash used
in investing activities during the nine months ended September 30, 2009 and 2008
was approximately $492 thousand and $236 thousand, respectively, used for
equipment purchases.
Cash used
in financing activities during the nine months ended September 30, 2009 was
approximately $1.7 million to pay down the line of credit. Cash
provided by financing activities during the nine months ended September 30, 2008
was approximately $2.7 million and was comprised of approximately $1.6 million
from the sale of common stock, $1.8 million from the line of credit, and offset
by payments on debt of $0.7 million.
24
Contractual
Obligations
The
following chart describes the outstanding contractual obligations of eMagin as
of November 11, 2009 (in thousands):
Payments
due by period
|
||||||||||||||||
Total
|
1
Year
|
2-3
Years
|
4-5
Years
|
|||||||||||||
Operating
lease obligations
|
$
|
5,104
|
$
|
1,093
|
$
|
2,262
|
$
|
1,749
|
||||||||
Line
of credit
|
50
|
50
|
—
|
—
|
||||||||||||
Purchase
obligations (a)
|
2,595
|
2,595
|
—
|
—
|
||||||||||||
Other
long-term liabilities (b)
|
625
|
125
|
250
|
250
|
||||||||||||
Total
|
$
|
8,374
|
$
|
3,863
|
$
|
2,512
|
$
|
1,999
|
(a)
The majority of purchase orders outstanding contain no cancellation fees
except for minor re-stocking fees.
|
|
(b)
This amount represents minimum royalty
payments.
|
Off-Balance
Sheet Arrangements
We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
Effect
of Recently Issued Accounting Pronouncements
In June 2009, the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“Codification” or “ASC”) became the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (“GAAP”) except
for additional authoritative rules and interpretive releases issued by the SEC.
The Codification did not create any new GAAP standards but incorporated existing
accounting and reporting standards into a new topical structure with a new
referencing system to identify authoritative accounting standards, replacing the
prior references to Statement of Financial Accounting Standards (“SFAS”),
Emerging Issues Task Force (“EITF”), FASB Staff Position (“FSP”),
etc. Authoritative standards included in the Codification are
designated by their ASC topical reference, and new standards will be designated
as Accounting Standards Updates (“ASU”), with a year and assigned sequence
number. Beginning with the interim report for the quarter ended
September 30, 2009, the Company adopted the Codification and it had no effect on
its financial position, results of operations, or cash flows .
Market Rate Risk. We
are exposed to market risk related to changes in interest rates and foreign
currency exchanges rates.
Interest Rate Risk. We
hold our assets in cash and cash equivalents. We do not hold
derivative financial instruments or equity securities.
Foreign Currency Exchange Rate
Risk. Our
revenue and expenses are denominated in U.S. dollars. We have conducted some
transactions in foreign currencies and expect to continue to do so; we do not
anticipate that foreign exchange gains or losses will be significant. We have
not engaged in foreign currency hedging to date.
Our
international business is subject to risks typical of international activity,
including, but not limited to, differing economic conditions; change in
political climates; differing tax structures; and other regulations and
restrictions. Accordingly, our future results could be impacted by changes in
these or other factors.
25
BUSINESS
Recent
Developments
We have
entered into an agreement effective as of September 1, 2009 (the “Agreement”),
with Access Business Finance, LLC (“Access”) pursuant to which we may borrow an
amount not to exceed $3,000,000. The Agreement provides that from
time to time we may request advances in an amount equal to the lesser of
(i) Borrowing Base less the Availability Reserves and (ii) the Maximum
Amount. The interest on the notes is equal to the Prime Rate plus
4.00% but may not be less than 7.25%. The term of the Agreement
is for one year and will automatically renew for successive one year terms
unless, at least 60 days’ prior to the end of the current term, we give
Access prior written notice of our intent not to renew or if
Access, at least ten days prior to the end of the current term, gives
us written notice of its intent not to renew. Our obligations under the
Agreement are secured by our assets.
As
previously reported on a Form 8-K that was filed with the Securities and
Exchange Commission on December 23, 2008, pursuant to a Securities Purchase
Agreement (the “Securities Purchase Agreement”) entered into on December 18,
2008 between the Company and Stillwater on December 22, 2008 (the “Closing”),
the Company sold Stillwater for an aggregate purchase price of $4,033,000 an
aggregate of 4,033 shares of its Series B Convertible Preferred Stock (the
“Preferred Stock”), which have a stated value of $1,000 per share, a conversion
price of $0.75 per share and have the rights and preferences set forth in the
Certificate of Designations of Series B Convertible Preferred Stock filed with
the Secretary of State for the State of Delaware on December 19, 2008 (the
“Certificate of Designations”), and warrants to purchase 1,875,467 shares of
common stock at $1.03 per share (the “Warrants”). The Warrants
terminate on December 22, 2013.
Pursuant
to the terms of the Securities Purchase Agreement, the Company used the proceeds
from the sale of the Preferred Stock exclusively to repay $4,033,000 of its
Amended and Restated 8% Senior Secured Convertible Notes (the “Notes”)
which matured on December 22, 2008.
Pursuant
to the Securities Purchase Agreement, the members of the Company’s board of
directors, and certain executive officers executed lockup agreements pursuant to
which, subject to the terms of the lockup agreement, they were restricted from
selling the Company’s stock that they beneficially own for 180 days from the
Closing.
On
December 18, 2008, the Company entered into an Exchange Agreement (the “Exchange
Agreement”) with three holders (“Holders”) of its outstanding
Notes. Pursuant to the Exchange Agreement, on December 22, 2008, the
Holders exchanged $1,700,000 of their outstanding Notes and accrued
and unpaid interest thereon and received 1,706 shares of the Preferred
Stock (the amount of the outstanding principal and accrued and
unpaid interest due on the Notes exchanged divided by
$1,000).
Pursuant
to the Securities Purchase Agreement, the Company filed the Certificate of
Designations with the State of Delaware on December 19, 2008. The
Certificate of Designations designates 10,000 shares of its Preferred
Stock. The Preferred Stock has a stated value of $1,000 and has a
conversion price of $0.75 per share. The Preferred Stock does not pay
interest. The holders of the Preferred Stock are not entitled to receive
dividends unless the Company’s Board of Directors declared a dividend for
holders of its common stock and then the dividend shall be equal to the amount
that such holder would have been entitled to receive if the holder converted its
Preferred Stock into shares of its common stock. Each share of
Preferred Stock has voting rights equal to (i) the number of shares
of its common stock issuable upon conversion of such shares of
Preferred Stock at such time (determined without regard to the shares of common
stock so issuable upon such conversion in respect of accrued and unpaid
dividends on such share of Preferred Stock) when the Preferred Stock votes
together with its common stock or any other class or series of its
stock and (ii) one vote per share of Preferred Stock when such vote is not
covered by the immediately preceding clause. The Company may at its option
redeem the Preferred Stock by providing the required notice to the holders of
the Preferred Stock and paying an amount equal to $1,000 multiplied by the
number of shares for all of such holder’s shares of outstanding Preferred Stock
to be redeemed.
The
Company also entered into a Registration Rights Agreement with Stillwater to
register for resale the shares of the common stock issuable upon
conversion of the Preferred Stock sold in the offering and the shares of common
stock issuable upon exercise of the warrants. Subject to the terms of
the Registration Rights Agreement, the Company is required to file a
registration statement (the “Registration Statement”) on Form S-1 with the
Securities and Exchange Commission (the “SEC”) within 30 days following the date
that the Company is permitted to file a registration statement by (i) the rules
and regulations of the Securities and Exchange Commission and (ii) the
agreements set forth on Schedule B to the Registration Rights Agreement, which
as of the date of the Exchange Agreement, December 22, 2008 prohibits the
Company from filing the initial Registration Statement until certain other
registration statements are filed which as of November 11, 2009 have not been
completed. After filing the Registration Statement, the Company is to cause such
Registration Statement to be declared effective under the Securities Act of
1933, (the “Act”) as promptly as possible after the filing thereof, but in no
event later than 90 days after the filing date (or no later than 120 days after
the filing date in the event of SEC “full review” of the Registration
Statement). The Holders of Notes that exchanged their Notes pursuant to the
Exchange Agreement received the same registration rights as
Stillwater.
Pursuant
to the Securities Purchase Agreement, the Company claims an exemption from the
registration requirements of the Act for the private placement of these
securities pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the “Act”) and/or Regulation D promulgated thereunder since, among other
things, the transaction did not involve a public offering, the investors were
accredited investors and/or qualified institutional buyers, the investors had
access to information about the Company and their investment, the investors took
the securities for investment and not resale, and the Company took appropriate
measures to restrict the transfer of the securities.
26
On April
2, 2008, the Company entered into a Securities Purchase Agreement, pursuant to
which it sold to certain qualified institutional buyers and accredited investors
(the “Investors”) an aggregate of 1,586,539 shares of the Company’s common
stock, par value $0.001 per share (the “Shares”), and warrants to purchase an
additional 793,273 shares of common stock, for an aggregate purchase price of
$1,650,000. The purchase price of the common stock was $1.04 per share and the
strike price of the corresponding warrant was $1.30 per share. The warrants have
been repriced to $1.13 as of December 22, 2008. The warrants expire April 2,
2013.
The
Company entered into a Registration Rights Agreement with the Investors to
register for resale the Shares sold in the offering and the shares of common
stock issuable upon exercise of the warrants. Subject to the terms of
the Registration Rights Agreement, the Company is required to file a
registration statement on Form S-1 with the Securities and Exchange Commission
(the “SEC”) within 45 days of the closing, to use its best efforts to cause the
registration statement to be declared effective under the Securities Act of 1933
(the “Act”) as promptly as possible after the filing thereof, but in no event
later than 90 days after the filing date and no later than 120 days after the
filing date in the event of SEC review of the registration
statement.
If the
registration statement is not effective within the grace periods (“Event Date”),
or the Company cannot maintain its effectiveness (“Event Date”). the Company
must pay partial liquidated damages (“damages”) in cash to each Investor equal
to 2% of the aggregate purchase price paid by each Investor under the Purchase
Agreement on the Event Date and each monthly anniversary of the Event Date (or
on a pro-rata basis for any portion of a month) until the registration statement
is effective. The Company is not liable for any damages with respect
to the registration of the warrants or warrant shares. The maximum
damages payable to each Investor is 36% of the aggregate purchase
price. If the Company fails to pay the damages to the Investors
within 7 days after the date payable, the Company must pay interest at a rate of
15% per annum to each Investor which accrues daily from the date payable until
damages are paid in full.
The
Company accounted for the registration payment arrangement under the guidance of
EITF 00-19-2, “Accounting for Registration Payment Arrangements”, (“EITF
00-19-2”) which requires the contingent obligation to make future payments be
recognized and measured in accordance with FASB Statement No. 5, “Accounting for
Contingencies”, (“Statement 5”) and FASB Interpretation No. 14, “Reasonable
Estimation of the Amount of a Loss”, (“Interpretation 14”). The Company
estimated $399 thousand to be the maximum potential damages that the Company may
be required to pay the Investors if the registration statement is not effective
within three years of the signing of the agreement. The Company estimated $186
thousand to be a reasonable estimate of the potential damages that may be due to
the Investors based on the anticipated filing date. As a result, the Company recorded a
liability of $186 thousand in the December 31, 2008 consolidated balance sheets
and the associated expense in other income (expense) in the consolidated
statements of operations for the period ended December 31,
2008.
The
Company claims an exemption from the registration requirements of the Act for
the private placement of these securities pursuant to Section 4(2) of the Act
and/or Regulation D promulgated thereunder since, among other things, the
transaction did not involve a public offering, the investors were accredited
investors and/or qualified institutional buyers, the investors had access to
information about the company and their investment, the investors took the
securities for investment and not resale, and the Company took appropriate
measures to restrict the transfer of the securities.
This
prospectus covers the resale of the 312,502 shares of common stock underlying
the Warrants.
Moriah
Capital Loan Agreement and Amendments
As
previously reported on a Form 8-K that was filed with the Securities and
Exchange Commission on August 10, 2007, the Company and Moriah Capital LP
(“Moriah”) entered into a Loan and Security Agreement, dated as of August
7, 2007 (the “Loan and Security Agreement”), which was amended as of January 30,
2008 by Amendment No. 1 and on March 18, 2008 by Amendment No. 2 (collectively,
the “Original Agreement”).
As
previously reported on a Form 8-K that was filed with the Securities and
Exchange Commission on August 26, 2008, the Company and Moriah entered into
Amendment No. 3 to the Loan and Security Agreement dated August 20, 2008 (the
“Amendment No. 3”). Pursuant to Amendment No. 3, the Company issued Moriah an
Amended and Restated Convertible Revolving Loan Note (the “Amended
Note”). The maturity date of the Amended Note was extended to
August 7, 2009 and the maximum amount that the Company can borrow pursuant to
the Amended
Note was increased to $3,000,000. The maturity date of the original revolving
loan note had previously been extended to August 20, 2008. On
August 7, 2009, the maturity date of the Amended Note, the Company repaid the
outstanding balance owed on the Amended Note and elected not to renew the
Amended Note.
27
Pursuant
to Amendment No. 3, the Company issued Moriah a warrant, which terminates on
August 7, 2013, to purchase up to 370,000 shares of the Company’s common stock
at an exercise price of $1.30 per share. In connection with Amendment No 3, the
Company paid Moriah $85,000 in fees. As previously reported,
pursuant to the Original Agreement, the Company issued Moriah warrants to
purchase up to 1,000,000 shares of the Company’s common stock at an exercise
price of $1.50 per share.
Pursuant
to Amendment No. 3, the Company and Moriah entered into an Amendment to
Registration Rights Agreement (the “Amended Registration Rights
Agreement”). Pursuant to the Amended Registration Rights
Agreement, the Company agreed to use its best efforts to file a registration
statement to register the 485,000 shares of the Company’s common stock
issued pursuant to the Amended and Restated Securities Issuance Agreement and
the shares of common stock issuable upon exercise of the Warrant, provided that
the Company is permitted under applicable securities rules and regulations and
after the certain other registration statements that the Company was obligated
to file on behalf of selling shareholders have been declared
effective.
On August
19, 2008, the Holders of the Amended Notes and the Investors in
the Purchase Agreement consented to the Company’s execution of the Amended
Note, Amendment No. 3, Amended and Restated Securities Issuance Agreement, and
the Amended Registration Rights Agreement. In consideration for the
consent, a total of 144,000 shares of common stock were issued to the Holders
and Investors based on individual participation in the Amended Notes and
Securities Purchase Agreement on September 4, 2008.
The
Company claims an exemption from the registration requirements of the
Securities Act of 1933, amended (the "Act") for the private placement
of the above-referenced securities pursuant to Section 4(2) of the Act
since, among other things, these transactions did not involve a public offering
and the Company took appropriate measures to restrict the transfer of the
securities.
The
foregoing description of Amendment No. 3 to the Loan and Security
Agreement, the Amended and Restated Revolving Loan Note, the Amended and
Restated Securities Issuance Agreement, and the Amendment to the Registration
Rights Agreement does not purport to be complete and is qualified in its
entirety by reference to the entire text of the agreements.
This
prospectus covers the resale of the 1,370,000 shares of common stock underlying
the Warrants.
General
eMagin
Corporation (“eMagin, “we,” “our,” or “us,”) is a leader in OLED (organic light
emitting diode) technology. We design, develop, manufacture, and market OLED on
silicon microdisplays, virtual imaging products which utilize OLED
microdisplays, and related products. We also perform research in the OLED field.
Our virtual imaging products integrate OLED technology with silicon chips to
produce high-resolution microdisplays smaller than one-inch diagonally which,
when viewed through a magnifier, create virtual images that appear comparable in
size to that of a computer monitor or a large-screen television. Our products
enable our original equipment manufacturer (“OEM”) customers to develop and
market improved or new electronic products. We believe that virtual imaging will
become an important way for increasingly mobile people to have quick access to
high resolution data, work, and experience new more immersive forms of
communications and entertainment.
We
believe our OLED microdisplays offer a number of significant advantages over the
more widely used liquid crystal displays, including greatly increased power
efficiency, less weight, and wider viewing angles. Using our active matrix OLED
technology, many computer and electronic system functions can be built directly
into the OLED microdisplay, resulting in compact, high resolution, power
efficient systems. We have developed our own intellectual property and
accumulated over 6 years of manufacturing know-how to create high performance
OLED microdisplays.
28
As the
first to exploit OLED technology for microdisplays, and with the support of our
partners and the development of our intellectual property, we believe that we
enjoy a significant advantage in the commercialization of microdisplays for
virtual imaging. We believe we are currently the only company to sell active
matrix small molecule OLED-on-silicon microdisplays.
eMagin
Corporation was created through the merger of Fashion Dynamics Corporation
("FDC"), which was organized on January 23, 1996 under the laws of the State of
Nevada and FED Corporation ("FED"), a developer and manufacturer of optical
systems and microdisplays for use in the electronics industry. Simultaneous with
this merger, we changed our name to eMagin Corporation. eMagin is incorporated
in the state of Delaware.
We derive
the majority of our revenue from sales of our OLED microdisplay products. We
also generate revenue from sales of optics, microdisplays combined with optics
(“microviewers”), and virtual imaging systems (primarily our Z800 3DVisor ™). In
addition we earn revenue from non-recurring engineering (“NRE”) projects and
under government contracts that support some of our research and development
programs.
Using our
active matrix OLED technology, many computer and video electronic system
functions can be built directly into the OLED microdisplay, resulting in compact
systems with expected lower overall system costs relative to alternative
microdisplay technologies. Already proven in commercialized military and
commercial systems, our portfolio of OLED microdisplays deliver high-resolution,
flicker-free virtual images, working effectively even in extreme temperatures
and high-vibration conditions with greatly increased system level power
efficiency, less weight and wider viewing angles.
Our
Technology Platforms
Small
Molecule, Top-Emitting Active Matrix OLED Technology
There are
two basic classes of OLED technology, dubbed single molecule or small molecule
(monomer) and polymer. Our microdisplays are currently based upon active matrix
small molecule OLED technology, which we refer to as active matrix OLED
(“AMOLED”) because we build the displays directly on silicon chips. Our AMOLED
technology uniquely permits millions of individual low-voltage light sources to
be built on low-cost, silicon computer chips to produce single color, white
or full-color display arrays. AMOLED microdisplays offer a number of advantages
over current liquid crystal microdisplays, including lower power requirements,
less weight and wider viewing angles. Using our OLED technology, many computer
and video electronic system functions can be built directly into the silicon
chip, under the OLED film, resulting in very compact, integrated systems with
lowered overall system costs relative to alternative technologies.
OLEDs are
thin films of stable organic materials that emit light of various colors when a
voltage is impressed across them. OLEDs are emissive devices, which mean they
create their own light, as opposed to liquid crystal displays, which require a
separate light source. As a result, OLED devices use less power and can be
capable of higher brightness and fuller color than liquid crystal microdisplays.
Because the light they emit is Lambertian, which means that it appears equally
bright from most forward directions, a moderate movement in the eye does not
change the image brightness or color as it does in other
technologies.
We have
developed numerous and significant enhancements to OLED technology as well as
key silicon circuit designs to effectively incorporate the OLED film on a
silicon integrated circuit. For example, we have developed a unique,
top-emitting structure for our OLED devices that enables OLED displays to be
built on opaque silicon integrated circuits rather than only on glass. Our OLED
devices emit full visible spectrum light that is isolated with color filters to
create full color images. Our microdisplays have a brightness that can be
greater than that of a typical notebook computer and can have a potential useful
life of over 50,000 operating hours, in certain applications. New materials and
device improvements, such as our recently developed OLED-XL technology, offer
potential for even better performance for brightness, efficiency, and lifespan.
In addition to our active matrix OLED technology, we have developed compact
optic and lens enhancements which, when coupled with the microdisplay, provide
the high quality large screen appearance that we believe a large proportion of
the marketplace demands.
29
We
believe that our AMOLED technology provides significant advantages over other
microdisplay technologies in our targeted microdisplay markets. We believe these
key advantages include:
·
|
Low
power consumption for improved battery life and longer system
life;
|
·
|
High-speed
performance resulting in clear video images;
|
·
|
Wide
angle light emission resulting in large apparent screen
size;
|
·
|
Wide
operating temperature range;
|
·
|
Good
environmental stability (vibration and humidity);
|
·
|
Low
manufacturing cost; and
|
·
|
Low
cost system solutions.
|
Prism
Optics
High
quality, large view lenses with a wide range for eye positioning are essential
for using our displays in near-eye systems. We have developed advanced molded
plastic prism lenses which permit our AMOLED microdisplays to provide large
field of view images that can be viewed for extended periods with reduced
eye-fatigue. We have engaged a firm to manufacture our lenses in order to
provide them in larger quantities to our customers and are using them in our own
Z800 3DVisor personal display systems.
Our
Market Opportunities
The
growth potential of our selected target market segments have been investigated
using information gathered from key industry market research firms, including
DisplaySearch, Frost and Sullivan, Fuji-Chimera, McLaughlin Group, Nikkei, and
others. Such data was obtained using published reports and data obtained at
industry symposia. We have also relied substantially on market projections
obtained privately from industry leaders, industry analysts, and current and
potential customers.
Most
markets involve near-eye imaging applications for products such as viewfinders,
such as for digital cameras, or for head-wearable displays. These near-to-eye
viewing products have been recently characterized by the McLaughlin Consulting
Group as the Personal Viewer Market. The McLaughlin Group forecasts the total
Personal Viewer Market to reach as much as 16.0 million units and $5.7
billion in revenue by 2012.
Head-wearable
display products incorporate microdisplays mounted in or on eyeglasses, goggles,
simple headbands, helmets, or hardhats, and are often referred to as
head-mounted displays (HMDs) or headsets. Head-wearable displays may block out
surroundings for a fully immersive experience, or be designed as "see-through"
or "see-around" to the user's surroundings. They may contain one (monocular) or
two (binocular) displays. Some of the increased current interest is due to
accelerating the timetable to adapt such systems to military applications such
as night vision and fire and rescue applications. The virtual-imaging markets we
are targeting broadly fall into the categories of military, industrial/medical,
and consumer though many products serve multiple markets (“dual use”). Within
each of these market sectors, we believe that our OLED microdisplays, when
combined with compact optic lenses, will become a key component for a number of
mobile electronic products.
Military/First
Responder
Properly
implemented, we believe that head-mounted systems incorporating our
microdisplays increases effectiveness by allowing hands-free operation and
increasing situational awareness with enough brightness to be used in daylight,
yet controllable for nighttime light security. As a COTS (commercial off the
shelf) component, OLED microdisplays intrinsically demonstrate performance
characteristics important to military and other demanding commercial and
industrial applications, including high contrast, wide dimming range, shock and
vibration resistance and insensitivity to high G-forces. The image does not
suffer from flicker or color breakup in vibrating environments, and the
microdisplay's wide viewing angle allows ease of viewing for long periods of
time. Most importantly, our OLED's very low power consumption reduces battery
weight and increases allowed mission length. The OLED's inherent wide
temperature range is especially of interest for military applications because
the display can turn on instantly at temperatures far below freezing and can
operate at very high temperatures in desert conditions. Our recently announced
SXGA OLED-XL™ microdisplay provides power advantages over other microdisplay
technologies, particularly liquid crystal displays which require backlights and
heaters and cannot provide instant-on capabilities at low
temperatures.
Our
products’ military applications primarily fall into three broad areas: (1)
helmet-mounted displays for situational awareness and data, (2) night
vision/thermal imaging goggles and viewers, and (3) training and simulation
devices. Similar systems are of interest for other military applications as well
as for demanding operations such as urban security, homeland defense, fire and
rescue.
30
Situational
Awareness. Situational awareness products include head mounted displays
which are used to display mapping, logistics and status and handheld imagers for
border patrol and training. In certain situations these products are combined
with a weapon system in order to give the user
the capability of selecting targets without direct exposure. Our OLED
microdisplays have already been commercially implemented into a number of
military situational awareness programs including: US Army Land Warrior Program,
U.S. Army Mounted Warrior Program, US Army Remote Viewer Program, Felin
Fantassin à Equipements et Liaisons Intégrés Program (French Infantryman with
Networked Equipment), and Israeli Advanced Integrated Soldier System, among
others.
Night
Vision/Thermal Imaging. Night Vision Goggles allow the user to see in low
light conditions. The most modern versions usually include two different
technologies: infrared/thermal, and image intensification. Third and fourth
generation military devices usually use some combination of the two modes.
Thermal imagers detect infrared energy (heat) and convert it into an electronic
signal. The resulting signal needs to be presented on a display. Heat sensed by
an infrared camera can be very precisely quantified, or measured, allowing the
user to not only monitor thermal performance, but also identify and evaluate the
relative severity of heat-related problems. Thermal imaging systems can be
stand-alone handheld systems or integrated as part of the aiming mechanism for a
larger system. Our OLED microdisplays are typically targeted to
uncooled systems, as opposed to systems that require external cooling in order
to increase their sensitivity. Advances in sensor technology, both in
sensitivity and resolution as well as economic efficiency, have been driving
factors in the adoption of thermal technologies for military applications. The
power efficiency and environmental ruggedness of our products are strong
competitive advantages, particularly in these small hand-held non-cooled
systems.
Training and
Simulation. Our OLED microdisplays and our Z800 3DVisor have been
acquired by OEMs for use with their simulation and training
products. The Z800’s capability to integrate 360 degree head tracking
and stereo vision, as well as its wide field of view are attractive attributes
for any simulation or virtual reality system. Examples of commercialized
training and simulation products include: Quantum 3D Expedition System, NVIS
Virtual Binocular SSV, and Virtually Better’s Virtual Iraq.
Military Market
Size. The McLaughlin Group reports that in 2012 sales of thermal weapons
sights are forecast to reach $525M and sales of enhanced night vision systems
are projected to reach $1.75B, propelled by both higher volumes and higher
prices for added capabilities of color, higher resolution, and digital
connectivity. Sales of helmet-mounted personal viewers for situational awareness
are forecast to reach $330M in 2012, with growth resulting from higher
definition and color displays, Our displays have already been
commercialized for situational awareness and night vision/thermal imaging
applications by military systems integrators including Elbit, Insight
Technologies, Intevac Vision Systems, Nivisys, Oasys Technology, Qioptiq,
Rockwell Collins, Saab, Sagem, and Thales, among many others. Night Vision
Equipment Corporation's HelmetIR-50™, a lightweight, military helmet mounted
thermal imager, which provides hands-free operation and allows viewers to see
through total darkness, battlefield obscurants, and even foliage, is the first
OLED-equipped product to be listed on the US Government's GSA schedule.
Similar systems are of interest for other military applications as well as for
related operations such as urban security, fire and rescue.
Commercial,
Industrial, and Medical
We
believe that a wide variety of commercial and industrial markets offer
significant opportunities due to increasing demand for instant data
accessibility in mobile workplaces. Some examples of potential microdisplay
applications include: immediate access to inventory such as parts, tools and
equipment availability; instant accessibility to maintenance or construction
manuals; routine quality assurance inspection; endoscopic surgery; and real-time
viewing of images and data for a variety of applications. As one potential
example, a user wearing a HMD while using test equipment, such as oscilloscopes,
can view technical data while simultaneously probing printed circuit boards.
Current commercial products equipped with our OLED microdisplays in these
sectors include those produced by Liteye, FLIR Systems, NordicNeuroLab, VRmagic
GmbH, Sensics, and Total Fire Group, among others.
Consumer
We
believe that the most significant driver of the longer term near-eye virtual
imaging microdisplay market is growing consumer demand for mobile access to
larger volumes of information and entertainment in smaller packages. This desire
for mobility has resulted in the development of mobile video Personal Viewer
products in two general categories: (i) an established market for electronic
viewers incorporated in products such as viewfinders for digital cameras and
video cameras which may potentially also be developed as personal viewers for
cell phones and (ii) an emerging market for headset-application platforms which
include accessories for mobile devices, portable DVD systems, electronic games,
and other entertainment, and wearable computers.
As our
OLED displays are manufactured in increasingly higher volumes at reduced costs,
we believe that our OLED microdisplay products will be increasingly well
positioned to compete with and displace liquid crystal displays in the rapidly
growing consumer market as demand for higher-resolution, and better image
quality evolves to meet the wish for more sophisticated Personal Viewers.
Examples of potential applications for mobile Personal Viewers include handheld
personal computers and mobile devices (such as smartphones, iPods™), whose
small, direct view screens are often limitations, but which are now capable of
running software applications that would benefit from a larger display accessory
and entertainment and gaming video headset systems, which permit
individuals to privately view television, including HDTV, video CDs, DVDs and
video games on virtual large screens or stereovision.
31
Our
Products
Our
commercial microdisplay products based on our SVGA series OLED microdisplays,
first introduced in 2001, have received award recognition including: SID Display
of the Year and Electronic Products
Magazine Product of the Year. In 2008 we introduced
engineering samples of our SXGA OLED microdisplays. We are in the process of
completing development of the SVGA 3DS (SVGA 3D shrink, a smaller format SVGA
display with new cell architecture with embedded features). In 2006 we
introduced our OLED-XL technology, which provides longer luminance half life and
enhanced efficiency for all of our microdisplay product lines. These OLED and
OLED-XL products are being applied or considered for near-eye and headset
applications in products to be manufactured by OEM customers for a wide variety
of military, medical, industrial, and consumer applications. We offer our
products to OEMs and other buyers as both separate components, integrated
bundles coupled with our own optics, or full systems. We also offer engineering
support to enable customers to quickly integrate our products into their own
product development programs and offer design of customized displays with
resolutions or features to meet special customer requirements.
SVGA+ OLED
Microdisplay Series (Super Video Graphics Array of 800x600 plus 52 added columns
of data). Our 0.62 inch diagonal SVGA+ OLED microdisplays
have a resolution of 852x600 triad pixels (1.53 million picture elements). The
product was dubbed "SVGA+" because it has 52 more display columns than a
standard SVGA display, permitting users to run either (1) standard SVGA (800 x
600 pixels) to interface to the analog output of many portable computers or (2)
852 x 480, using all the data available from a DVD player in a 16:9 wide screen
entertainment format. The display also has an internal NTSC monochrome video
decoder for low power night vision systems. SVGA+ Rev3 OLED-XL microdisplay, the
most power efficient OLED solution for near-eye personal viewer applications,
uses less than 115 mW power in monochrome, such as for thermal imaging
applications, and lower than 175 mW at 400 cd/m2 for full color video. This new
microdisplay has simpler calibration over temperature and is ideal for demanding
binocular luminance and color matching. It also shares all the functional and
design characteristics of eMagin's original SVGA OLEDs, responding instantly at
temperatures as low as -40 degrees C.
SVGA-3D OLED
Microdisplay (Super Video Graphics Array plus built-in stereovision
capability). Our 0.59 inch diagonal SVGA-3D OLED
microdisplays have a resolution of 800x600 triad pixels (1.44 million picture
elements). A built-in circuit provides compatibility with single channel frame
sequential stereoscopic vision without additional external components. The
SVGA-3D OLED-XL is primarily used as components of our Z800
3DVisor.
SXGA OLED-XL
(Super eXtended Graphics Array, 1280 x 1024 ). Our SXGA OLED microdisplay
with 0.77 inch diagonal active area provides 3,932,160 sub-pixels in an active
area that is only 26% larger than our SVGA+ microdisplay. The 1280 x 1024 triad
pixel array comprises triads of vertical sub-pixels stacked side by side to make
up each 12 x 12mm color pixel. The SXGA OLED-XL microdisplay offers both analog
and digital signal processing, requiring less than 200mW under typical
operation. The new SXGA microdisplays provide versatility and flexibility for
OEM developers though a FPGA driver design available on a separate, lower power
driver board, or as source code for integration into end product electronics for
maximum power efficiency. The supported video formats are SXGA, 720p, DVGA
(through 1280 x 960 pixel doubling, and both frame sequential and field
sequential stereovision. Additional enhancements include increased pixel
uniformity, improved color gamut, on-chip temperature sensor and compensation,
and compatibility with both analog RGB and digital video signals. On-board
circuitry ensures consistent color and brightness over a wide range of operating
temperatures.
Lens and Design
Reference Kit s.
We offer a WF05 prism optic, with mounting brackets or combined with OLED
microdisplays to form an optic-display module. We provide Design Reference Kits,
which include a microdisplay and associated electronics to help OEMs evaluate
our microdisplay products and to assist their efforts to build and test new
products incorporating our microdisplays.
Integrated
Modules. We provide near-eye virtual imaging modules that incorporate our
OLED-on-silicon microdisplays with our lenses and electronic interfaces for
integration into OEM products. We have shipped customized modules to several
customers, some of which have incorporated our products into their own
commercial products.
Z800
3DVisor™ Our Z800 3DVisors™
give users the ability to work with their hands while simultaneously viewing
information or video on the display. The Z800 3DVisor enables more versatile
portable computing, using a 0.59-inch diagonal microdisplay (SVGA-3D capable of
delivering an image that appears comparable to that of a 19-inch monitor at 22
to 24 inches from the eye, or a 105 inch movie screen at 12 foot distance.) Our
systems are currently being used for personal entertainment, electronic gaming,
and military training and simulation, among other applications. This product has
received industry recognition including: Digital Living Class 2005 Innovators,
Consumer Electronics Association’s Consumer Electronics Show (CES) 2006 Best of
Innovation Awards for the entire display category as well as a Design and
Innovations Award for the electronic gaming category, and, was recognized as one
of Advanced Imaging's Solutions of the Year, as integrated in Chatten
Associates’ head-aimed remote viewer. We sell the Z800 3DVisor to individual
buyers, OEM systems and equipment customers, through distributors, and
through our e-commerce website, www.3dvisor.com. The contents of our
e-commerce website are not part of this Report.
32
Government
Contract Funding
We derive
a portion of our revenue from funding that we receive pursuant to research
contracts or subcontracts funded by various agencies of the U.S. Government. The
revenue that we recognize from these contracts represents reimbursement by
various U.S. Government entities. Our recent contracts have been awarded for
development of power efficient microdisplay for US Army Night Vision,
development of ultra-high resolution display for US Army telemedicine, and
development of display technology for US Navy aircraft. Our government contracts
require us to conduct the research effort described in the statement of work
section of the contract. These contracts may be modified or terminated at the
discretion of the government and typically are subject to appropriation and
allocation of the required funding on an annual basis. On contracts for which we
are the prime contractor, we subcontract portions of the work to various
entities and institutions.
Our
Strategy
Our
strategy is to strengthen our leadership position as a worldwide supplier of
microdisplays and virtual imaging technology solutions for applications in high
growth segments of the electronics industry by capitalizing on our experience
and expertise in active matrix OLED technology. We aim to provide
microdisplay and complementary accessories to enable OEM customers to develop
and manufacture new and enhanced electronic products. Some key elements of our
strategy to achieve these objectives include the following:
·
|
Strengthen our technology
leadership. As the first to exploit AMOLED microdisplays, we
believe that we enjoy a significant advantage in bringing this technology
to market. By continuing to invest in research and development, and
protecting our intellectual property, we expect to further develop
performance improvements and provide a competitive edge for our customers
who integrate our displays into their end products.
|
·
|
Optimize microdisplay
manufacturing efficiencies while protecting proprietary processes.
We intend to reduce our production costs primarily through increasing
manufacturing yield and lowering fixed costs through reduced cycle time
and increased automation, as well as equipment upgrades. We outsource
certain portions of microdisplay production, such as chip fabrication, to
minimize both our costs and time to market. We intend to retain the
OLED-related processes in-house, where we have a core competency and
manufacturing expertise. We also believe that by keeping these processes
under tight control we can better protect our proprietary technology and
process know-how. This strategy will also enhance our ability to continue
to optimize and customize processes and devices to meet customer
needs.
|
·
|
Build and maintain strong
design capabilities. We employ in-house design capabilities
supplemented by outsourced design services. Building and maintaining this
capability will allow us to reduce engineering costs, accelerate the
design process and enhance design accuracy to respond to our customers'
needs as new markets develop. In addition, we intend to maintain a product
design staff capable of rapidly developing prototype products for our
customers and strategic partners. Contracting third party design support
to meet demand and for specialized design skills will also remain a part
of our overall long term strategy.
|
·
|
Leverage strategic
relationships. External relationships play an important role in our
research and development efforts. Suppliers, equipment vendors, government
organizations, contract research groups, external design companies,
customer and corporate partners, consortia, and university relationships
all enhance the overall research and development effort and bring us new
ideas and solutions. In addition, we participate in industry associations
such as Society Information Display, FlexTech Alliance (formerly known as
United States Display Consortium), OLED Association, Consumer Electronics
Association, and the Association of the United States Army, among others.
Furthermore, we have established a CRADA (Cooperative Research and
Development Agreement) with the US Army/RDECOM/NVESD for the purpose of
evaluating and characterizing new and existing AMOLED microdisplay
configurations. We believe that strategic relationships allow us to better
determine the demands of the marketplace and, as a result, allow
us to focus our future research and development activities to satisfy
our customers’ evolving
requirements.
|
Sales
and Marketing
We
primarily provide our OLED display and optics components for OEMs to incorporate
into their branded products and sell through their own well-established
distribution channels. We have traditionally marketed and sold our products to
customers through targeted selling, promotions, select advertising and
attendance at trade shows. We identify companies with end products and
applications for which we believe our products will provide a key
differentiator. Marketing efforts focus on identifying prospects and
communicating the product performance attributes foremost in the minds of
purchasing decision-makers. This approach is intended to ensure the highest
possible return on investment for our marketing expense.
We market
our products in North America, Asia, and Europe directly from our sales office
located in our Bellevue, Washington facility. We also have a local sales
representative in Japan. We market our Z800 3DVisor through select value-added
resellers and on-line through Amazon and our e-commerce site, www.3dvisor.com.
We intend to continue to expand our global sales, marketing and distribution
capabilities.
An OEM
design cycle typically requires between 6 and 36 months, depending on the
uniqueness of the market, the complexity of the end product, or in the case of
military OEM customers, government procurement schedules. Because our
microdisplays are the main functional component that defines many of our
customers' end products, we work closely with customers to provide technical
assistance throughout the product evaluation and integration
process.
33
Customers
Customers
for our products include both large multinational and smaller OEMs. We maintain
relationships with OEMs in a diverse range of industries encompassing the
military, industrial, medical, and consumer market sectors. During 2008, 61% of
our net revenue was to firms based in the United States and 39% was to
international firms as compared to 51% domestic revenue and 49% international
revenue during 2007. In 2008, we had 10 customers that accounted for
more than 63% of our total revenue as compared to 10 customers that accounted
for more than 54% of our total revenue in 2007. In 2008, we had 2
customers that accounted for more than 10% of our total revenue as compared to
2007 when we did not have any customers that accounted for more than 10% of our
total revenue.
Backlog
As of
November 11, 2009, we had a backlog of approximately $4.6 million for purchases
through June 2010. This backlog primarily consists of non-binding purchase
orders and purchase agreements but does not include expected revenue from
R&D contracts or expected NRE (non-recurring engineering) programs under
development.
The
majority of our backlog consists of non-binding purchase orders or purchase
agreements for delivery over the next six months. Most purchase orders are
subject to rescheduling or cancellation by the customer with no or limited
penalties. We believe that the backlog metric is of limited utility
in predicting future sales because many of our OEM customers operate on a
ship-to-order basis. Variations in the magnitude and duration of purchase orders
and customer delivery requirements may result in substantial fluctuations in
backlog from period to period.
Manufacturing
Facilities
We are
located at IBM's Microelectronics Division facility, known as the Hudson Valley
Research Park, located about 70 miles north of New York City in Hopewell
Junction, New York. We lease approximately 33,000 square feet of space which
houses our own equipment for OLED microdisplay fabrication and research and
development, includes a 16,300 square foot class 10 clean room space, additional
lower level clean room space, assembly space and administrative
offices.
Facilities
services provided by IBM include our clean room, pure gases, high purity
de-ionized water, compressed air, chilled water systems, and waste disposal
support. This infrastructure provided by our lease with IBM provides us with
many of the resources of a larger corporation without the added overhead costs.
It further allows us to focus our resources more efficiently on our product
development and manufacturing goals.
We
believe manufacturing efficiency is an important factor for success, especially
in the consumer markets. We currently have the equipment needed for profitable
production in place. We plan to add equipment to increase capacity and yield
over the next two years to meet expected demand for our
microdisplays.
Competition
The
industry in which we operate is highly competitive. We face competition from
legacy technologies such as cathode ray tubes (CRTs), liquid crystal on silicon
microdisplays (LCOS), and transmissive liquid crystal displays
(LCDs) as well as from alternative flat panel display
technologies such as field emission and virtual scanning retinal displays.
There are many large and small companies that manufacture or have in development
products based on these technologies.
Currently,
in the high resolution microdisplay market, we face competition from liquid
crystal microdisplay manufacturers, such as those sold by Kopin. We are not
aware of any current manufacturers of high resolution OLED microdisplays that
compete with our microdisplay products.
In the
future, we believe that our key competition will come from LCOS and small
transmissive LCDs. While we believe that OLED technology has the capability to
provide higher quality images, greater environmental ruggedness,
reduced electronics cost and complexity, and improved power efficiency
advantages over either type of liquid crystal based microdisplays, there is no
assurance that these benefits will be fully realized or that liquid crystal
manufacturers will not suitably improve these parameters to reduce these
potential advantages of OLEDs.
To our
knowledge, the only other companies that have publicly stated plans to
commercially develop OLED microdisplays for near-eye applications are
MicroEmissive Displays (MED) in Britain and MicroOLED in France. Though MED
had raised substantial funds and created a new production facility, the company
ceased business operations in 2008. We may also compete with potential licensees
of Universal Display Corporation,
Eastman Kodak, or Cambridge Display Technology, among others, each of which
potentially can license OLED technology portfolios. If other new OLED-based
companies enter our markets with directly relevant display designs and
without manufacturing and reliability issues, we will face competition, though
we believe that our progress to date in this area gives us a substantial head
start.
34
Intellectual
Property
We
believe we have developed a substantial intellectual property portfolio of
patents, trade secrets and manufacturing know-how. It is important to protect
our investment in technology by obtaining and enforcing intellectual property
rights, including rights under patent, trademark, trade secret and copyright
laws. We seek to protect inventions we consider significant by applying for
patents in the United States and other countries when
appropriate. Our intellectual property covers a wide range of
materials, device structures, processes, and fabrication techniques, primarily
concentrated in the following areas:
·
|
OLED
Materials, Structures, and Processes;
|
·
|
Display
Color Processing and Sealing;
|
·
|
Active
Matrix Circuit Methodologies and Designs;
|
·
|
Lenses
and Tracking (Eye and Head);
|
·
|
Ergonomics
and Industrial Design;
|
·
|
Wearable
Computer Interface Methodology; and
|
·
|
Legacy
Field Emission and General Display
Technologies.
|
We
believe that, in addition to patent protection, our success is dependent upon
non-patentable trade secrets and technical expertise. To protect this
information and know-how from unauthorized use or disclosure, we use
nondisclosure agreements and other measures to protect our proprietary rights,
and we require all employees, and where appropriate, contractors, consultants,
advisors and collaborators to enter into confidentiality and non-competition
agreements. We believe that our intellectual property portfolio, coupled with
our strategic relationships and accumulated manufacturing know-how in OLED,
gives us a significant advantage over potential competitors.
Employees
As of
November 11, 2009, we had a total of 66 full time and part time staff. None of
our employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be
good.
Our
website address is www.emagin.com. We make available free of charge through our
website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, our Proxy Statements and all amendments to such
reports filed under the Securities and Exchange Act after we electronically file
such material with, or furnish such material to, the Securities and Exchange
Commission (SEC). These reports may be accessed from our website by following
the links under “Investors,” then “SEC Filings.” The information found on our
website is not part of this or any other report we file with or furnish to the
SEC. We assume no obligation to update or revise any forward-looking statements
in this Annual Report or in other reports filed with the SEC, whether as a
result of new information, future events or otherwise, unless we are required to
do so by law. A copy of this Annual Report and our other reports is available
without charge upon written request to Investor Relations, eMagin Corporation,
3006 Northup Way, Suite 103, Bellevue, WA 98004.
We also
post on our website the charters of our Audit, Compensation, Governance and
Nominating committees, our Codes of Ethics and any amendments of or waiver to
those codes of ethics, and other corporate governance materials recommended by
the SEC as they occur, as well as earnings press releases and other
business-related press releases. Our e-commerce site for sales of our Z800
3DVisor is www.3dvisor.com. The contents of this website are not part of this
Report.
Our
corporate offices are located in Bellevue, Washington. Our Washington
location includes administrative, finance, operations, research and development
and sales and marketing functions and consists of leased space of approximately
5,100 square feet. The lease expires in August
2014. Our manufacturing facility is located in Hopewell Junction, New
York, where we lease approximately 33,000 square feet from IBM. The
NY facility houses our equipment for OLED microdisplay fabrication, assembly
operations, research and development, and administrative functions. The lease
expires in May 2014. We believe our facilities are adequate for our
current and near-term needs.
LEGAL
PROCEEDINGS
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe will have, individually
or in the aggregate, a material adverse affect on our business, financial
condition or operating results.
35
The
following table sets forth the names of our directors and executive officers as
of November 11, 2009:
Age
|
Position
|
||
Andrew
G. Sculley
|
57
|
Chief
Executive Officer and President
|
|
Paul
Campbell (4)
|
53
|
Chief
Financial Officer
|
|
Susan
K. Jones
|
57
|
Chief
Business Officer, Secretary
|
|
Adm.
Thomas Paulsen (Ret.) (2)(3*)
|
72
|
Chairman
of the Board, Director
|
|
Claude
Charles (1 )(2)(3)(5)
|
72
|
Director
|
|
Paul
Cronson
|
52
|
Director
|
|
Irwin
Engelman (1*)
|
74
|
Director
|
|
Dr.
Jacob Goldman (2*)(3)
|
87
|
Director
|
|
Brig.
Gen. Stephen Seay (Ret.) (1)(3)
|
62
|
Director
|
|
(1)
|
Audit
Committee
|
||
(2)
|
Governance
& nominating Committee
|
||
(3)
|
Compensation
Committee
|
||
(4)
|
On
May 8, 2009, Paul Campbell became the Chief Financial
Officer.
|
||
(5)
|
As
of September 1, 2009, Claude Charles is a member of the Governance &
nominating and the Compensation
Committees.
|
*
Committee Chair
Andrew G.
Sculley became the Company’s Chief Executive Officer and President on June 1,
2008. Mr. Sculley served as the General Manager of Kodak’s OLED
systems Business Unit and Vice President of Kodak’s Display Business from 2004
to 2008. From 2003 to 2006, he served on the Board of Directors of SK Display, a
joint venture between Sanyo and Kodak. From 1996 to 2001 Mr. Sculley served as
the Manager of Operations, CFO and member of the Board of Directors of Kodak
Japan Ltd., where he managed Distribution, Information Technologies, Legal,
Purchasing and Finance. Previously, he held positions in strategic planning and
finance in Eastman Kodak Company. Mr. Sculley holds an MBA from
Carnegie-Mellon University and an MS in physics from
Cornell University. He attended Harvard University’s International
Senior Management Program while an executive at Kodak.
Paul
Campbell became the Company’s Chief Financial Officer as of May 8,
2009. Prior to this date, Paul Campbell had served as the Company’s
Interim Chief Financial Officer since April 15, 2008. Mr. Campbell is a partner
with Tatum, LLC (“Tatum”), an executive services firm, since November
2007. Mr. Campbell served as the Chief Financial Officer of four public
companies, including Checkers Drive-In Restaurants, Inc, which until 2006 was
traded on the Nasdaq and as Chief Financial Officer of Famous Dave’s of America,
Inc., a publicly held company currently trading on the Nasdaq. Mr.
Campbell also served as Chief Financial Officer of Sonus Corporation, a medical
device retailer, and of Organic To Go, Inc., an emerging publicly-held food
company, from May 2007 through October 2007. From 2001 through April
2007, Mr. Campbell owned and operated Campbell Capital, LLC, a consulting and
investment firm in Seattle, Washington providing strategic planning and
financing services to small businesses. Mr. Campbell received his Masters
of Business Administration from Pepperdine University and his Bachelor of
Arts degree in Business Economics from the University of California at Santa
Barbara.
Susan K.
Jones has served as Executive Vice President and Secretary since 1992, Chief
Marketing and Strategy Officer since 2001, and assumed responsibility of Chief
Business Officer in 2008. Ms. Jones has more than 30 years of industrial
experience, including senior research, management, and marketing assignments at
Texas Instruments and Merck, Sharp, & Dohme Pharmaceuticals. Ms. Jones
serves on the boards or chairs committees for industry organizations including
IEEE, SPIE, and SID. Ms. Jones served as a director of eMagin Corporation from
1993 to 2000 and was a director of Virtual Vision, Inc. Ms. Jones graduated from
Lamar University with a B.S. in chemistry and biology, holds more than a
dozen patents, and has authored more than 100 papers and talks.
Rear
Admiral Thomas Paulsen (ret.) has served as a director since July 2003 and
Non-Executive Chairman of the Board since 2007. He served as Interim CEO and
President from January 2008 to May 2008. Admiral Paulsen served for over 34
years in the US Navy in Command Control, Communications and Intelligence (C3I),
Telecommunications, Network Systems Operations, Computers and Computer Systems
Operations until his retirement in 1994 as a Rear Admiral. He then served as
Chief Information Officer for Williams Telecommunications. Admiral Paulsen has
served as a director of Umbanet, Inc. since 2002. Since 2000, Admiral Paulsen
has served on the Board of Governors of the Institute of Knowledge Management,
George Washington University. Since 1994, he has served as the
Chairman of the Advisory Board
and
President Emeritus of the Center for Advanced Technologies (CAT) and a Managing
Partner on the National Knowledge and Intellectual Property Management
Taskforce, a not-for-profit company headquartered in Dallas, Texas, and is a
member of the Board of Governors for the
Japanese American National Museum, Los Angeles,
California.
36
Claude
Charles has served as a director since April of 2000. Mr. Charles has served as
President of Azur Capital Limited since 1999. From 1996 to 1998 Mr. Charles was
Chairman of Equinox Group Holdings. Prior to 1996, Mr. Charles has also served
as a director and in senior executive positions at SG Warburg and Co. Ltd.,
Peregrine Investment Holdings, Trident International Finance Ltd., and Dow
Banking Corporation. Mr. Charles holds a B.S. in economics from the
Wharton School at the University of Pennsylvania and a M.S. in
international finance from Columbia University. Paul
Cronson has served as a director since July of 2003. Mr. Cronson is Managing
Director of Larkspur Capital Corporation, which he co-founded in 1992. Larkspur
is a broker dealer that is a member of FINRA and advises companies seeking
private equity or debt. Mr. Cronson's career in finance began in 1979 at
Laidlaw, Adams Peck where he worked in asset management and corporate finance.
From 1983 to 1985, Mr. Cronson worked with Samuel Montagu Co., Inc. in London,
where he marketed eurobond issuers and structured transactions. Subsequently
from 1985 to 1987, he was employed by Chase Investment Bank Ltd., where he
structured international debt securities and he developed "synthetic asset"
products using derivatives. Returning to the U.S., he joined Peter Sharp Co.,
where he managed a real estate portfolio, structured financings and assisted
with capital market investments until 1992. Mr. Cronson received his BA from
Columbia College in 1979, and his MBA from Columbia College in 1982.
He is on the Board of the Evelyn Sharp Foundation in New York, a private
foundation supporting various not for profit endeavors.
Irwin
Engelman has served as a director since May of 2005. He is currently a
consultant to various industrial companies and is a director of Sanford C.
Bernstein Mutual Funds, a publicly-traded company, and chairman of its audit
committee. From November 1999 until April 2002, he served as Executive
Vice President and Chief Financial Officer of YouthStream Media
Networks, Inc., a media and retailing company serving high school and
college markets. From 1992 until April 1999, he served as Executive Vice
President and Chief Financial Officer of MacAndrews and Forbes
Holdings, Inc., a privately-held financial holding company. From
November 1998 until April 1999, he also served as Vice Chairman, Chief
Administrative Officer and a director of Revlon, Inc., a publicly-traded
consumer products company. From 1978 until 1992, he served as an executive
officer of various public companies including International Specialty
Products, Inc. (a subsidiary of GAF Holdings Inc.), CitiTrust
Bancorporation, General Foods Corporation and The Singer Company. Mr. Engelman
received a BBA in Accounting from Baruch College in 1955 and a Juris
Doctorate from Brooklyn Law School in 1961. He was admitted practice
law in the State of New York in 1962. In addition, he was licensed as a CPA in
the State of New Jersey in 1966.
Dr. Jack
Goldman joined our board of directors in February of 2003. Dr. Goldman is the
retired senior vice-president for R&D and chief technical officer of the
Xerox Corporation. While at Xerox, he founded and directed the celebrated Xerox
PARC laboratory. Prior to joining Xerox, Dr. Goldman was Director of Ford Motor
Company's Scientific Research Laboratory. He also served as Visiting Edwin
Webster Professor at MIT. Dr. Goldman presently serves on the Boards of
Directors of Umbanet Inc. and Medis Technologies Inc., and he has served on the
Boards of Xerox, General Instrument Corp., United Brands, Intermagnetics
General, GAF and Bank Leumi USA. He has also been active in government and
professional advisory roles including service on the US Dept. of Commerce
Technical Advisory Board, chairman of Statutory Visiting Committee of The
National Bureau of Standards (National Institute of Standards and Technology),
vice-president of the American Association for the Advancement of Science and
president of the Connecticut Academy of Science and Engineering.
General
Stephen M. Seay was elected to the Board of Directors in January 2006. In his
33-year Army career, General Seay held a wide variety of command and staff
positions, most importantly as a soldier's soldier volunteering for deployment
on Operation Iraqi Freedom, 2004-2005. Simultaneously, he was Commanding
General, Joint Contracting Command-Iraq, Head of Contracting Authority,
Operation Iraqi Freedom and Program Executive Officer for Simulation, Training
and Instrumentation. He previously served as Program Manager for a joint
automation system, headed the Joint Target Oversight Council and was Commanding
General, Simulation, Training and Instrumentation Command (STRICOM), Army
Materiel Command. Earlier, as a Field Artillery officer, he commanded at
all levels, rising to corps artillery commander. He served as Chief of Staff,
United States Army, Europe (Forward) and National Security Element, Taszar,
Hungary, during Operation Joint Endeavor. He held resource management,
operations research, and acquisition positions during three tours on Department
of the Army staff. General Seay holds a Bachelor of Science degree from
the University of New Hampshire and a Master of Science degree from North
Carolina State University.
CORPORATE
GOVERNANCE
Code
of Ethics
We have
adopted a Code of Business Conduct and Ethics that applies to all of our
directors, officers and employees, including our principal executive officer,
principal financial officer and principal accounting officer. The Code of
Business Conduct and Ethics is posted on our website at
http://www.emagin.com/investors.
37
We intend
to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an
amendment to, or waiver from, a provision of this Code of Business Conduct and
Ethics by filing a Current Report on Form 8-K with the SEC, disclosing such
information.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires our directors and
executive officers and persons who own more than 10% of the issued and
outstanding shares of eMagin common stock to file reports of initial ownership
of common stock and other equity securities and subsequent changes in that
ownership with the SEC. Officers, directors and greater than ten percent
stockholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file. To our knowledge, based solely on a review
of the copies of such reports furnished to us and written representations that
no other reports were required, during the fiscal year ended December 31, 2008
all Section 16(a) filing requirements applicable to our officers, directors and
greater than 10% beneficial owners were complied with.
The Board
of Directors of eMagin is classified into three classes: Class A, Class B and
Class C. As of December 31, 2008, Irwin Engelman is the only Class A
Director, and will hold office until the next Annual Meeting of our
stockholders. Paul Cronson, Admiral Thomas Paulsen, and General Stephen Seay are
Class B directors who will hold office until the next Annual Meeting. Claude
Charles and Dr. Jacob Goldman are Class C directors who will hold office
until the next Annual Meeting. There was no Annual Meeting held
during 2008. In each case, each director will hold office until
his successor is duly elected or appointed and qualified in the manner provided
in our Amended and Restated Certificate of Incorporation and our Amended and
Restated Bylaws, or as otherwise provided by applicable law.
Our Board
of Directors held 19 meetings during 2008. Our independent directors met in
executive session on a periodic basis in connection with regular meetings, as
well as in their capacity as members of our Audit Committee and Compensation
Committee.
Admiral
Thomas Paulsen was not an independent director during the period January through
May 2008 when he was acting Interim CEO and President. As of June 1,
2008, Admiral Paulsen was an independent director. No change occurred
in Admiral Paulsen’s compensation as a director of the Company as a result of
his accepting this temporary position.
Compensation
of Directors
Non-management
directors receive options under the 2003 and 2008 Stock Option Plans. Under
these Plans, a grant of options to purchase 15,000 shares of common stock will
automatically be granted on the date a director is first elected or re-elected,
or otherwise validly appointed to the Board with an exercise price per share
equal to 100% of the market value of one share on the date of grant. Such
options granted will expire ten years after the date of grant and will become
exercisable in four equal installments commencing on the date of grant and
annually thereafter. For calendar years 2007 and 2008, Directors received an
annual cash retainer of $10,000 and an annual stock retainer of 25,000 options,
fully vested, at market price on the date of issuance. Directors are also
granted options based on committee assignments consisting of options to purchase
5,000 shares per year for members of the Compensation committee, 10,000
shares for the governance committee and 15,000 shares for the audit committee.
Each committee chair will receive 5,000 additional shares. In 2008 and 2009 the
chairs of the Audit and the Governance and Nominating committees receive
additional 10,000 options. In addition, each non-management director
receives $1,000 for each in-person Board meeting, and $500 for each
teleconference meeting or Committee meeting. Directors are eligible for
reimbursement for ordinary expenses incurred in connection with attendance at
such meetings.
Admiral
Thomas Paulsen was not an independent director during the period January through
May 2008 when he was acting Interim CEO and President. As of June 1,
2008, Admiral Paulsen was an independent director. No change occurred
in Admiral Paulsen’s compensation as a director of the Company as a result of
his accepting this temporary position.
Audit
Committee.
The Audit Committee is responsible for determining the adequacy of our internal
accounting and financial controls, supervising matters relating to audit
functions, reviewing and setting internal policies and procedures regarding
audits, accounting and other financial controls, reviewing the results of our
audit performed by the independent public accountants, and recommending the
selection of independent public accountants. The Audit Committee has adopted an
Audit Charter, which is posted on our website at
http://www.emagin.com/investors. The Audit Committee is composed of
three Directors, Claude Charles, Irwin Engelman, and General Stephen Seay. The
Board has determined that each of the members of the Audit Committee is
unrelated, an outside member with no other affiliation with us and is
independent. The Board has determined that Mr. Engelman is an “audit committee
financial expert” as defined by the SEC. During 2008, the Audit Committee held 4
meetings via teleconference.
Compensation
Committee. The Compensation Committee determines matters pertaining to
the compensation and expense reporting of certain of our executive officers, and
administers our stock option, incentive compensation, and employee stock
purchase plans. The Compensation Committee is presently composed of four
Directors, Jack Goldman, Thomas Paulsen, Claude Charles and Stephen Seay, each
of whom the Board has
determined to be independent and none of whom has been an employee of the
Company, except as noted above. During 2008, the Compensation Committee held 5
meetings in person or through a conference call.
38
Governance and
Nominating Committee. The Governance and Nominating Committee is
responsible for considering potential Board members, nominating Directors for
election to the Board, implementing the Company’s corporate governance and
ethics policies, and for all other purposes outlined in the Governance and
Nominating Committee Charter, which is posted on our website at
http://www.emagin.com/investors. The Governance and Nominating Committee is
composed of Jack Goldman, Claude Charles and Thomas Paulsen, each of whom the
Board has determined to be independent, except as noted above. During 2008, the
Governance and Nominating Committee held 2 meetings in person or through a
conference call.
Nomination
of Directors
As
provided in its charter and our company’s corporate governance principles, the
Governance and Nominating Committee is responsible for identifying individuals
qualified to become directors. The Governance and Nominating Committee seeks to
identify director candidates based on input provided by a number of sources,
including (1) the Governance and Nominating Committee members, (2) our other
directors, (3) our stockholders, (4) our Chief Executive Officer or Chairman,
and (5) third parties such as professional search firms. In evaluating potential
candidates for director, the Nominating and Corporate Governance Committee
considers the entirety of each candidate’s credentials.
Qualifications
for consideration as a director nominee may vary according to the particular
areas of expertise being sought as a complement to the existing composition of
the Board of Directors. However, at a minimum, candidates for director must
possess:
·
|
high
personal and professional ethics and integrity;
|
·
|
the
ability to exercise sound judgment;
|
·
|
the
ability to make independent analytical inquiries;
|
·
|
a
willingness and ability to devote adequate time and resources to
diligently perform Board and committee duties; and
|
·
|
the
appropriate and relevant business experience and
acumen.
|
In
addition to these minimum qualifications, the Governance and Nominating
Committee also takes into account when considering whether to nominate a
potential director candidate the following factors:
·
|
whether
the person possesses specific industry expertise and familiarity with
general issues affecting our business;
|
·
|
whether
the person’s nomination and election would enable the Board to have a
member that qualifies as an “audit committee financial expert” as such
term is defined by the Securities and Exchange Commission (the “SEC”) in
Item 401 of Regulation S-K;
|
·
|
whether
the person would qualify as an “independent” director under the listing
standards of the OTC Bulletin Board;
|
·
|
the
importance of continuity of the existing composition of the Board of
Directors to provide long term stability and experienced oversight;
and
|
·
|
the
importance of diversified Board membership, in terms of both the
individuals involved and their various experiences and areas of
expertise.
|
Shareholder
Communications
Shareholders
requesting communication with Directors can do so by writing to eMagin
Corporation, c/o Corporate Secretary, 3006 Northup Way, Suite 203, Bellevue, WA
98004, or emailing to sjones@emagin.com At this time we do
not screen communications received and would forward any requests directly to
the named Director. If no Director was named in a general inquiry, the Secretary
would contact either the Chairman or the Chairman of a particular committee, as
appropriate. We do not provide the physical address, email address, or phone
numbers of Directors to outside parties without a Director's
permission.
This
section describes the compensation program for our executive officers. In
particular, this section focuses on our 2008 compensation program and related
decisions.
Compensation
Discussion and Analysis
The
objectives of our compensation program are as follows:
·
|
Reward
performance that drives substantial increases in shareholder value, as
evidenced through both future operating profits and increased market price
of our common shares; and
|
·
|
Attract,
hire and retain well-qualified
executives.
|
39
The compensation level of our executives generally reflects their unique position and incentive to positively affect our future operating performance and shareholder value. Part of the compensation of our executives is from equity compensation, primarily through stock option grants or restricted stock awards. The stock option exercise price is generally the fair market value of the stock on the date of grant. Therefore, a gain is only recognized if the value of the stock increases, which promotes a long term alignment between the interests of the Company’s executives and its shareholders. For that reason, stock options are a component of 100% of our employees’ salary package.
Specific
salary and bonus levels, as well as the amount and timing of equity incentive
grants, are determined informally and judgmentally, on an individual-case basis,
taking into consideration each executive's unique talents and experience as they
relate to our needs. Executive compensation is paid or granted pursuant to each
executive's compensation agreement. Compensation adjustments are made
occasionally based on changes in an executive's level of responsibility or on
changed local and specific executive employment market conditions.
The Board
of Directors has established a Compensation Committee, comprised exclusively of
independent outside directors which approves all compensation and awards to
executive management. The members of the Compensation Committee have extensive
executive level experience in other companies and bring a perspective of
reasonableness to compensation matters with our Company. In addition, the
Compensation Committee compares executive compensation practices of similar
companies at similar stages of development.
Generally
on its own initiative, at least annually, the Compensation Committee reviews the
performance of executives and establishes compensation levels based on the
performance evaluation, historical compensation levels of the executives, levels
of responsibility and contributions to the Company, and comparable position
studies provided by independent sources. With respect to equity
compensation, the Compensation Committee approves all option grants, generally
based on the recommendation of the president and chief executive officer and has
delegated granting authority to the president and chief executive officer or, on
occasion, his designee. Executives are eligible to receive bonus compensation at
the discretion of the Compensation Committee, which is primarily based on the
achievement of certain goals and objectives and the executive’s contributions to
the Company. Executives also are entitled to participate in the same benefit
plans that are available to other Company employees.
Compensation
for the Chairman
From
January through May 2008, Admiral Paulsen served as Interim Chief Executive
Officer. Admiral Paulsen receives an annual stipend of $60,000 for serving as
Non-Executive Chairman of the Board, an annual cash retainer of $10,000 for
serving as a director, and meetings fees. No change occurred in Admiral
Paulsen’s compensation as a result of his accepting the temporary position of
Interim Chief Executive Officer and President.
40
Summary
Compensation Table
The
following table sets forth information regarding compensation paid to our
principal executive officer, principal financial officer, and our highest paid
executive officer, all of whose total annual salary and bonus for the years
ended December 31, 2008, 2007 and 2006 exceeded $100,000.
SUMMARY
COMPENSATION TABLE
Salary
|
Bonus
|
Stock
Awards
|
Option
awards
|
Non-equity
incentive plan compensation
|
Change
in pension value and non qualified deferred compensation
|
All
Other Compensation
|
Total
|
||||||||||||||||||||||||||||||||||
Name
and principal position
|
Year
|
($)
|
($)
|
($)
|
($),
(a)
|
($)
|
($)
|
($)
|
($)
|
||||||||||||||||||||||||||||||||
Andrew
G. Sculley, President and Chief Executive Officer (1)
|
2008
|
161,923
|
-
|
-
|
287,150
|
-
|
-
|
-
|
449,073
|
||||||||||||||||||||||||||||||||
2007
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||||||
2006
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||||||
K.C. Park,
Interim President and Chief Executive Officer (2)
|
2008
|
105,817
|
60,000
|
-
|
(7
|
)
|
42,371
|
-
|
-
|
75,000
|
(8
|
)
|
283,188
|
||||||||||||||||||||||||||||
2007
|
313,462
|
-
|
40,000
|
(9
|
)
|
-
|
-
|
-
|
-
|
353,462
|
|||||||||||||||||||||||||||||||
2006
|
200,000
|
-
|
-
|
-
|
-
|
-
|
-
|
200,000
|
|||||||||||||||||||||||||||||||||
Gary
Jones, President and Chief Executive Officer (3)
|
2008
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||||||||
2007
|
102,060
|
-
|
430,000
|
(10
|
)
|
-
|
-
|
-
|
51,638
|
(11
|
)
|
583,698
|
|||||||||||||||||||||||||||||
2006
|
368,170
|
-
|
-
|
-
|
-
|
-
|
127,928
|
(12
|
)
|
496,098
|
|||||||||||||||||||||||||||||||
Paul
Campbell, Chief Financial Officer (4)
|
2008
|
203,539
|
-
|
-
|
-
|
-
|
-
|
-
|
203,539
|
||||||||||||||||||||||||||||||||
2007
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||||||||
2006
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||||||||
Michael
D. Fowler, Interim Chief Financial Officer (5)
|
2008
|
84,808
|
-
|
-
|
-
|
-
|
-
|
-
|
84,808
|
||||||||||||||||||||||||||||||||
2007
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||||||||
2006
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||||||||
John
D. Atherly, Chief Financial Officer (6)
|
2008
|
44,628
|
-
|
-
|
-
|
-
|
-
|
-
|
44,628
|
||||||||||||||||||||||||||||||||
2007
|
243,000
|
-
|
-
|
-
|
-
|
-
|
-
|
243,000
|
|||||||||||||||||||||||||||||||||
2006
|
242,308
|
-
|
-
|
-
|
-
|
-
|
-
|
242,308
|
|||||||||||||||||||||||||||||||||
Susan
Jones, Executive Vice President, Chief Business Officer, and
Secretary
|
2008
|
329,916
|
-
|
-
|
-
|
-
|
-
|
189,325
|
(13
|
)
|
519,241
|
||||||||||||||||||||||||||||||
2007
|
278,888
|
-
|
-
|
-
|
-
|
-
|
175,184
|
(13
|
)
|
454,072
|
|||||||||||||||||||||||||||||||
2006
|
289,163
|
-
|
-
|
-
|
-
|
-
|
81,379
|
(13
|
)
|
370,542
|
41
(1)
Mr. Sculley has been serving as our President and Chief Executive Officer
as of June 1, 2008.
|
|||||||||||||
(2)
Dr. Park was appointed Interim President and Chief Executive Officer in
January 2007 and resigned his post in January 2008. Prior to
January 2007, Dr. Park served as Executive Vice President of International
Operations. Dr. Park provided consulting services from February
1, 2008 through August 1, 2008.
|
|||||||||||||
(3)
Mr. Jones resigned as President and Chief Executive Officer in January
2007.
|
|||||||||||||
(4)
Mr. Campbell served as our Interim Chief Financial Officer from April 15,
2008 through May 8, 2009 when he became the Chief Financial
Officer.
|
|||||||||||||
(5)
Mr. Fowler resigned as Interim Chief Financial Officer as of April 14,
2008.
|
|||||||||||||
(6)
Mr. Atherly resigned as Chief Financial Officer in January
2008.
|
|||||||||||||
(7) This
amount represents options issued pursuant to Mr. Park’s consulting
agreement.
|
|||||||||||||
(8) This
amount represent consulting fees paid pursuant to Mr. Park’s consulting
agreement.
|
|||||||||||||
(9)
This amount represents a retention bonus in the form of a stock grant that
was issued to the named executive officer.
|
|||||||||||||
(10)
This amount represents a payment in the form of a stock grant pursuant to
Mr. Jones' severance agreement. Previously granted options that
remained unexercised were also forfeited pursuant to the severance
agreement.
|
|||||||||||||
(11)
This amount represents legal and accounting fee reimbursement for the
benefit of the named executive officer.
|
|||||||||||||
(12)
This amount represents relocation expense reimbursement for the benefit of
the named executive officer.
|
|||||||||||||
(13)
This amount represents deferred dollar amount earned in sales incentive
compensation by the named executive officer.
|
|||||||||||||
Column
note:
|
|||||||||||||
(a) The
amounts in this column represent the fair value of option awards to the
named executive officer as computed on the date of the option grants using
the Black-Scholes option-pricing model.
|
Grants
of Plan-Based Awards
The
following table sets forth information regarding stock option awards to our
named executive officers under our stock option plans for the year ended
December 31, 2008 as follows:
Name
|
Grant
Date
|
All
Other Option Awards: Number of Securities Underlying Options
(#)
|
Exercise
or Base Price of Options Awards ($/Sh)
|
Total
Grant Date Fair Value ($)
|
|||||||||
Andrew
G. Sculley
|
June
2, 2008 (1)
|
500,000
|
0.81
|
287,150
|
|||||||||
K.C. Park
|
May
1, 2008 (2)
|
70,453
|
0.97
|
24,461
|
|||||||||
K.C. Park
|
August
1, 2008 (2)
|
37,500
|
0.68
|
17,910
|
(1) 1/3
of the grant is exercisable immediately; 1/3 of the grant is exercisable on the
first anniversary and the remaining 1/3 is exercisable on the second
anniversary.
(2) The
grant is exercisable immediately.
42
The
following table sets forth information with respect to the outstanding equity
awards of our principal executive officers and principal financial officer
during 2008, and each person who served as an executive officer of eMagin
Corporation as of December 31, 2008:
OUTSTANDING
EQUITY AWARDS AT YEAR-END
|
|||||||||||||||||||||||||||||||||
Option
awards
|
Stock
awards
|
||||||||||||||||||||||||||||||||
Name
and
|
Number
of securities underlying unexercised options (#)
|
Number
of securities underlying unexercised options (#)
|
Equity
incentive plan awards: Number of securities underlying unexercised
options
|
Options
exercise price
|
Option
expiration
|
Number
of
shares
or
units
of stock
that
have
not
vested
|
Market
value of shares or units of stock that have not vested
|
Equity
incentive plan awards:
Number
of unearned shares other rights that have not vested
|
Equity
incentive plan awards:
Market
or payout value of unearned shares, units or other rights that have not
vested
|
||||||||||||||||||||||||
principal
position
|
Exercisable
|
Unexercisable
|
(#), (a) |
($)
|
Date
|
(#) |
($)
|
(#) |
($)
|
||||||||||||||||||||||||
Andrew
G. Sculley, President and Chief Executive Officer (1)
|
166,667 | 333,333 | 500,000 | 0.81 |
June
2, 2015
|
- | - | - | - | ||||||||||||||||||||||||
K.C. Park,
Interim President and Chief Executive Officer (2)
|
70,453 | - | 70,453 | 0.97 |
May
1, 2018
|
- | - | - | - | ||||||||||||||||||||||||
37,500 | - | 37,500 | 0.68 |
August
1, 2018
|
- | - | - | - | |||||||||||||||||||||||||
Susan
Jones, Executive Vice President, Chief Business Officer, and
Secretary
|
48,750 | - | 48,750 | 2.60 |
May
17, 2009
|
- | - | - | - | ||||||||||||||||||||||||
16,770 | - | 16,770 | 2.60 |
January
11, 2010
|
|||||||||||||||||||||||||||||
9,685 | - | 9,685 | 2.60 |
January
11, 2010
|
|||||||||||||||||||||||||||||
16,250 | - | 16,250 | 2.60 |
March
17, 2010
|
|||||||||||||||||||||||||||||
11,700 | - | 11,700 | 2.60 |
November
30, 2012
|
|||||||||||||||||||||||||||||
11,932 | - | 11,932 | 2.60 |
April
24, 2013
|
|||||||||||||||||||||||||||||
7,159 | - | 7,159 | 2.60 |
August
30, 2013
|
|||||||||||||||||||||||||||||
7,159 | - | 7,159 | 2.60 |
December
1, 2013
|
(1)
Mr. Sculley is the President and Chief Executive Officer as of June 1,
2008.
|
(2)
Dr. Park was appointed Interim President and Chief Executive Officer in
January 2007 and resigned his post in January 2008. The options
were granted pursuant to his consulting agreement.
|
Column
note:
|
On
November 3, 2006, a reverse stock split, ratio of 1-for-10, became
effective. All stock options presented reflect the stock
split.
|
(a)
The options in this column were repriced. On July 21,
2006, certain employees agreed to cancel a portion of their existing stock
options in return for repricing the remaining stock options at $2.60 per
share. The repriced unvested options continued to vest on the
original schedule.
|
43
No
executive officer identified in the Summary Compensation Table above exercised
an option in fiscal year ended December 31, 2008.
The
following table sets forth information regarding stock option awards to our
named executive officers under our stock option plans for the year ended
December 31, 2008 as follows:
Name
|
Grant
Date
|
All
Other Option Awards: Number of Securities Underlying Options
(#)
|
Exercise
or Base Price of Options Awards ($/Sh)
|
Total
Grant Date Fair Value ($)
|
|||||||||
Andrew
G. Sculley
|
June
2, 2008 (1)
|
500,000
|
0.81
|
287,150
|
|||||||||
K.C. Park
|
May
1, 2008 (2)
|
70,453
|
0.97
|
24,461
|
|||||||||
K.C. Park
|
August
1, 2008 (2)
|
37,500
|
0.68
|
17,910
|
(1) 1/3
of the grant vests immediately; 1/3 of the grant vests on the first anniversary
and the remaining 1/3 vests on the second anniversary.
(2) The
grant vests immediately.
eMagin
does not have any plan which provides for payments or other benefits at,
following, or in connection with retirement.
Non-qualified
Deferred Compensation
eMagin
does not have any defined contribution or other plan which provides for the
deferral of compensation on a basis that is not tax-qualified.
Employment
Agreements
Effective
January 1, 2006, the Company entered into a revised executive employment
agreement with Susan K. Jones, Chief Marketing and Strategy Officer. The
agreement was effective for an initial term of three years. The agreement
provides for an annual salary, benefits made available by the Company to its
employees and eligibility for an incentive bonus pursuant to one or more
incentive compensation plans established by the Company from time to time. The
Company may terminate the employment of Ms. Jones at any time with or without
notice and with or without cause (as such term is defined in the
agreements). If Ms. Jones’ employment is terminated without cause, or if
Ms. Jones resigns with good reason (as such term is defined in the agreements),
or Ms. Jones’ position is terminated or significantly changed as result of
change of control (as such term is defined in the agreements), Ms. Jones shall
be entitled to receive salary until the end of the agreement’s full term or
twelve months, whichever is greater, payment for accrued vacation, and bonuses
which would have been accrued during the term of the agreement. If Ms. Jones
voluntarily terminates employment with the Company, other than for good reason
or is terminated with cause (as such term is defined in the agreement), she
shall cease to accrue salary, vacation, benefits, and other compensation on the
date of the voluntary or with cause termination. The Executive Employment
Agreement includes other conventional terms and also contains invention
assignment, non-competition, non-solicitation and non-disclosure
provisions. On April 17, 2006, the parties entered into amendments to
the employment agreements pursuant to which the parties clarified that the
Company has agreed to pay for health benefits equivalent to medical and dental
benefits provided during Ms. Jones’ full time employment until the end of the
agreement’s full term or twenty-four (24) months, whichever is
greater.
Effective
January 30, 2008, the Company entered into an amended employment agreement with
Susan K. Jones, Chief Business Officer. The amended agreement
provides for an annual base salary of $315 thousand, an extension of the term of
the agreement to January 31, 2010, modification and clarification of the basis
for the incentive component of her salary, provision for payment in the event
Ms. Jones voluntarily terminates her employment, and extension of the
change-of-control/material change/termination-without-cause compensation payout
periods to the greater of 18 months or the remaining term of the amended
employment agreement.
Effective
January 31, 2008, K.C. Park resigned as Interim Chief Executive Officer,
President and Director. Dr. Park and the Company entered into a
Separation Agreement and General Release (“Separation
Agreement”). The Company recorded severance expense of
$60,000. Dr. Park
and the
Company also entered into a Consulting Agreement (“Agreement”) for the term,
February 1 through August 1, 2008. Dr. Park was paid a sum of
$75.000. In addition to the compensation, Dr. Park received
non-qualified stock options to acquire 56,250 shares of common stock which are
fully vested and exercisable on the dates of the grant. On May
1, 2008, Dr. Park received non-qualified stock options to acquire 51,703 shares
of common stock at the fair market value and are fully vested.
44
Effective
January 2, 2008, John Atherly resigned as Chief Financial
Officer. There was no separation agreement executed between Mr.
Atherly and the Company.
Effective
December 27, 2007, Michael D. Fowler became the Company’s Interim Chief
Financial Officer. Effective April 14, 2008, Michael D. Fowler, the
Company’s Interim Chief Financial Officer, resigned his position with the
Company. There was no separation agreement executed between Mr. Fowler and the
Company.
Effective
April 15, 2008, Mr. Paul Campbell was serving as the Company’s Interim
Chief Financial Officer pursuant to an agreement between the Company and Tatum,
LLC, dated April 2, 2008 (the “Tatum Agreement”). Pursuant to the
Tatum Agreement, for a minimum term of three months, Mr. Campbell will be paid a
salary of $24,500 per month and the Company will also pay Tatum, LLC a fee of
$10,500 per month plus $300 per business day. Either party may
terminate the Tatum Agreement by providing the other with at least 30 days
notice.
Effective
June 1, 2008, Andrew G. Sculley became the Company’s Chief Executive Officer and
President pursuant to an employment agreement dated May 13, 2008, which
contemplates that the Company is to use its reasonable, good faith efforts to
cause Mr. Sculley to be elected as a member of the Company’s Board of Directors.
Pursuant to the agreement, Mr. Sculley will be paid a salary of $300,000,
per annum, increasing to $310,000, per annum, after six months and to $320,000,
per annum, at the end of the first year. Mr. Sculley was granted 500,000
qualified stock options. The options vest as
follows: 166,667 shares vest immediately, 166,667 vests on the first
anniversary date, and 166,666 vests on the second anniversary
date. If Mr. Sculley voluntarily terminates his employment with
the Company, other than for good reason as defined in the employment agreement,
he shall cease to accrue salary, personal time off, benefits and other
compensation on the date of voluntary termination. The Company may
terminate Mr. Sculley’s employment with or without cause. If the Company
terminates without cause, Mr. Sculley will be entitled to one year of
salary.
On May 8,
2009 (the “Effective Date”), the Company and Paul Campbell entered in an
Employment Agreement (the “Employment Agreement”). Pursuant to the
Employment Agreement, Mr. Campbell, who is currently serving as the Company’s
interim Chief Financial Officer, will serve as the Company’s Chief Financial
Officer, Senior Vice President and Treasurer. The Employment
Agreement terminates 36 months from the Effective Date. Pursuant to
the Employment Agreement, Mr. Campbell’s salary is $282,000 per
annum. The Company’s board may also award a bonus to Mr.
Campbell. Pursuant to the Employment Agreement, the Company shall
issue Mr. Campbell options to purchase up to 340,000 shares of the Company’s
common stock, which are exercisable at $1.09 per share, the market price on the
date of grant. The options vest as follows: one third of
the options vest as of the Effective Date, one third of the options vest on the
first anniversary of the Employment Agreement and one third of the options vest
on the second anniversary of the Employment Agreement. If Mr.
Campbell voluntarily terminates his employment with the Company, other than for
good reason as defined in the employment agreement, he shall cease to accrue
salary, personal time off, benefits and other compensation on the date of
voluntary termination. The Company may terminate Mr. Campbell’s employment
with or without cause. If the Company terminates without cause, Mr.
Campbell will be entitled to one year of salary.
In
connection with the employment of Paul Campbell, the Company entered into an
agreement with Tatum LLC (“Tatum”). Pursuant to the agreement with
Tatum, the Company paid Tatum a signing fee of $97,700 and shall pay Tatum
$1,000 per month for as long as Mr. Campbell is employed by
eMagin. In addition, the Company will grant Tatum 60,000 options with
the same vesting and exercise price as Mr. Campbell's and will pay Tatum 15% of
any cash bonus that is paid to Mr. Campbell.
45
Potential
Payments Upon Termination or Change-in-Control
The
following table sets forth information regarding potential payments and benefits
our principal executive officers would receive upon termination of employment
under specified circumstances, assuming that the triggering event in question
occurred on December 31, 2008, the last business day of the fiscal
year:
Name
|
Voluntary
Resignation w/o Good Reason
|
Voluntary
Resignation for Good Reason
|
Involuntary
Termination without Cause
|
Involuntary
Termination with Cause
|
Involuntary
Termination with a Change in Control
|
|||||||||||||||
Andrew
Sculley
|
||||||||||||||||||||
Cash
severance
|
$
|
—
|
$
|
310,000
|
(1)
|
$
|
310,000
|
(1)
|
$
|
—
|
$
|
310,000
|
(1)
|
|||||||
Vesting
of stock options
|
$
|
—
|
$
|
—
|
(2)
|
$
|
—
|
(2)
|
$
|
—
|
$
|
—
|
(2)
|
|||||||
Susan
Jones
|
||||||||||||||||||||
Cash
severance
|
$
|
157,500
|
(1)
|
$
|
472,500
|
(1)
|
$
|
472,500
|
(1)
|
$
|
—
|
$
|
472,500
|
(1)
|
||||||
Post-termination
health and welfare
|
$
|
—
|
$
|
10,820
|
(3)
|
$
|
10,820
|
(3)
|
$
|
—
|
$
|
10,820
|
(3)
|
|||||||
Vesting
of stock options
|
$
|
—
|
$
|
—
|
(4)
|
$
|
—
|
(4)
|
$
|
—
|
$
|
—
|
(4)
|
(1) This
amount reflects the lump sum that is payable within thirty days of the
triggering event to the named executive. All calculations were made
as of December 31, 2008 using then current salary figures for the named
executive.(2) This amount reflects the value of the stock
options awards that were unvested as of December 31, 2008 which would accelerate
and vest under the terms of eMagin’s option plans following a triggering
event.
(3) This
amount reflects the COBRA payments for health and dental benefits that eMagin
would make on behalf of the named executive.
(4) This
amount would reflect the value of the stock option awards that were unvested as
of December 31, 2008 which would accelerate and vest under the terms of eMagin’s
option plans following a triggering event. As of December 31, 2008,
all stock options were fully vested.
Director
Compensation Arrangements
The
following table sets forth with respect to the named director, compensation
information inclusive of equity awards and payments made in the year ended
December 31, 2008. The table includes only directors that were not
employees of eMagin Corporation. Any director who was also an
executive officer is included in the Summary Compensation Table.
DIRECTOR
COMPENSATION
|
||||||||||||||||||||||||||||
Name
|
Fees
earned or paid in cash($)
|
Stock
awards
($)
|
Option
awards($)
|
Non-equity
incentive plan compensation($)
|
Change
in pension value and nonqualified deferred compensation
earnings($)
|
All
other compensation
($)
|
Total($)
|
|||||||||||||||||||||
Claude
Charles
|
20,500
|
-
|
39,035
|
-
|
-
|
-
|
59,535
|
|||||||||||||||||||||
Paul
Cronson
|
18,500
|
-
|
24,263
|
-
|
-
|
-
|
42,763
|
|||||||||||||||||||||
Irwin
Engelman
|
21,000
|
-
|
39,035
|
-
|
-
|
-
|
60,035
|
|||||||||||||||||||||
Jack
Goldman
|
22,500
|
-
|
39,035
|
-
|
-
|
-
|
61,535
|
|||||||||||||||||||||
Thomas
Paulsen
|
84,000
|
-
|
34,111
|
-
|
-
|
-
|
118,111
|
|||||||||||||||||||||
Stephen
Seay
|
19,500
|
-
|
34,111
|
-
|
-
|
-
|
53,611
|
46
OUTSTANDING
EQUITY AWARDS AT YEAR-END
|
|||||||||||||||||||||||||||||||||
Option
awards
|
Stock
awards
|
||||||||||||||||||||||||||||||||
Name
and
principal
|
Number
of securities underlying unexercised options (#)
|
Number
of securities underlying unexercised options (#)
|
Equity
incentive plan awards: Number of securities underlying unexercised
options
|
Options
exercise price
|
Option
expiration
|
Number
of shares or units of stock that have not vested
|
Market
value of shares or units of stock that have not vested
|
Equity
incentive plan awards:
Number
of unearned shares other rights that have not vested
|
Equity
incentive plan awards:
Market
or payout value of unearned shares, units or other rights that have not
vested
|
||||||||||||||||||||||||
position
|
Exercisable
|
Unexercisable
|
(#), (a) |
($)
|
Date
|
(#) |
($)
|
(#) |
($)
|
||||||||||||||||||||||||
Claude
Charles
|
1,000 | - | 1,000 | 3.50 |
January
2, 2010
|
- | - | - | - | ||||||||||||||||||||||||
975 | - | 975 | 2.60 |
July
2, 2010
|
- | - | - | - | |||||||||||||||||||||||||
650 | - | 650 | 2.60 |
September
2, 2010
|
- | - | - | - | |||||||||||||||||||||||||
3,250 | - | 3,250 | 2.60 |
April
5, 2011
|
- | - | - | - | |||||||||||||||||||||||||
1,950 | - | 1,950 | 2.60 |
June
15, 2014
|
- | - | - | - | |||||||||||||||||||||||||
975 | - | 975 | 2.60 |
September
30, 2015
|
- | - | - | - | |||||||||||||||||||||||||
3,900 | - | 3,900 | 2.60 |
December
31, 2015
|
- | - | - | - | |||||||||||||||||||||||||
12,700 | - | 12,700 | 1.51 |
November
23, 2017
|
- | - | - | - | |||||||||||||||||||||||||
25,000 | - | 25,000 | 1.44 |
December
3, 2017
|
- | - | - | - | |||||||||||||||||||||||||
25,000 | - | 25,000 | 1.35 |
January
2, 2018
|
- | - | - | - | |||||||||||||||||||||||||
30,000 | - | 30,000 | 0.70 |
July
24, 2018
|
- | - | - | - | |||||||||||||||||||||||||
Paul
Cronson
|
4,875 | - | 4,875 | 2.60 |
July
2, 2010
|
- | - | - | - | ||||||||||||||||||||||||
1,625 | - | 1,625 | 2.60 |
June
15, 2014
|
- | - | - | - | |||||||||||||||||||||||||
3,900 | - | 3,900 | 2.60 |
December
31, 2015
|
- | - | - | - | |||||||||||||||||||||||||
10,400 | - | 10,400 | 1.51 |
November
23, 2017
|
- | - | - | - | |||||||||||||||||||||||||
25,000 | - | 25,000 | 1.44 |
December
3, 2017
|
- | - | - | - | |||||||||||||||||||||||||
25,000 | - | 25,000 | 1.35 |
January
2, 2018
|
- | - | - | - | |||||||||||||||||||||||||
Irwin
Engelman
|
3,900 | - | 3,900 | 2.60 |
October
3, 2012
|
- | - | - | - | ||||||||||||||||||||||||
975 | - | 975 | 2.60 |
September
30, 2015
|
- | - | - | - | |||||||||||||||||||||||||
163 | - | 163 | 2.60 |
October
3, 2015
|
- | - | - | - | |||||||||||||||||||||||||
5,038 | - | 5,038 | 1.51 |
November
23, 2017
|
- | - | - | - | |||||||||||||||||||||||||
25,000 | - | 25,000 | 1.44 |
December
3, 2017
|
- | - | - | - | |||||||||||||||||||||||||
25,000 | - | 25,000 | 1.35 |
January
2, 2018
|
- | - | - | - | |||||||||||||||||||||||||
30,000 | - | 30,000 | 0.70 |
July
24, 2018
|
- | - | - | - | |||||||||||||||||||||||||
Jacob
Goldman
|
650 | - | 650 | 2.60 |
July
2, 2010
|
- | - | - | - | ||||||||||||||||||||||||
3,900 | - | 3,900 | 2.60 |
September
2, 2010
|
- | - | - | - | |||||||||||||||||||||||||
2,113 | - | 2,113 | 2.60 |
June
15, 2014
|
- | - | - | - | |||||||||||||||||||||||||
650 | - | 650 | 2.60 |
September
30, 2015
|
- | - | - | - | |||||||||||||||||||||||||
488 | - | 488 | 2.60 |
October
3, 2015
|
- | - | - | - | |||||||||||||||||||||||||
3,900 | - | 3,900 | 2.60 |
December
31, 2015
|
- | - | - | - | |||||||||||||||||||||||||
12,026 | - | 12,026 | 1.51 |
November
23, 2017
|
- | - | - | - | |||||||||||||||||||||||||
25,000 | - | 25,000 | 1.44 |
December
3, 2017
|
- | - | - | - | |||||||||||||||||||||||||
25,000 | - | 25,000 | 1.35 |
January
2, 2018
|
- | - | - | - | |||||||||||||||||||||||||
30,000 | - | 30,000 | 0.70 |
July
24, 2018
|
- | - | - | - | |||||||||||||||||||||||||
Thomas
Paulsen
|
3,900 | - | 3,900 | 2.60 |
July
30, 2010
|
- | - | - | - | ||||||||||||||||||||||||
1,300 | - | 1,300 | 2.60 |
June
15, 2014
|
- | - | - | - | |||||||||||||||||||||||||
1,625 | - | 1,625 | 2.60 |
September
30, 2015
|
- | - | - | - | |||||||||||||||||||||||||
3,250 | - | 3,250 | 2.60 |
October
3, 2015
|
- | - | - | - | |||||||||||||||||||||||||
813 | - | 813 | 2.60 |
December
31, 2015
|
- | - | - | - | |||||||||||||||||||||||||
11,213 | - | 11,213 | 1.51 |
November
23, 2017
|
- | - | - | - | |||||||||||||||||||||||||
25,000 | - | 25,000 | 1.44 |
December
3, 2017
|
- | - | - | - | |||||||||||||||||||||||||
25,000 | - | 25,000 | 1.35 |
January
2, 2018
|
- | - | - | - | |||||||||||||||||||||||||
20,000 | - | 20,000 | 0.70 |
July
24, 2018
|
- | - | - | - | |||||||||||||||||||||||||
Stephen
Seay
|
3,900 | - | 3,900 | 2.60 |
February
14, 2016
|
- | - | - | - | ||||||||||||||||||||||||
3,900 | - | 3,900 | 1.51 |
November
23, 2017
|
- | - | - | - | |||||||||||||||||||||||||
25,000 | - | 25,000 | 1.44 |
December
3, 2017
|
- | - | - | - | |||||||||||||||||||||||||
25,000 | - | 25,000 | 1.35 |
January
2, 2018
|
- | - | - | - | |||||||||||||||||||||||||
20,000 | - | 20,000 | 0.70 |
July
24, 2018
|
- | - | - | - |
47
Compensation Committee Interlocks and
Insider Participation
None of
the members of our Compensation Committee has been an officer or employee of
eMagin during years ending December 31, 2006, 2007 and 2008, except as noted
below. In addition, during the most recent fiscal year, no eMagin
executive officer served on the Compensation Committee (or equivalent), or the
Board, of another entity whose executive officer(s) served on our Compensation
Committee or Board. On January 31, 2008, Dr. K.C. Park resigned
as our Interim Chief Executive Officer and President and Thomas Paulsen, a
director and Chairman of both the Board of Directors and the Compensation
Committee, assumed that role on an interim basis until June 1, 2008 when Andrew
G. Sculley, Jr. joined the Company as Chief Executive Officer and
President. No change in Admiral Paulsen’s compensation occurred as a
result of his accepting the temporary position of Interim Chief Executive
Officer and President.
Compensation
Committee Report
The
Committee has reviewed the Compensation Discussion and Analysis and discussed
that analysis with management. Based on its review and discussions with
management, the Committee recommended to the Board that the Compensation
Discussion and Analysis be included in eMagin’s 10-K. This report is
provided by the following independent directors, who comprise the
Committee:
Thomas
Paulsen (Chairman)
Jacob
Goldman
Stephen
Seay
48
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The following
table sets forth the number of shares known to be owned by all persons who own
at least 5% of eMagin's outstanding common stock, the Company's directors, the
executive officers, and the directors and executive officers as a group as of
October 16, 2009, unless otherwise noted. Unless otherwise indicated, the
stockholders listed in the table have sole voting and investment power with
respect to the shares indicated.
Name
of Beneficial Owner
|
Common
Stock Beneficially Owned
|
Percentage
of Common Stock
|
||||||
Stillwater
LLC (1)
|
13,137,958
|
35.8
|
%
|
|||||
Ginola
Limited (2)
|
5,079,856
|
13.8
|
%
|
|||||
Rainbow
Gate Corporation (3)
|
1,951,037
|
5.3
|
%
|
|||||
Susan
K Jones (4)
|
634,715
|
1.7
|
%
|
|||||
Paul
Cronson (5)
|
610,031
|
1.7
|
%
|
|||||
Claude
Charles (6)
|
195,400
|
*
|
%
|
|||||
Jack
Goldman (7)
|
208,727
|
*
|
%
|
|||||
Thomas
Paulsen (8)
|
267,101
|
*
|
||||||
Irwin
Engelman (9)
|
165,076
|
*
|
||||||
Stephen
Seay ( 10)
|
152,800
|
*
|
||||||
Andrew
G. Sculley (11)
|
333,334
|
*
|
||||||
Paul
Campbell (12)
|
113,333
|
*
|
||||||
All
executive officers and directors as a group (consisting of 9 individuals)
(13)
|
2,680,517
|
7.3
|
*Less
than 1*% of the outstanding common stock
**
Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options,
warrants, or preferred shares exercisable or convertible within 60
days of November 11, 2009 are deemed outstanding for computing the
percentage of the person holding such option or warrant. Percentages
are based on a total of 36,704,639 shares: 16,961,902 shares of common
stock outstanding on November 11, 2009 and 19,742,737 shares issuable upon the
exercise of options, warrants exercisable and preferred shares convertible
on or within 60 days of November 11, 2009, as described
below.
(1) This
figure represents: (i) 2,969,819 shares of common stock owned by Stillwater
LLC, which includes 276,084 shares of common stock owned by Rainbow Gate
Corporation, in which the sole member of Stillwater LLC is the investment
manager of Rainbow Gate Corporation; (ii) warrants held by Stillwater LLC to
purchase 3,853,472 shares of common stock, which includes warrants to purchase
737,620 shares of common stock held by Rainbow Gate Corporation, in which the
sole member of Stillwater LLC is the investment manager of Rainbow Gate
Corporation; and (iii) 6,314,667 shares of common stock
underlying convertible preferred shares which includes 937,333 shares of
common stock underlying convertible preferred shares held by Rainbow Gate
Corporation, in which the sole member of Stillwater LLC is the investment
manager of Rainbow Gate Corporation. Mortimer D.A. Sackler exercises the sole
voting power with respect to the shares held in the name of Stillwater LLC as
sole member, and Mortimer D.A. Sackler exercises the sole voting power with
respect to the shares held in the name of Rainbow Gate Corporation as investment
manager; therefore Stillwater LLC is deemed to beneficially own the shares held
by Rainbow Gate as “beneficially owned” but Stillwater LLC disclaims beneficial
ownership of such shares.
(2) This
figure represents: (i) 1,257,629 shares of common stock owned by Ginola Limited,
which include: 276,084 shares of common stock held indirectly by Rainbow Gate
Corporation, in which the sole shareholder of Ginola Limited is also the sole
shareholder of Rainbow Gate Corporation; 65,080 shares of common stock owned by
Mount Union Corp.; 57,372 shares of common stock owned by Chelsea Trust Company
Limited, as trustee (Ginola Limited disclaims beneficial ownership of the shares
owned by Mount Union Corp. and Chelsea Trust Company Limited, as trustee); and
284,736 shares of common stock owned by Crestflower Corporation, in which the
sole shareholder of Crestflower Corporation is Ginola Limited; and (ii) warrants
held by Ginola Limited to purchase 1,814,227 shares of common stock, which
include: warrants to purchase 737,620 shares of common stock held by Rainbow
Gate Corporation, in which the sole shareholder of Ginola Limited is also the
sole shareholder of Rainbow Gate Corporation; warrants to purchase 32,540 shares
of common stock owned by Mount Union Corp.; warrants to purchase 27,273 shares
of common stock held indirectly by Chelsea Trust Company Limited, as trustee
(Ginola Limited disclaims beneficial ownership of the shares owned by Mount
Union Corp. and Chelsea Trust Company Limited, as trustee);
and
warrants
to purchase 120,193 shares of common stock held by Crestflower Corporation, in
which the sole shareholder of Crestflower Corporation is Ginola
Limited; and (iii) 2,008,000 shares of common stock underlying convertible
preferred shares, which includes 937,333 shares of common stock underlying
convertible preferred shares held by Rainbow Gate Corporation, in which the sole
shareholder of Ginola Limited is also the sole shareholder of Rainbow Gate
Corporation. Stillwater LLC and Ginola Limited are beneficially owned by
separate individuals and therefore do not exert voting control over one another.
However, Stillwater LLC does include the shares held by Rainbow Gate as
“beneficially owned” since the sole member of Stillwater LLC is investment
manager and sole director of Rainbow Gate Corporation and exerts voting control
over such shares but Stillwater LLC disclaims beneficial ownership of such
shares. Jonathan White, Steven Meiklejohn, and Joerg Fischer exercise the
shared voting power with respect to the shares held in the name of Mount Union
Corp. Stuart Baker, Joerg Fischer, Charles Lubar, Christopher Mitchell, Leslie
Schreyer and Jonathan White exercise the shared voting power with respect to the
shares held in the name of Chelsea Trust Company Limited. Jonathan
White, Joerg Fischer and Steven Meiklejohn exercise the shared voting power with
respect to the shares held in the name of Crestflower
Corporation. Jonathan White, Joerg Fischer, John Crellin and Steven
Meiklejohn are the directors of Ginola Limited and exercise the shared voting
power with respect to the shares held in the name of Ginola
Limited.
49
(3) This
figure represents (1) 276,084 shares of common stock owned by Rainbow Gate
Corporation; (ii) warrants to purchase 737,620 shares of common stock; and (iii)
937,333 shares of common stock underlying convertible preferred shares. Mortimer
D.A. Sackler exercises the sole voting power with respect to the shares
held in the name of Rainbow Gate Corporation but disclaims beneficial ownership
of such shares.
(4) This
figure represents shares of common stock owned by Gary Jones and Susan Jones who
are married to each other, including (i) 395,268 shares of common stock owned by
Gary Jones and 158,792 shares of common stock owned by Susan Jones; and (ii)
80,655 shares of common stock issuable upon exercise of stock options held by
Susan Jones. Mr. and Mrs. Jones disclaim beneficial ownership of
500,000 shares of common stock.
(5) This
figure represents 22,981 shares of common stock owned by Mr. Cronson, 199,583
shares of common stock underlying warrants, 120,800 shares of common stock
underlying options, and 266,667 shares of common stock
underlying convertible preferred shares held directly and indirectly by
Paul Cronson. This includes (i) 12,097 shares of common stock held indirectly by
a family member of Paul Cronson; and (ii) 3,783 shares of common stock, 186,666
shares of common stock underlying warrants and 266,667 shares of common stock
underlying convertible preferred shares held indirectly by Navacorp III,
LLC. Mr. Cronson exercises the sole voting power with respect to the shares held
in the name of Navacorp III, LLC.
(6) This
figure represents shares of common stock underlying options.
(7) This
figure represents shares of common stock underlying options.
(8) This
figure represents shares of common stock underlying options.
(9) This
figure represents shares of common stock underlying options.
(10) This
figure represents shares of common stock underlying options.
(11) This
figure represents shares of common stock underlying options.
(12) This
figure represents shares of common stock underlying options.
(13) This
figure represents: (i) 577,041 shares of common stock; (ii) warrants
held to purchase 199,583 shares of common stock; (iii) 266,667 shares of common
stock underlying convertible preferred shares; and (iv) 1,637,226 shares of
common stock issuable upon exercise of stock options.
50
The
following table sets forth the aggregate information of our equity compensation
plans in effect as of December 31, 2008:
Plan
|
Number of
securities to be
issued upon exercise
of outstanding options,
warrants and rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities reflected
in first column
|
|||||||||
Equity
compensation plans approved by security holders
|
1,323,480
|
$
|
1.23
|
2,055,595
|
||||||||
Equity
compensation plans not approved by security holders
|
292,193
|
$
|
3.41
|
TRANSFER
AGENT
Our
transfer agent for our common stock is Continental Stock Transfer, 17 Battery
Place, New York, NY 10004.
INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Our
Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware that our directors or officers shall not be personally liable to us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our By
Laws also provide that the Board of Directors may also authorize us to indemnify
our employees or agents, and to advance the reasonable expenses of such persons,
to the same extent, following the same determinations and upon the same
conditions as are required for the indemnification of and advancement of
expenses to our directors and officers. As of the date of this Registration
Statement, the Board of Directors has not extended indemnification rights to
persons other than directors and officers.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
We are
registering the shares of common stock issuable upon exercise of the warrants to
permit the resale of these shares of common stock by the holders of the warrants
from time to time after the date of this prospectus. We will receive
proceeds of $2,334,127 from the exercise of the warrants. We will
bear all fees and expenses incident to our obligation to register the shares of
common stock.
The
selling stockholders and any of their pledgees, donees, transferees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be
at fixed prices, at prevailing market prices at the time of sale, at varying
prices determined at the time of sale or negotiated prices. The selling
stockholders may use any one or more of the following methods when selling
shares:
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits investors;
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
·
|
privately
negotiated transactions;
|
·
|
to
cover short sales made after the date that this registration statement is
declared effective by the Commission;
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per share;
|
·
|
a
combination of any such methods of sale; and
|
·
|
any
other method permitted pursuant to applicable
law.
|
51
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts
from the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The
selling stockholders may from time to time pledge or grant a security interest
in some or all of the shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of common stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and if such short
sale shall take place after the date that this registration statement is
declared effective by the Commission, the selling stockholders may deliver these
securities to close out such short sales, or loan or pledge the common stock to
broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
Upon us
being notified in writing by a selling stockholder that any material arrangement
has been entered into with a broker-dealer for the sale of common stock through
a block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, a supplement to this prospectus will be
filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing
(i) the name of each such selling stockholder and of the participating
broker-dealer(s), (ii) the number of shares involved, (iii) the price at which
such the shares of common stock were sold, (iv)the commissions paid or discounts
or concessions allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus, and (vi) other facts
material to the transaction. In addition, upon us being notified in
writing by a selling stockholder that a donee or pledgee intends to sell more
than 500 shares of common stock, a supplement to this prospectus will be filed
if then required in accordance with applicable securities law.
The
selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this
prospectus.
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Discounts, concessions,
commissions and similar selling expenses, if any, that can be attributed to the
sale of securities will be paid by the selling stockholder and/or the
purchasers.
We have
advised each selling stockholder that it may not use shares registered on this
registration statement to cover short sales of common stock made prior to the
date on which this registration statement shall have been declared effective by
the Commission. If a selling stockholder uses this prospectus for any sale
of the common stock, it will be subject to the prospectus delivery requirements
of the Securities Act unless an exemption therefrom is available. The
selling stockholders will be responsible to comply with the applicable
provisions of the Securities Act and Exchange Act, and the rules and regulations
thereunder promulgated, including, without limitation, Regulation M, as
applicable to such selling stockholders in connection with resales of their
respective shares under this registration statement.
52
There can
be no assurance that any selling stockholder will sell any or all of the shares
of common stock registered pursuant to the registration statement, of which this
prospectus forms a part.
Once sold
under the registration statement, of which this prospectus forms a part, the
shares of common stock will be freely tradable in the hands of persons other
than our affiliates.
We have
agreed to indemnify the selling stockholders against certain losses, claims,
damages and liabilities, including liabilities under the Securities Act.
DESCRIPTION OF
SECURITIES
COMMON
STOCK
We are
authorized to issue up to 200,000,000 shares of common stock, $0.001 par value.
As of November 11, 2009, there were 16,961,902 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
non-assessable.
PREFERRED
STOCK
We are
authorized to issue up to 10,000,000 shares of Preferred Stock, $0.001 par
value. The 10,000,000 shares of Preferred Stock authorized are undesignated as
to preferences, privileges and restrictions. As the shares are issued, the Board
of Directors must establish a “series” of the shares to be issued and designate
the preferences, privileges and restrictions applicable to that
series.
The
Company filed the Certificate of Designations with the State of Delaware on
December 19, 2008. The Certificate of Designations designates 10,000
shares of the Company’s preferred stock as Series B Convertible Preferred
Stock. The Preferred Stock has a stated value of $1,000 and has a
conversion price of $.75 per share. The Preferred Stock does not pay
interest. The holders of the Preferred Stock are not entitled to
receive dividends unless the Company’s Board of Directors declared a dividend
for holders of the Company’s common stock and then the dividend shall be equal
to the amount that such holder would have been entitled to receive if the holder
converted its Preferred Stock into shares of the Company’s common
stock. Each share of Preferred Stock has voting rights equal to (i)
the number of shares of Common Stock issuable upon conversion of such shares of
Preferred Stock at such time (determined without regard to the shares of Common
Stock so issuable upon such conversion in respect of accrued and unpaid
dividends on such share of Preferred Stock) when the Preferred Stock votes
together with the Company’s Common Stock or any other class or series of stock
of the Company and (ii) one vote per share of Preferred Stock when such vote is
not covered by the immediately preceding clause. In the event of a
liquidation, dissolution, or winding up of the Company, the Preferred Stock
is entitled to receive liquidation preference before the Common Stock. The
Company may at its option redeem the Preferred Stock by providing the required
notice to the holders of the Preferred Stock and paying an amount equal to
$1,000 multiplied by the number of shares for all of such holder’s shares of
outstanding Preferred Stock to be redeemed. As of November 11, 2009, there
were 5,739 shares of Preferred Stock issued.
SELLING
STOCKHOLDERS
The table
below sets forth information concerning the resale of the shares of common stock
by the selling stockholders. We will not receive any proceeds from the resale of
the common stock by the selling stockholders. We will receive proceeds from the
exercise of the warrants. Assuming all the shares registered below are sold by
the selling stockholders, none of the selling stockholders will continue to own
any shares of our common stock registered pursuant to the registration statement
of which this prospectus forms a part.
The
following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person based on its ownership of the
shares of common stock underlying the warrants, as of November 11, 2009 to the
extent known to us, assuming exercise of the warrants held by the selling
stockholders on that date, without regard to
any limitations on exercise, the number of shares of common stock that may be
sold in this offering and the number of shares of common stock each person will
own after the offering, assuming they sell all of the shares
offered.
53
Except as
described below the selling stockholders do not have and within the past three
years have not had any position, office or other material relationship with us
or any of our predecessors or affiliates.
In accordance with the terms of registration rights agreements
with the holders of the shares of common stock and the warrants, this prospectus
generally covers the resale of at least the sum of (i) the number of shares of
common stock issued and (ii) the shares of common stock issued and issuable upon
exercise of the related warrants, determined as if the outstanding warrants were
exercised, as applicable, in full, as of the trading day immediately preceding
the date this registration statement was initially filed with the SEC.
Name
of Selling Security Holder
|
Shares
of Common Stock Included in Prospectus (i)
|
Beneficial
Ownership Before Offering (ii)
|
Percentage
of Common Stock Before Offering (ii)
|
Beneficial
Ownership After the Offering (iii)
|
Percentage
of common Stock Owned After Offering (iii)
|
|||||||||||||||
Iroquois
Master Fund Ltd. (1)
|
72,116 | 408,543 | 1.1 | % | 336,427 | * | ||||||||||||||
Kettle
Hill Master Fund, Ltd. (2)
|
86,539 | 235,362 | * | 148,823 | * | |||||||||||||||
Kettle
Hill Partners, LP (3)
|
55,289 | 212,391 | * | 157,102 | * | |||||||||||||||
Kettle
Hill Partners II, LP (4)
|
98,558 | 172,633 | * | 74,075 | * | |||||||||||||||
Moriah
Capital L.P. (5)
|
1,370,000 | 1,547,914 | 4.22 | % | 177,914 | * | ||||||||||||||
Total
|
1,682,502 | 2,576,843 | 894,341 |
* Less
than 1% of the outstanding common stock
(i)
|
Represents
1,682,502 shares issuable upon the exercise of common stock purchase
warrants.
|
(ii)
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or
convertible within 60 days of November 11, 2009 are deemed outstanding for
computing the percentage of the person holding such option or warrant.
Percentage prior to offering is based on 36,704,639
shares: 16,961,902 shares of common stock outstanding as of
November 11, 2009 and 19,742,737 shares issuable upon exercise of options,
warrants exercisable and convertible preferred stock on or within 60 days
of October 16, 2009.
|
(iii)
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or
convertible within 60 days of November 11, 2009 are deemed outstanding for
computing the percentage of the person holding such option or warrant.
Percentage prior to offering is based on 36,704,639
shares: 16,961,902 shares of common stock outstanding as of
November 11, 2009 and 19,742,737 shares issuable upon exercise of options,
warrants exercisable and convertible preferred stock on or within 60 days
of November 11, 2009.It assumes all shares offered in this prospectus are
sold.
|
(1)
|
Represents
(i) 149,761 shares of common stock and (ii) 258,782 shares
underlying warrants of which 72,116 are exercisable at $1.13 per share and
being registered with this prospectus.
|
(2)
|
Represents
(i) 148,823 shares of common stock and (ii) 86,539 shares underlying
warrants which are exercisable at $1.13 per share which are being
registered with this prospectus. Kettle Hill Capital
Management, LLC acts as investment manager for Kettle Hill Master Fund,
Ltd. Andrew Y. Kurita has voting and dispositive power over the
shares beneficially owned by Kettle Hill Master Fund, Ltd, but Mr.
Kurita disclaims beneficial ownership except to the extent of his
pecuniary interest therein. Other than in connection with April
2008 offering the Company has had no formal relationship with Kettle
Hill Master Fund within the last 3 years. The address
for Kettle Hill Master Fund, Ltd. is c/o Kettle Hill Capital
Management, LLC, 101 Park Avenue, 23rd Floor, New York NY 10178, Attn:
Andrew Y. Kurita.
|
(3)
|
Represents
(i) 157,102 shares of common stock and (ii) 55,289 shares underlying
warrants which are exercisable at $1.13 per share which are being
registered with this prospectus. Kettle Hill Capital
Management, LLC acts as investment manager for Kettle Hill Partners,
LP. Andrew Y. Kurita has voting and dispositive power over the
shares beneficially owned by Kettle Hill Partners, LP, but Mr. Kurita
disclaims beneficial ownership except to the extent of his pecuniary
interest therein. Other than in connection with April 2008
offering the Company has had no formal relationship with Kettle Hill
Partners, LP within the last 3 years. The address
for Kettle Hill Partners, LP is 101 Park Avenue, 23rd Floor, New York
NY 10178, Attn: Andrew Y. Kurita.
|
(4)
|
Represents
(i) 74,075 shares of common stock and (ii) 98,558 shares underlying
warrants which are exercisable at $1.13 per share which are being
registered with this prospectus. Kettle Hill Capital
Management, LLC acts as investment manager for Kettle Hill Partners II,
LP. Andrew Y. Kurita has voting and dispositive power over the
shares beneficially owned by Kettle Hill Partners II, LP, but Mr.
Kurita disclaims beneficial ownership except to the extent of his
pecuniary interest therein. Other than in connection with April
2008 offering the Company has had no formal relationship with Kettle
Hill Partners II, LP within the last 3 years. The address
for Kettle Hill Partners II, LP is 101 Park Avenue, 23rd Floor, New
York NY 10178, Attn: Andrew Y. Kurita.
|
(5)
|
Represents
1,370,000 shares underlying warrants of which 1,000,000 are exercisable at
$1.50 per share, and 370,000 are exercisable at $1.30 per share and being
registered in this
prospectus.
|
54
TRANSACTIONS WITH RELATED PERSONS,
PROMOTERS AND CERTAIN CONTROL PERSONS
As
previously reported on a Form 8-K that was filed with the Securities and
Exchange Commission on December 23, 2008, pursuant to a Securities Purchase
Agreement (the “Securities Purchase Agreement”) entered into on December 18,
2008 between the Company and Stillwater LLC ("Stillwater"), on
December 22, 2008 (the “Closing”), the Company sold Stillwater for an aggregate
purchase price of $4,033,000 an aggregate of 4,033 shares of its Series B
Convertible Preferred Stock (the “Preferred Stock”), which have a stated value
of $1,000 per share, a conversion price of $0.75 per share and have the rights
and preferences set forth in the Certificate of Designations of Series B
Convertible Preferred Stock filed with the Secretary of State for the State of
Delaware on December 19, 2008 (the “Certificate of Designations”), and warrants
to purchase 1,875,467 shares of common stock at $1.03 per share (the
“Warrants”). The Warrants terminate on December 22, 2013. Stillwater
beneficially owns 35.8% of the Company’s common stock.
Pursuant
to the terms of the Securities Purchase Agreement, the Company used the proceeds
from the sale of the Preferred Stock exclusively to repay $4,033,000 of its
Amended and Restated 8% Senior Secured Convertible Notes (the “Notes”)
which matured on December 22, 2008.
Pursuant
to the Securities Purchase Agreement, the members of the Company’s board of
directors, and certain executive officers executed lockup agreements pursuant to
which, subject to the terms of the lockup agreement, they were restricted from
selling the Company’s stock that they beneficially own for 180 days from the
Closing.
On
December 18, 2008, the Company entered into an Exchange Agreement (the “Exchange
Agreement”) with three holders (“Holders”) of its outstanding Notes, (i)
Navacorp III LLC whose managing member, Paul Cronson, is a member of its board
of directors; (ii) Ginola Limited who beneficially owns 13.8% of the shares of
common stock; and (iii) Rainbow Gate Corporation who beneficially owns 5.3% of
common stock. Pursuant to the Exchange Agreement, on December 22, 2008, the
Holders exchanged $1,700,000 of their outstanding Notes and accrued and unpaid
interest thereon and received 1,706 shares of the Preferred Stock (the amount of
the outstanding principal and accrued and unpaid interest due on the Notes
exchanged divided by $1,000).
The
Company also entered into a Registration Rights Agreement with Stillwater
to register for resale the shares of the common stock issuable upon
conversion of the Preferred Stock sold in the offering and the shares of common
stock issuable upon exercise of the warrants. Subject to the terms of
the Registration Rights Agreement, the Company is required to file a
registration statement (the “Registration Statement”) on Form S-1 with the
Securities and Exchange Commission (the “SEC”) within 30 days following the date
that it is permitted to file a registration statement by (i) the rules and
regulations of the Securities and Exchange Commission and (ii) the agreements
set forth on Schedule B to the Registration Rights Agreement, which as of
November 11, 2009 prohibits the Company from filing the initial Registration
Statement until certain other registration statements are filed. After filing
the Registration Statement, the Company is to cause such Registration Statement
to be declared effective under the Securities Act of 1933, as amended (the
“Act”) as promptly as possible after the filing thereof, but in no event later
than 90 days after the filing date (or no later than 120 days after the filing
date in the event of SEC “full review” of the Registration Statement). The
Holders of Notes that exchanged their Notes pursuant to the Exchange Agreement,
(i.e., Rainbow Gate Corporation, Ginola Limited and Navacorp III LLC), received
the same registration rights as Stillwater.
In
connection with the issuance of the Shares and the warrants pursuant to the
December 22, 2008 Securities Purchase Agreement, the Company was required to
lower the exercise prices of existing Series F warrants from $3.31 to $2.50 per
share pursuant to the anti-dilution provisions of the Series F
warrants.
On April
2, 2008, the Company completed a private placement of its common stock with
several institutional investors, including Stillwater (as defined above) and
Ginola Limited, for gross proceeds of $1,650,000. The transaction
involved the sale of 1,586,539 shares of common stock at $1.04 per share, or the
5-day average closing price of the Company’s common stock on the trading days
immediately preceding the closing date. The Company also issued
warrants to the investors to purchase 793,273 shares of common stock at a price
of $1.30 per share which were repriced on December 22, 2008 to $1.13 as a result
of the Exchange Agreement discussed above. Pursuant to the
transaction, the Company filed a registration statement on April 29, 2008 for
the common stock shares as well as for the common stock shares underlying the
warrants issued in the transaction to the investors, but the Company made a
request for withdrawal of the registration statement on May 27,
2009. On June 22, 2009, the Company filed a registration statement
for the common stock shares as well as for the common stock shares underlying
the warrants issued in the transaction to the investors. Stillwater
and Ginola Limited are beneficial owners of more than 5% of the Company’s common
stock. The common stock and common stock shares underlying the warrants
beneficially owned by Stillwater and Ginola Limited are no longer being
registered pursuant to this amendment to the registration
statement.
On April
2, 2008, Stillwater, a beneficial owner of more than 5%, invested $500 thousand
and received 480,769 shares of common stock and warrants to purchase additional
240,385 shares of common stock. Ginola Limited, a beneficial owner of
more than 5%, invested $250 thousand and received 240,385 shares of common stock
and warrants to purchase an additional 120,193 shares of common stock.
Crestflower Corporation invested $250 thousand and received 240,385 shares of
common stock and warrants to purchase additional 120,193 shares of common
stock. Ginola Limited is the sole shareholder
of Crestflower Corporation.
As
previously reported in the Form 8-K of the Company dated as of July 25, 2007, on
July 23, 2007, the Company entered into Amendment Agreements (the Amendment
Agreements”) with the note holders and issued 8% Amended Senior Secured
Convertible Notes (“Amended Notes”) to the note holders in the principal amount
equal to the principal amount outstanding as of July 23, 2007. The due date for
the principal payment was extended to December 21, 2008 and the interest rate
increased to 8%. The Amended Notes were convertible into 8,407,612 shares of the
Company’s common stock. The conversion price for approximately $5,770,000 of
principal was revised from $2.60 to $.75 per share and the conversion price of
$.35 per share for $250,000 of principal was unchanged. $3,010,000 of the Notes
can convert into 3,010 shares of the Company’s newly formed Series A Convertible
Preferred Stock (the “Preferred”) at a conversion price of $1,000 per share. The
Preferred was convertible into common stock at the same price allowable by
the Amended Notes, subject to adjustment as provided for in the Certificate
of Designations. The Amendment Agreements adjusted the exercise price, except
for the Stillwater Warrant (as defined above), from $3.60 to $1.03 per share for
1,553,468 warrants and required the issuance of 3,831,859 warrants exercisable
at $1.03 per share pursuant to which the note holders may acquire common stock,
until July 21, 2011.
55
Stillwater
is a beneficial owner of more than 5% of the Company’s common
stock. Rainbow Gate Corporation, a corporation in which its
investment manager is the sole member of Stillwater and its controlling
shareholder is the same as Ginola Limited, had an Amended Note of $700,000 which
was convertible into 933,333 shares and received 653,333 warrants exercisable at
$1.03 per share. Ginola Limited had an Amended Note of $800,000 which
was convertible into 1,066,333 shares and received 746,666 warrants exercisable
at $1.03 per share.
On March
28, 2007, the Company entered into an amendment to the Stillwater Agreement (as
defined above), originally dated July 21, 2006. On April 9, 2007, the sale of
the Stillwater Note (as defined above) and Stillwater Warrant was complete and
the Company issued a 6% Senior Secured Convertible Note in the principal amount
of $500,000 and warrants to purchase 1,000,000 shares of the Company’s common
stock at an exercise price of $0.48. On July 23, 2007, Stillwater elected to
convert $250,000 of the principal amount of the Stillwater Note and
approximately $2,167 of accrued and unpaid interest. Stillwater
received 720,476 shares of Common Stock at the conversion price of
$0.35. The remaining 50% was amended to an 8% Amended Senior Secured
Convertible Note on July 23, 2007.
In the
Note Purchase transaction, two employees and one board member participated.
Olivier Prache, Senior VP of Display Operations, purchased a $30,000 promissory
note which was convertible into 11,539 shares and received 8,077
warrants which are exercisable at $3.60 per share. Mr. Prache converted $20,000
of his promissory note and received 7,693 shares. John Atherly,
former CFO as of January 2, 2008, purchased a $40,000 promissory note which was
convertible into 15,385 shares and received 10,770 warrants exercisable at $3.60
per share. Paul Cronson, board member, through Navacorp III, LLC purchased
a $200,000 promissory note which was convertible into 76,923 shares and received
53,847 warrants exercisable at $3.60 per share.
Stillwater
is a beneficial owner of more than 5% of the Company’s common
stock. Rainbow Gate Corporation, a corporation in which its
investment manager is the sole member of Stillwater and its controlling
shareholder is the same as Ginola Limited’s, purchased a $700,000 promissory
note which was convertible into 269,231 shares and received 188,462 warrants
exercisable at $3.60 per share. Ginola Limited purchased an $800,000
promissory note which was convertible into 307,693 shares and received 215,385
warrants exercisable at $3.60 per share. Stillwater disclaims beneficial
ownership of shares owned by Rainbow Gate Corporation.
The
Company has entered into a financial advisory agreement with Larkspur Capital
Corporation. Paul Cronson, a director of the Company, is a founder and
shareholder of Larkspur Capital Corporation. The Company has agreed to pay a
minimum fee of $500 thousand to Larkspur Capital Corporation in the event
certain transactions occur, i.e. sale of the Company’s assets or change of
control.
56
Director
Independence
The Board
of Directors has determined that Messrs. Thomas Paulsen, Claude Charles,
Jacob Goldman, Irwin Engelman, and Stephen Seay are
each independent directors as of November 11, 2009. Thomas
Paulsen was not an independent director during the period January through May
2008 when he was acting Interim CEO and President. As of June 1,
2008, Thomas Paulsen is an independent director.
The Board
of Directors has established a compensation committee which is
currently comprised of Thomas Paulsen, Jacob Goldman, Claude Charles and Stephen
Seay each of whom is independent as of November 11, 2009. Thomas
Paulsen was not an independent director during the period January through May
2008 when he was acting Interim CEO and President. As of June 1,
2008, Thomas Paulsen is an independent director.
The Board of Directors has established
a corporate governance and nominating committee, which is comprised of
Thomas Paulsen, Claude Charles and Jacob Goldman, each of whom
is independent as of November 11, 2009. Thomas Paulsen was not an
independent director during the period January through May 2008 when he was
acting Interim CEO and President. As of June 1, 2008, Thomas Paulsen
is an independent director.
The
Board of Directors has a separately
designated audit committee established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, which is
currently comprised of Claude Charles, Irwin Engelman, and Stephen Seay. The
members of the Audit Committee are independent as of November 11,
2009.
Review,
Approval or Ratification of Transactions with Related Persons
All
future transactions, if any, between us and any of our officers, directors and
principal security holders and their affiliates, as well as any transactions
between us and any entity with which our officers, directors or principal
security holders are affiliated, will be approved in accordance with applicable
law governing the approval of the transactions.
Promoter
and Certain Control Persons
Not
applicable.
57
LEGAL MATTERS
Sichenzia
Ross Friedman Ference LLP will issue an opinion with respect to the validity of
the shares of common stock being offered hereby.
EXPERTS
Eisner
LLP, Independent Registered Public Accountants, have audited, as set forth in
their report thereon appearing in this Prospectus and Registration Statement,
our consolidated financial statements as of December 31, 2008 and 2007 and
for each of the years in the three year period ended December 31, 2008 and the
financial statement schedule included in item 16. The consolidated
financial statements and financial statement schedule referred to above are
included herein in reliance upon the auditors’ opinion based on their expertise
in accounting and auditing.
AVAILABLE
INFORMATION
We have
filed a registration statement on Form S-1 under the Securities Act of 1933, as
amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of eMagin Corp., filed as part of the
registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange
Commission.
We are
subject to the informational requirements of the Securities Exchange Act of 1934
which requires us to file reports, proxy statements and other information with
the Securities and Exchange Commission. Such reports, proxy statements and other
information may be inspected at public reference facilities of the SEC at 100 F
Street, N.E., Washington D.C. 20549. Copies of such material can be obtained
from the Public Reference Section of the SEC at 100 F Street, N.E., Washington,
D.C. 20549 at prescribed rates. Because we file documents electronically with
the SEC, you may also obtain this information by visiting the SEC’s Internet
website at http://www.sec.gov.
58
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
60
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
61
|
Consolidated
Statements of Operations for the years ended December 31, 2008, 2007, and
2006
|
62
|
Consolidated
Statements of Changes in Shareholders’ Equity (Capital Deficit) for the
years ended December 31, 2008, 2007, and 2006
|
63
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007, and
2006
|
64
|
Notes
to the Consolidated Financial Statements
|
65
|
Schedule
II – Valuation and Qualifying Accounts, included in Item 16. Exhibits and
Financial Statement Schedules
|
106
|
Unaudited:
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2009
(unaudited) and December 31, 2008
|
86
|
Condensed
Consolidated Statements of Operations for the Three and Nine Months ended
September 30, 2009 and 2008 (unaudited)
|
87
|
Condensed
Consolidated Statements of Changes in Shareholders’ Equity for the Nine
Months ended September 30, 2009 (unaudited)
|
88
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 2009 and 2008 (unaudited)
|
89
|
Notes
to Condensed Consolidated Financial Statements
(unaudited)
|
90
|
59
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
eMagin
Corporation
We have
audited the accompanying consolidated balance sheets of eMagin Corporation (the
"Company") as of December 31, 2008 and 2007, and the related consolidated
statements of operations, changes in shareholders' equity (capital deficit) and
cash flows for each of the years in the three-year period ended
December 31, 2008. Our audits also included the financial statement
schedule - Valuation and Qualifying Accounts - listed in
the index at item 16. These financial statements and schedule
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of eMagin Corporation as
of December 31, 2008 and 2007, and the consolidated results of its
operations and its consolidated cash flows for each of the years in the
three-year period ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Eisner
LLP
New York,
New York
March 27,
2009
CONSOLIDATED
BALANCE SHEETS
December
31,
|
||||||||
2008
|
2007
|
|||||||
(In
thousands, except
|
||||||||
share
and per share amounts)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
2,404
|
$
|
713
|
||||
Investments
– held to maturity
|
97
|
94
|
||||||
Accounts
receivable, net
|
3,643
|
2,383
|
||||||
Inventory
|
2,374
|
1,815
|
||||||
Prepaid
expenses and other current assets
|
796
|
850
|
||||||
Total
current assets
|
9,314
|
5,855
|
||||||
Equipment,
furniture and leasehold improvements, net
|
381
|
292
|
||||||
Intangible
assets, net
|
47
|
51
|
||||||
Other
assets
|
—
|
232
|
||||||
Deferred
financing costs, net
|
362
|
218
|
||||||
Total
assets
|
$
|
10,104
|
$
|
6,648
|
||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY (CAPITAL DEFICIT)
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
1,026
|
$
|
620
|
||||
Accrued
compensation
|
837
|
891
|
||||||
Other
accrued expenses
|
804
|
729
|
||||||
Advance
payments
|
694
|
35
|
||||||
Deferred
revenue
|
164
|
179
|
||||||
Current
portion of debt
|
1,691
|
7,089
|
||||||
Other
current liabilities
|
798
|
1,020
|
||||||
Total
current liabilities
|
6,014
|
10,563
|
||||||
Long-term
debt
|
—
|
60
|
||||||
Total
liabilities
|
6,014
|
10,623
|
||||||
Commitments
and contingencies
|
||||||||
Redeemable
common stock,: 522,500 shares redeemable as of December 31,
2008 and 162,500 shares redeemable as of December 31, 2007
|
429
|
195
|
||||||
Shareholders’
equity (capital deficit):
|
||||||||
Preferred
stock, $.001 par value: authorized 10,000,000 shares:
|
||||||||
Series
B Convertible Preferred stock, (liquidation preference of $5,739,000)
stated value $1,000 per share, $.001 par value: 10,000 shares
designated and 5,739 issued as of December 31, 2008
|
—
|
—
|
||||||
Common
stock, $.001 par value: authorized 200,000,000 shares, issued and
outstanding, 15,213,959 shares in 2008 and 12,458,400 shares in 2007, net
of redeemable common stock
|
15
|
12
|
||||||
Additional
paid in capital
|
204,818
|
195,131
|
||||||
Accumulated
deficit
|
(201,172
|
)
|
(199,313
|
)
|
||||
Total
shareholders’ equity (capital deficit)
|
3,661
|
( 4,170
|
)
|
|||||
Total
liabilities and shareholders’ equity (capital deficit)
|
$
|
10,104
|
$
|
6,648
|
See notes
to Consolidated Financial Statements.
61
eMAGIN
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Year Ended December 31,
|
||||||||||||
2008 |
2007
|
2006
|
||||||||||
Revenue:
|
(In
thousands, except per share data)
|
|||||||||||
Product
revenue
|
$ | 15,730 | $ | 16,169 | $ | 7,983 | ||||||
Contract
revenue
|
3,009 | 1,385 | 186 | |||||||||
Total
revenue, net
|
18,739 | 17,554 | 8,169 | |||||||||
Cost
of goods sold:
|
||||||||||||
Product
revenue
|
9,086 | 11,889 | 11,226 | |||||||||
Contract
revenue
|
1,587 | 739 | 93 | |||||||||
Cost
of goods sold
|
10,673 | 12,628 | 11,359 | |||||||||
Gross
profit (loss)
|
8,066 | 4,926 | (3,190 | ) | ||||||||
Operating
expenses:
|
||||||||||||
Research
and development
|
2,081 | 2,949 | 4,406 | |||||||||
Selling,
general and administrative
|
6,254 | 6,591 | 8,860 | |||||||||
Total
operating expenses
|
8,335 | 9,540 | 13,266 | |||||||||
Loss
from operations
|
(269 | (4,614 | (16,456 | ) | ||||||||
Other
income (expense):
|
||||||||||||
Interest
expense
|
(1,990 | ) | (3,087 | ) | (1,306 | ) | ||||||
Loss
on extinguishment of debt
|
— | (10,749 | ) | — | ||||||||
(Loss)
gain on warrant derivative liability
|
— | (853 | 2,405 | |||||||||
Other
income, net
|
400 | 815 | 91 | |||||||||
Total
other (expense) income, net
|
(1,590 | ) | (13,874 | ) | 1,190 | |||||||
Net
loss
|
$ | (1,859 | ) | $ | (18,488 | ) | $ | (15,266 | ) | |||
Loss
per share, basic and diluted
|
$ | (0.13 | ) | $ | (1.59 | ) | $ | (1.52 | ) | |||
Weighted
average number of shares outstanding:
|
||||||||||||
Basic
and diluted
|
14,175 | 11,633 | 10,058 |
See notes
to Consolidated Financial Statements.
62
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CAPITAL DEFICIT)
(In thousands)
Preferred
Stock
|
Common
Stock
|
Additional
Paid-
|
Accumulated
|
Total Shareholders’ Equity
(Capital
|
||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
in
Capital
|
Deficit
|
Deficit)
|
||||||||||||||||||||||
Balance,
December 31, 2005
|
—
|
$
|
—
|
9,997
|
$
|
10
|
$
|
175,950
|
$
|
(165,559
|
)
|
$
|
10,401
|
|||||||||||||||
Debt
conversion
|
—
|
—
|
85
|
—
|
220
|
—
|
220
|
|||||||||||||||||||||
Issuance
of common stock for services
|
—
|
—
|
254
|
—
|
580
|
—
|
580
|
|||||||||||||||||||||
Stock-based
compensation
|
—
|
—
|
—
|
—
|
2,891
|
—
|
2,891
|
|||||||||||||||||||||
Stock
options exercised
|
—
|
—
|
5
|
—
|
10
|
—
|
10
|
|||||||||||||||||||||
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(15,266
|
)
|
(15,266
|
)
|
|||||||||||||||||||
Balance,
December 31, 2006
|
—
|
$
|
—
|
10,341
|
$
|
10
|
179,651
|
$
|
(180,825
|
)
|
$
|
(1,164
|
)
|
|||||||||||||||
Debt
conversion
|
—
|
—
|
797
|
1
|
310
|
—
|
311
|
|||||||||||||||||||||
Issuance
of common stock for services
|
—
|
—
|
1,310
|
1
|
1,129
|
—
|
1,130
|
|||||||||||||||||||||
Exercise
of common stock warrants
|
—
|
—
|
10
|
—
|
3
|
—
|
3
|
|||||||||||||||||||||
Stock-based
compensation
|
—
|
—
|
—
|
—
|
1,652
|
—
|
1,652
|
|||||||||||||||||||||
Expiration
of derivative liability- warrants
|
—
|
—
|
—
|
—
|
2,653
|
—
|
2,653
|
|||||||||||||||||||||
Beneficial
conversion premium
|
—
|
—
|
—
|
—
|
5,078
|
—
|
5,078
|
|||||||||||||||||||||
Fair
value of warrants issued
|
—
|
—
|
—
|
—
|
4,655
|
—
|
4,655
|
|||||||||||||||||||||
Net
loss
|
—
|
—
|
—
|
—
|
(18,488
|
)
|
(18,488
|
)
|
||||||||||||||||||||
Balance,
December 31, 2007
|
—
|
$
|
—
|
12,458
|
$
|
12
|
$
|
195,131
|
$
|
(199,313
|
)
|
$
|
(4,170
|
)
|
||||||||||||||
Sale
of preferred stock, net of issuance costs
|
4
|
—
|
—
|
—
|
3,933
|
—
|
3,933
|
|||||||||||||||||||||
Sale
of common stock, net of issuance costs
|
—
|
—
|
1,587
|
2
|
1,578
|
—
|
1,580
|
|||||||||||||||||||||
Debt
conversion
|
2
|
—
|
718
|
1
|
1,956
|
—
|
1,957
|
|||||||||||||||||||||
Issuance
of common stock for services
|
—
|
—
|
326
|
—
|
303
|
—
|
303
|
|||||||||||||||||||||
Stock-based
compensation
|
—
|
—
|
—
|
—
|
928
|
—
|
928
|
|||||||||||||||||||||
Put
option waiver
|
—
|
—
|
125
|
150
|
—
|
150
|
||||||||||||||||||||||
Fair
value of warrants issued
|
—
|
—
|
—
|
—
|
883
|
—
|
883
|
|||||||||||||||||||||
Deemed
dividend, put option
|
—
|
—
|
—
|
—
|
(44
|
)
|
—
|
(44
|
)
|
|||||||||||||||||||
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(1,859
|
)
|
(1,859
|
)
|
|||||||||||||||||||
Balance,
December 31, 2008
|
6
|
$
|
—
|
15,214
|
$
|
15
|
$
|
204,818
|
$
|
(201,172
|
)
|
$
|
3,661
|
|||||||||||||||
See notes
to Consolidated Financial Statements.
63
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year
Ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
(In
thousands)
|
||||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss
|
$
|
(1,859
|
)
|
$
|
(18,488
|
)
|
$
|
(15,266
|
)
|
|||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||||||
Depreciation
and amortization
|
223
|
392
|
841
|
|||||||||
Amortization
of deferred financing and waiver fees
|
1,295
|
418
|
221
|
|||||||||
Increase
(reduction) of provision for sales returns and doubtful
accounts
|
499
|
(79
|
)
|
(39
|
)
|
|||||||
Stock
based compensation
|
928
|
1,652
|
2,891
|
|||||||||
Issuance
of common stock for services, net
|
95
|
1,130
|
553
|
|||||||||
Amortization
of discount on notes payable
|
25
|
1,925
|
956
|
|||||||||
Loss
(gain) on warrant derivative liability
|
—
|
853
|
(2,405
|
)
|
||||||||
Loss
on extinguishment of debt
|
—
|
10,749
|
—
|
|||||||||
Loss
on other asset
|
—
|
—
|
157
|
|||||||||
Write-off
of miscellaneous receivable
|
—
|
103
|
—
|
|||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Accounts
receivable
|
(1,759
|
)
|
(1,390
|
)
|
(42
|
)
|
||||||
Inventory
|
(559
|
)
|
670
|
1,354
|
||||||||
Prepaid
expenses and other current assets
|
399
|
1
|
389
|
|||||||||
Advance
payments
|
659
|
(409
|
)
|
384
|
||||||||
Deferred
revenue
|
(15
|
)
|
53
|
30
|
||||||||
Accounts
payable, accrued compensation, and accrued expenses
|
429
|
(381
|
)
|
(566
|
)
|
|||||||
Other
current liabilities
|
(222
|
)
|
858
|
153
|
||||||||
Net
cash provided by (used in) operating activities
|
138
|
(1,943
|
)
|
(10,389
|
)
|
|||||||
Cash
flows from investing activities:
|
||||||||||||
Purchase
of equipment
|
(308
|
)
|
(16
|
)
|
(204
|
)
|
||||||
Proceeds
from maturity of (purchase of) investments – held to
maturity
|
(3
|
)
|
77
|
(51
|
)
|
|||||||
Purchase
of intangibles and other assets
|
—
|
—
|
(2
|
)
|
||||||||
Net
cash (used in) provided by investing activities
|
(311
|
)
|
61
|
(257
|
)
|
|||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds
from sale of preferred stock, net of issuance costs
|
3,933
|
—
|
—
|
|||||||||
Proceeds
from sale of common stock, net of issuance costs
|
1,580
|
|||||||||||
Proceeds
from exercise of stock options and warrants
|
—
|
3
|
10
|
|||||||||
Borrowings
from line of credit
|
1,934
|
1,108
|
—
|
|||||||||
Proceeds
from long-term debt
|
—
|
500
|
5,970
|
|||||||||
Payments
related to deferred financing costs
|
(117
|
)
|
(368
|
)
|
(591
|
)
|
||||||
Payments
of long-term debt and capitalized lease obligations
|
(5,466
|
)
|
(63
|
)
|
(55
|
)
|
||||||
Net
cash provided by financing activities
|
1,864
|
1,180
|
5,334
|
|||||||||
Net
increase (decrease) in cash and cash equivalents
|
1,691
|
(702
|
)
|
(5,312
|
)
|
|||||||
Cash
and cash equivalents, beginning of year
|
713
|
1,415
|
6,727
|
|||||||||
Cash
and cash equivalents, end of year
|
$
|
2,404
|
$
|
713
|
$
|
1,415
|
||||||
Cash
paid for interest
|
$
|
702
|
$
|
426
|
$
|
128
|
||||||
Cash
paid for taxes
|
$
|
44
|
$
|
78
|
$
|
40
|
||||||
Supplemental
non-cash transactions:
|
||||||||||||
Conversion
of debt to common stock
|
$
|
251
|
$
|
311
|
$
|
220
|
||||||
Conversion
of debt to convertible preferred stock – series B
|
$
|
1,706
|
$
|
—
|
$
|
—
|
||||||
Issuance
of 485,000 and 162,500 shares of common stock for deferred financing costs
in 2008 and 2007, respectively.
|
$
|
340
|
$
|
195
|
$
|
—
|
||||||
Issuance
of 1,120,000 shares of common stock underlying warrants for deferred
financing costs in 2008.
|
$
|
715
|
$
|
—
|
$
|
—
|
See notes
to Consolidated Financial Statements.
64
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - NATURE OF BUSINESS
eMagin
Corporation and its wholly owned subsidiary (the “Company”)
designs, develops, manufactures, and markets OLED on silicon
microdisplays, virtual imaging products which utilize OLED microdisplays. The
Company’s products are sold mainly in North America, Asia, and
Europe.
Note
2 - SIGNIFICANT ACCOUNTING POLICIES
Principles
of consolidation
The
accompanying audited consolidated financial statements include the accounts of
eMagin Corporation and its wholly owned subsidiary. All intercompany
transactions have been eliminated in consolidation.
Reclassifications
Certain
items in the prior years’ consolidated financial statements have been
reclassified to conform to the current period presentation.
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. Management bases its estimates and judgments on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from those estimates.
Revenue
and cost recognition
Revenue
is recognized when products are shipped to customers, net of allowances for
anticipated returns. The Company’s revenue-earning
activities generally involve delivering products, and revenues
are considered to be earned when the Company has completed the process
by which it is entitled to such revenues.
Revenue is recognized when persuasive evidence of
an arrangement exists, delivery has occurred, selling price is
fixed or determinable and collection is reasonably assured. We record
a reserve for estimated sales returns, which is reflected as a reduction of
revenue at the time of revenue recognition. The Company defers
revenue recognition on products sold directly to the consumer with a maximum
thirty day right of return. Revenue is recognized upon the expiration
of the right of return.
The
Company also earns revenues from certain R&D activities under
both firm fixed-price contracts and cost-type
contracts, including some cost-plus-fee contracts.
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. These rates are subject to audit by the other
party.
Shipping
and Handling Fees and Costs
Shipping
and handling fees billed to customers are netted against the shipping and
handling costs which are recorded as cost of sales.
Research
and development expenses
Research
and development costs are expensed as incurred.
Cash
and cash equivalents
All
highly liquid instruments with an original maturity of three months or less at
the date of purchase are considered to be cash equivalents.
65
Investments-held
to maturity
Securities
that the Company has the positive intent and ability to hold to maturity are
classified as held-to-maturity and are carried at amortized cost on the
accompanying balance sheet.
Accounts
receivable
The
majority of the Company’s commercial accounts receivable is due from Original
Equipment Manufacturers ("OEM’s”). Credit is extended based on evaluation of a
customer’s financial condition and, generally, collateral is not required.
Accounts receivable are payable in U.S. dollars, are due within 30-90 days and
are stated at amounts due from customers net of an allowance for doubtful
accounts. Any account outstanding longer than the contractual payment terms is
considered past due.
Allowance
for doubtful accounts
The
allowance for doubtful accounts reflects an estimate of probable losses inherent
in the accounts receivable balance. The allowance is determined based on a
variety of factors, including the length of time receivables are past due,
historical experience, the customer's current ability to pay its obligation, and
the condition of the general economy and the industry as a whole. The
Company will record a specific reserve for individual accounts when the Company
becomes aware of a customer's inability to meet its financial obligations, such
as in the case of bankruptcy filings or deterioration in the customer's
operating results or financial position. If circumstances related to customers
change, the Company would further adjust estimates of the recoverability of
receivables.
Inventory
Inventory
is stated at the lower of cost or market. Cost is determined using the first-in
first-out method. Cost includes materials, labor, and manufacturing overhead
related to the purchase and production of inventories. The Company regularly
reviews inventory quantities on hand, future purchase commitments with the
Company’s suppliers, and the estimated utility of the inventory. If the Company
review indicates a reduction in utility below carrying value, the inventory is
reduced to a new cost basis.
Equipment,
furniture and leasehold improvements
Equipment,
furniture and leasehold improvements are stated at cost. Depreciation on
equipment is calculated using the straight-line method of depreciation over its
estimated useful life. Amortization of leasehold improvements is calculated by
using the straight-line method over the shorter of their estimated useful lives
or lease terms. Expenditures for maintenance and repairs are charged to expense
as incurred.
In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company performs impairment tests on its long-lived
assets when circumstances indicate that their carrying amounts may not be
recoverable. If required, recoverability is tested by comparing the estimated
future undiscounted cash flows of the asset or asset group to its carrying
value. Impairment losses, if any, are recognized based on the excess of the
assets' carrying amounts over their estimated fair values.
Intangible
Assets
The
Company’s intangible assets consist of patents that are amortized over their
estimated useful lives of fifteen years using the straight line
method. Total intangible amortization expense was approximately $4
thousand for each of the years ended December 31, 2008, 2007, and 2006,
respectively. The accumulated amortization as of December 31, 2008
was $18 thousand.
Advertising
Costs
related to advertising and promotion of products is charged to sales and
marketing expense as incurred. Advertising expense for the years
ended December 31, 2008, 2007, and 2006 was $0, $10 thousand, and $296 thousand,
respectively.
Income
taxes
The
Company accounts for income taxes in accordance with the provisions of Statement
of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS
No. 109”). SFAS No. 109 requires that the Company recognize deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined on the basis of the difference between the tax basis of assets and
liabilities and their respective financial reporting amounts (“temporary
differences”) at enacted tax rates in effect for the years in which the
temporary differences are expected to reverse. The Company records an
estimated valuation allowance on its deferred income tax assets if it is more
likely than not that these deferred income tax assets will not be
realized.
66
In
accordance with SFAS No. 128, "Earnings Per Share", net loss per common share
amounts ("basic EPS") is computed by dividing net loss by the weighted average
number of common shares outstanding and excluding any potential dilution. Net
loss per common share amounts assuming dilution ("diluted EPS") reflects the
potential dilution from the exercise of stock options and warrants. These common
equivalent shares have been excluded from the computation of diluted EPS for all
periods presented as their effect is antidilutive. The years ended December 31,
2008, 2007, and 2006 do not include options, warrants, convertible notes,
redeemable stock, and convertible preferred stock to purchase common equivalent
shares of 22,069,412, 17,728,020, and 6,832,620, respectively, as their effect
would be antidilutive.
Comprehensive
income (loss)
SFAS No.
130, "Reporting Comprehensive Income", requires companies to report all changes
in equity during a period, except those resulting from investment by owners and
distributions to owners, for the period in which they are recognized.
Comprehensive income (loss) is the total of net income (loss) and other
comprehensive income (loss) items, such as unrealized gains or losses on foreign
currency translation adjustments. Comprehensive income (loss) must be reported
on the face of the annual financial statements. The Company's operations did not
give rise to any material items includable in comprehensive income (loss), which
were not already in net loss for the years ended December 31, 2008, 2007, and
2006. Accordingly, the Company's comprehensive loss is the same as its net
income (loss) for the periods presented.
Stock-based
compensation
The
Company accounts for stock-based compensation under the provisions of SFAS No.
123R, “Share-Based Payment”, which requires the Company to recognize expense
related to the fair value of the Company’s share-based compensation issued to
employees and directors. We adopted SFAS No. 123R using the modified
prospective transition method. Compensation cost recognized for the
years ended December 31, 2008, 2007, and 2006 includes a) compensation cost for
all share-based compensation granted prior to, but not vested as of January 1,
2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS No.123 and b) compensation cost for all share-based
compensation granted beginning January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS
No.123R. The compensation cost was recognized using the straight-line
attribution method. See Note 11 for a further discussion
on stock-based compensation.
Fair
value of financial instruments
At
December 31, 2008, the Company's cash, cash equivalents, accounts receivable,
short-term investments, accounts payable and debt are shown at cost which
approximates fair value due to the short-term nature of these
instruments.
Concentration
of Credit Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist of cash and cash equivalents. The Company’s cash and
cash equivalents are deposited with financial institutions which, at times, may
exceed federally insured limits. To date, the Company has not
experienced any loss associated with this risk.
Note
3 - RECENTLY ISSUED ACCOUNTING STANDARDS
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements,” (“SFAS 157”), which defines fair value,
establishes a framework for measuring fair value under generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 does not require any new fair value measurements, but provides guidance
on how to measure fair value by providing a fair value hierarchy used to
classify the source of the information. In February 2008, the FASB issued
FASB Staff Position No. FSP 157-2, “Effective Date of FASB Statement
No. 157”, which provides a one year deferral of the effective date of SFAS
157 for non-financial assets and non-financial liabilities, except those that
are recognized or disclosed in the financial statements at fair value on a
recurring basis. The Company adopted SFAS 157 as of January 1, 2008, with
the exception of the application of the statement to non-recurring non-financial
assets and non-financial liabilities for which it will defer the adoption until
January 1, 2009. In October 2008, the FASB issued FASP FAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active” (“FSP 157-3”). FSP 157-3 clarified the application of
FAS 157 in situations where the market for that financial asset is not
active. FSP 157-3 was effective upon issuance, including prior
periods for which financial statements had not been issued. The adoption of SFAS
157 did not have a material impact on the Company’s consolidated results of
operations, financial condition or cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — including an amendment of FASB
Statement No. 115,” (“SFAS 159”) which is effective for fiscal years
beginning after November 15, 2007. This statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. This statement also establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and liabilities. Unrealized
gains and losses on items for which the fair value option is elected would be
reported in earnings. The Company has adopted SFAS 159 and has elected not to
measure any additional financial instruments and other items at fair value and
therefore the adoption of SFAS 159 did not have a material impact on the
Company’s consolidated results of operations, financial condition or cash
flows.
In
March 2008, the FASB issued Statement of Financial Accounting Standards
No. 161, Disclosures about Derivative Instruments and Hedging Activities,
an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires
entities to provide greater transparency about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations and (c) how derivative instruments and related hedged items
affect an entity’s financial position, results of operations, and cash flows.
SFAS 161 is effective prospectively for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application permitted. The Company is currently evaluating the disclosure
implications of this statement.
67
In June
2008, the FASB ratified EITF No. 07-5, " Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity's Own Stock " ("EITF
07-5"). EITF 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years, and must be applied to all
instruments outstanding on the date of adoption. The Company is currently
assessing the potential impact of this EITF 07-5 on its consolidated financial
condition and results of operations.
Note
4 - RECEIVABLES
Receivables
consisted of the following (in thousands):
December
31,
|
||||||||
2008
|
2007
|
|||||||
Trade
receivables
|
$
|
4,500
|
$
|
2,741
|
||||
Less
allowance for doubtful accounts
|
(857
|
)
|
(358
|
)
|
||||
Net
receivables
|
$
|
3,643
|
$
|
2,383
|
Note
5 - INVENTORY
The
components of inventory were as follows (in thousands):
December
31,
|
||||||||
2008
|
2007
|
|||||||
Raw
materials
|
$
|
1,109
|
$
|
1,069
|
||||
Work
in process
|
280
|
370
|
||||||
Finished
goods
|
985
|
376
|
||||||
Total
inventory
|
$
|
2,374
|
$
|
1,815
|
Note
6 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consist of the following (in
thousands):
December
31,
|
||||||||
2008
|
2007
|
|||||||
Vendor
prepayments
|
$
|
180
|
$
|
537
|
||||
Other
prepaid expenses*
|
383
|
310
|
||||||
Other
current assets*
|
233
|
3
|
||||||
Total
prepaid expenses and other current assets
|
$
|
796
|
$
|
850
|
*No
individual amounts greater than 5% of current assets.
68
Equipment,
furniture and leasehold improvements consist of the following (in
thousands):
December
31,
|
||||||||
2008
|
2007
|
|||||||
Computer
hardware and software
|
$
|
1,039
|
$
|
1,025
|
||||
Lab
and factory equipment
|
3,612
|
3,318
|
||||||
Furniture,
fixtures, and office equipment
|
306
|
306
|
||||||
Assets
under capital leases
|
66
|
66
|
||||||
Leasehold
improvements
|
473
|
473
|
||||||
Total
equipment, furniture and leasehold improvements
|
5,496
|
5,188
|
||||||
Less: accumulated
depreciation
|
(5,115
|
)
|
(4,896
|
)
|
||||
Equipment,
furniture and leasehold improvements, net
|
$
|
381
|
$
|
292
|
Depreciation
expense was $219 thousand, $388 thousand, and $837 thousand for the years ended
December 31, 2008, 2007, and 2006, respectively. Assets under capital
leases are fully amortized.
Note
8 - DEBT
Debt is
as follows (in thousands):
December
31,
|
||||||||
2008
|
2007
|
|||||||
Current
portion of debt:
|
||||||||
Other
debt
|
$
|
60
|
$
|
44
|
||||
Line
of credit
|
1,631
|
1,108
|
||||||
8%
Amended Senior Secured Convertible Notes
|
—
|
5,962
|
||||||
Less: Unamortized
discount on notes payable
|
—
|
(25
|
)
|
|||||
Current
portion of debt, net
|
1,691
|
7,089
|
||||||
Long-term
debt:
|
||||||||
Other
debt
|
—
|
60
|
||||||
Long-term
debt, net
|
—
|
60
|
||||||
Total
debt, net
|
$
|
1,691
|
$
|
7,149
|
The total
debt will mature as of December 31, 2009. For the years ended December 31, 2008
and 2007, approximately $1.3 million and $0.4 million, respectively, of deferred
debt issuance costs and waiver fees were amortized to interest expense. For
the years ended December 31, 2008 and 2007, interest expense includes interest
paid or accrued of approximately $667 thousand and $836 thousand,
respectively, on outstanding debt.
8%
Amended Senior Secured Convertible Notes
On July
23, 2007, an investor elected to convert approximately $252 thousand of the 6%
Senior Secured Convertible Note (“Original Note”) representing $250 thousand of
the principal amount of the Note due on July 23, 2007 and approximately $2
thousand of accrued and unpaid
interest.
The investor received 720,476 shares of Common Stock at the conversion price of
$0.35.
On July
23, 2007, the Company entered into Amended Agreements with the note holders of
the Original Notes issued July 21, 2006 and March 28, 2007 and agreed to issue
each holder an 8% Amended Senior Secured Convertible Note (“Amended Note”) in
the principal amount equal to the principal amount outstanding as of July 23,
2007 which was in total approximately $6.0 million. The significant
changes to the Amended Notes include the following:
69
·
|
the
due dates have been changed from July 23, 2007 and January 21, 2008 to
December 21, 2008;
|
·
|
the
annual interest rate has been changed from 6% to 8%;
|
·
|
the
Amended Notes are convertible into 8,407,612 shares of the Company’s
common stock. The conversion price for $5.8 million of
principal is at a conversion price of $0.75, originally $2.60, and the
conversion price for $250,000 of principal remains the same at
$0.35;
|
·
|
the
Agreement adjusts the exercise price of the amended Warrants from $3.60 to
$1.03 per share for 1,553,468 shares of common stock and requires the
issuance of warrants for an additional 3,831,859 shares of common stock at
$1.03 per share with an expiration date of July 21,
2011. The warrants are subject to anti-dilution
adjustment rights;
|
·
|
50%
of the Amended Notes can be converted into the Company’s newly designated
Series A Senior Secured Convertible Preferred Stock which is convertible
into common stock at the same rate as the Amended
Notes;
|
·
|
the
liquidated damages of 1% per month will no longer accrue and the deferred
balance at July 23, 2007 is forgiven; and
|
·
|
there
is no minimum cash or cash equivalents balance
requirement.
|
Under the
guidance of EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of
Debt Instruments”, the Company determined the change in the present value of the
expected cash flows between the Amended Notes and the Original Notes issued July
21, 2006 was greater than 10%; therefore (a) for financial reporting purposes,
the modifications to the Original Notes issued July 21, 2006 were treated as an
extinguishment of debt and (b) on July 23, 2007, the Company recorded a loss on
extinguishment of debt of approximately $10.7 million reflecting the difference
between (i) the recorded amount of debt, net of related discounts, of
approximately $4.8 million and (ii) the fair value of the new debt instrument of
approximately $10.7 , which was determined by multiplying the number of
convertible shares underlying the note by the closing market price of the common
stock on July 23, 2007 plus the change in the fair value of the
warrants on July 23, 2007, the date of the modification, of
approximately $4.7 million, which was considered a fee paid by the debtor to the
creditor under EITF 96-19 . The Company has also recorded a
beneficial conversion charge of approximately $5.1 million on the Amended Notes,
which was calculated by multiplying the intrinsic value of the common stock by
the underlying convertible shares, adjusting the Amended Notes to their face
value of approximately $5.8 million. The Original Note issued on
March 28, 2007 and amended on July 23, 2007 was not treated as an extinguishment
but a modification.
On August
16, 2007, an investor elected to convert approximately $58 thousand of the
Amended Note. The investor received 76,923 shares of Common Stock at the
conversion price of $0.75.
On
December 22, 2008, the Company paid approximately $4.03 million to its 8%
Amended Senior Secured Convertible Note Holders (“the Amended Note Holders”)
which was comprised of approximately $4.01 million of principal and
approximately $0.02 million of accrued interest. The remaining Note Holders
elected to convert approximately $1.95 million to equity. See Note 10
– Shareholders’ Equity for additional information.
Line
of Credit
On August
7, 2007, the Company entered into a loan agreement
with Moriah Capital, L.P. (“Moriah”) and established a
revolving line of credit (the “Loan”) of $2.5 million. The Company
was permitted to borrow an amount not to exceed 90% of its domestic eligible
accounts receivable and 50% of its eligible inventory capped at $600
thousand. As part of the transaction, the Company issued 162,500
shares of unregistered common stock valued at $195 thousand and paid a servicing
fee of $82.5 thousand to Moriah which were amortized to interest expense over
the life of the agreement. In conjunction with entering into this loan and
issuing unregistered common stock, the Company granted Moriah registration
rights. In addition, the Company granted Moriah a put option pursuant
to which Moriah can sell to the Company the 162,500 shares of its common stock
for $195,000, or prorated for any portion thereof for one year from the issue
date (“the 2007 Put Option”). The Loan was convertible into shares of
the Company’s common stock pursuant to the terms of the Loan Conversion
Agreement. The Loan was to mature on August 7, 2008, however Moriah
extended the maturity date to August 20, 2008 when the loan agreement was
further amended as explained below.
On
January 30, 2008, the Company amended and restated its Loan agreement (“Amended
Loan Agreement”) with Moriah. The Amended Loan Agreement’s borrowing
base calculation was modified to include 70% of eligible foreign accounts
receivable. The Amended Loan Agreement eliminated the optional
conversion of principal up to $2.0 million into common stock. In
connection with the Amended Loan Agreement, the Company entered into a Warrant
Issuance Agreement and issued a Warrant to purchase 750,000 shares of its common
stock at a price of $1.50 per share with an expiration date of January 29,
2013.
The
Amended Loan Agreement has specific terms to which the Company must comply
including (a) maintaining a lockbox account into which payments from related
accounts receivable must be deposited, (b) periodic certifications as to
borrowing base amounts equaling or exceeding net balances outstanding under the
Line of Credit, and (c) a requirement that a registration statement with respect
to shares held or to be issued to the lender be filed within thirty days of
January 30, 2008. A delay in establishing the required lockbox
account created a technical default under the Line of Credit
agreement. Similarly, the production and subsequent discovery of
defective displays resulted in an inadvertent overstatement of inventory during
December 2007, January 2008 and early February 2008 that created a technical
default under the agreement. Finally, the Company was not able to
complete the registration of shares within the thirty day timeframe mandated in
the amended agreement. On March 25, 2008 the Company received a
waiver from the lender (a) waiving compliance with the lockbox account
requirement through March 14, 2008, (b) waiving compliance with the borrowing
base requirement in so far as it related exclusively to the defective displays
inadvertently included in inventory, and (c) extending the period for filing a
registration statement for certain shares held or to be issued to the lender
until April 29, 2008. The Company established a lockbox account by
March 14, 2008 and filed a registration statement with the SEC on April 29,
2008.
70
The
Company determined the fair value of the 1,000,000 warrants to be $729 thousand
of which $168 thousand was expensed immediately and $561 thousand was amortized
to interest expense over the life of the loan. The following
assumptions were used to determine the fair value of the
warrants: dividend yield of 0%; risk free interest rates of 2.61 %
and 2.96%; expected volatility of 90.9% and 92.3%; and expected contractual term
of 5 years.
The
Company and Moriah entered into Amendment No. 3 to the Loan and Security
Agreement dated August 20, 2008 (the “Amendment No. 3”). Pursuant to
Amendment No. 3, the Company issued Moriah an Amended and Restated Revolving
Loan Note (the “Amended Note”) and the maturity date has been extended to August
7, 2009. The Company paid Moriah $85 thousand in servicing fees. The
servicing fees are amortized to interest expense over the life of the
agreement.
Pursuant
to Amendment No. 3, the following changes were made to the Loan: the
maximum amount the Company can borrow has been increased to $3 million; the
borrowing base calculation was modified to increase eligible foreign accounts
receivable to 80% and increased the eligible inventory to the lesser of 70% or
$800 thousand; and financial covenants have been added. The Company
was in compliance with the financial covenants at December 31,
2008.
The
Company issued Moriah a warrant, which terminates on August 7, 2013, to purchase
up to 370,000 shares of the Company’s common stock at an exercise price of $1.30
per share. The Company determined the fair value of the warrants to
be approximately $154 thousand which was recorded as a deferred debt issuance
cost. The following assumptions were used to determine the fair value of the
warrants: dividend yield of 0%; risk free interest rates of 3.16 %;
expected volatility of 87.7%; and expected contractual term of 5
years. The deferred debt issuance costs are being amortized to
interest expense over the life of the loan.
Pursuant
to Amendment No. 3, the Company and Moriah, also, entered into an Amended and
Restated Securities Issuance Agreement. The Company issued 485,000
shares of unregistered common stock valued at approximately $340 thousand which
was recorded as a deferred debt issuance cost. It will be amortized
to interest expense over the life of the agreement. In addition, the holders of
the Amended 8% Notes and the investors in the Purchase Agreement (See Note 10)
consented to the Amended Note and received a total of 144,000 shares of
unregistered common stock valued at approximately $101 thousand which was
recorded as waiver fees and expensed to interest expense.
Pursuant
to Amendment No. 3, the Company and Moriah entered into an Amendment to
Registration Rights Agreement (the “Amended Registration Rights
Agreement”). Pursuant to the Amended Registration Rights
Agreement, the Company agreed to use its best efforts to file a registration
statement to register the 485,000 shares of the company’s common stock
issued pursuant to the Amended and Restated Securities Issuance Agreement and
the shares of common stock issuable upon exercise of the Warrant, provided that
the Company is permitted to under applicable securities rules and regulations
and after the certain other registration statements that the Company was
obligated to file on behalf of selling shareholders have
been declared effective.
Note
9 - INCOME TAXES
Loss
before income taxes consists of the following (in thousands):
For
the years ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Domestic
|
$ | (1,859 | ) | $ | (18,488 | ) | $ | (15,266 | ) | |||
Total
|
$ | (1,859 | ) | $ | (18,488 | ) | $ | (15,266 | ) |
Deferred
income taxes reflect the net tax effects of (a) temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes, and (b) operating losses and tax
credit carryforwards.
71
The tax
effects of significant items comprising the Company’s deferred taxes as of
December 31 are as follows (numbers are in thousands):
For
the years ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Federal
and state net operating loss carryforwards
|
$
|
40,964
|
$
|
42,266
|
$
|
41,554
|
||||||
Research
and development tax credit carryforwards
|
1,454
|
1,397
|
—
|
|||||||||
Stock
based compensation
|
879
|
609
|
279
|
|||||||||
Depreciation
and amortization
|
466
|
552
|
(63
|
)
|
||||||||
Other
provisions and expenses not currently deductible
|
851
|
585
|
304
|
|||||||||
Total
deferred tax assets
|
44,614
|
45,409
|
42,074
|
|||||||||
Less
valuation allowance
|
(44,614
|
)
|
(45,409
|
)
|
(42,074
|
)
|
||||||
Net
deferred tax asset
|
$
|
0
|
$
|
0
|
$
|
0
|
SFAS No.
109 requires that the tax benefit of net operating losses, temporary differences
and credit carryforwards be recorded as an asset to the extent that management
assesses that realization is “more likely than not.” Realization of
the future tax benefits is dependent on the Company’s ability to generate
sufficient taxable income within the carryforward period. Because of
the Company’s history of operating losses, management believes that realization
of the deferred tax assets arising from the above-mentioned future tax benefits
is currently not likely and, accordingly, has provided a valuation
allowance.
As of
December 31, 2008, 2007 and 2006, the Company has net deferred tax assets of
approximately of $44.6, $45.4, and $42.0 million, respectively, primarily
resulting from the future tax benefit of net operating loss carryforwards. The
valuation allowance decreased by $795 thousand during 2008 and increased by $3.3
million and $4.7 million during 2007 and 2006, respectively.
As of
December 31, 2008, eMagin has federal and state net operating loss
carryforwards of approximately $120.3 million. The federal research and
development tax credit carryforwards are approximately $1.5 million.
The net operating losses and tax credit carryforwards will be available to
offset future taxable income, if any, through December 2028. The
utilization of net operating losses is subject to a limitation due to the change
of ownership provisions under Section 382 of the Internal Revenue Code and
similar state provisions. Such limitation may result in the expiration of the
net operating losses before their utilization. The Company has done analysis
regarding prior year ownership changes, and it has been determined that the
Section 382 limitation on the utilization of net operating losses will not
materially affect the Company's ability to utilize its net operating
losses.
The
difference between the statutory federal income tax rate on the Company's
pre-tax income and the Company's effective income tax rate is summarized as
follows:
For
the years ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
U.S.
Federal income tax benefit at federal statutory rate
|
34
|
%
|
34
|
%
|
34
|
%
|
||||||
Change
in valuation allowance
|
43
|
%
|
(18
|
)%
|
(32
|
) %
|
||||||
Change
in effective state tax rate
|
(75
|
)%
|
—
|
—
|
||||||||
Loss
on extinguishment of debt
|
—
|
(20
|
)%
|
—
|
||||||||
Other,
net
|
(
2
|
)%
|
4
|
%
|
(
2
|
)
%
|
||||||
0
|
%
|
0
|
%
|
0
|
%
|
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007. The Company did not
have unrecognized tax benefits which would require an adjustment to the January
1, 2007 beginning balance of retained earnings. The Company did not
have any unrecognized tax benefits at December 31, 2007 or at December 31, 2008.
The Company recognizes interest accrued and penalties related to unrecognized
tax benefits in tax expense. During the years ended December 31, 2008
and 2007 the Company recognized no interest and penalties.
The
Company files income tax returns in the U.S. federal jurisdiction and New
York. The tax years 2005-2007 remain open to examination by major
taxing jurisdictions to which the Company is subject.
72
Note
10 - SHAREHOLDERS' EQUITY
Preferred
Stock
Preferred
Stock – Series B Convertible Preferred Stock (“the Preferred Stock – Series
B”)
The
Company has designated 10,000 shares of the Company’s preferred stock as
Preferred Stock – Series B at a stated value of $1,000 per share. The
Preferred Stock – Series B is convertible into common stock at a conversion
price of $0.75 per share. The Preferred Stock – Series B does not pay
interest. The holders of the Preferred Stock – Series B are not
entitled to receive dividends unless the Company’s Board of Directors declare a
dividend for holders of the Company’s common stock and then the dividend shall
be equal to the amount that such holder would have been entitled to receive if
the holder converted its Preferred Stock – Series B into shares of the Company’s
common stock. Each share of Preferred Stock – Series B has voting rights
equal to (i) the number of shares of Common Stock issuable upon conversion of
such shares of Preferred Stock – Series B at such time (determined without
regard to the shares of Common Stock so issuable upon such conversion in respect
of accrued and unpaid dividends on such share of Preferred Stock) when the
Preferred Stock – Series B votes together with the Company’s Common Stock or any
other class or series of stock of the Company and (ii) one vote per share of
Preferred Stock when such vote is not covered by the immediately preceding
clause. In the event of a liquidation, dissolution, or winding up of the
Company, the Preferred Stock – Series B is entitled to receive liquidation
preference before the Common Stock. The Company may at its option
redeem the Preferred Stock – Series B by providing the required notice to the
holders of the Preferred Stock – Series B and paying an amount equal to $1,000
multiplied by the number of shares for all of such holder’s shares of
outstanding Preferred Stock – Series B to be redeemed.
On
December 22, 2008, the Company entered into a Securities Purchase Agreement
pursuant to which the Company sold and issued an aggregate of 4,033 shares of
its Preferred Stock – Series B for an aggregate price of approximately $4.03
million and warrants to purchase 1,875,467 shares of common stock at $1.03 per
share. The net proceeds received after expenses were approximately $3.93
million. The fair value of the warrants was recorded as equity
and there was no impact on the consolidated financial position of the results of
operations. In addition, the Company entered into an Exchange
Agreement (the “Exchange Agreement”) with three holders (“Holders”) of its
outstanding Amended Notes. Pursuant to the Exchange Agreement, the
Holders exchanged $1.7 million of their outstanding Amended Notes and unpaid
interest of $6 thousand, and received 1,706 shares of the Preferred Stock –
Series B. There was no gain or loss on the extinguishment of
debt.
As of
December 31, 2008, there were 5,739 shares of Preferred Stock – Series B issued
and outstanding.
Preferred
Stock – Series A Senior Secured Convertible Preferred Stock (“the Preferred
Stock – Series A”)
The
Company designated but did not issue 3,198 shares of the Company’s preferred
stock as Series A Senior Secured Convertible Preferred Stock (“the Preferred
Stock - Series A”) at a stated value of $1,000 per share. The
Preferred Stock - Series A was entitled to cumulative dividends which accrued at
a rate of 8% per annum, payable on December 21, 2008. Each share of
the Preferred Stock - Series A had voting rights equal to
(1) in any case in which the Preferred Stock - Series A
voted together with the Company's Common Stock or any other class or series of
stock of the Company, the number of shares of Common Stock issuable upon
conversion of such shares of Preferred Stock - Series A at such time
(determined without regard to the shares of Common Stock so issuable upon such
conversion in respect of accrued and unpaid dividends on such share of Preferred
Stock - Series A) and (2) in any case not covered by the immediately
preceding clause one vote per share of Preferred Stock - Series
A. Preferred Stock - Series A had a mandatory redemption at December
21, 2008. As of December 21, 2008, there were no shares issued or
outstanding.
73
Common
Stock
2008
On
December 22, 2008, an investor converted $250 thousand of the principal amount
of the Amended Note and approximately $1 thousand of accrued and unpaid interest
totaling $251 thousand and received 717,620 shares of Common Stock at the
conversion price of $0.35.
On
December 22, 2008, the Company entered into a Securities Purchase Agreement
pursuant to which the Company sold and issued 5,739 shares of Preferred Stock –
Series B at a stated value of $1,000 per share (see Preferred Stock above for
additional information). The Preferred Stock – Series B is
convertible into Common Stock at a conversion price of $0.75. The
Company may at its option redeem the Preferred Stock – Series B by providing the
required notice to the holders of the Preferred Stock – Series B and paying an
amount equal to $1,000 multiplied by the number of shares for all of such
holder’s shares of outstanding Preferred Stock – Series B to be
redeemed. The total shares of Common Stock underlying the Preferred
Stock – Series B is 7,652,000. As mentioned above in Preferred Stock
– Series B, warrants were issued to purchase 1,875,467 shares of common stock at
$1.03 per share. The warrants terminate on December 22,
2013.
The
Company entered into a Registration Rights Agreement to register for resale of
the shares of the Company’s common stock issuable upon conversion of the
Preferred Stock sold in the offering and the shares of Common Stock issuable
upon exercise of the warrants. Subject to the terms of the
Registration Rights Agreement, the Company is required to file a registration
statement on Form S-1 with the Securities and Exchange Commission (the “SEC”)
within 30 days following the date that the Company is permitted to file a
registration statement by (i) the rules and regulations of the SEC and (ii) the
agreements set forth on Schedule B to the Registration Rights Agreement, which
as of December 18, 2008 prohibit the Company from filing the initial
Registration Statement until certain other registration statements are filed.
After filing the Registration Statement, the Company is to cause such
Registration Statement to be declared effective under the Securities Act of 1933
(the “Act”) as promptly as possible but in no event later than 90 days after the
filing date (or no later than 120 days after the filing date in the event of SEC
“full review” of the Registration Statement). The Holders that exchanged their
Notes pursuant to the Exchange Agreement received the same registration
rights.
As a
result of the December 22, 2008 Securities Purchase Agreement, the outstanding
650,000 Series F Common Stock Purchase Warrants that were issued to participants
of the Securities Purchase Agreement dated October 25, 2004, were repriced from
$3.31 to $2.50 and the April 2, 2008 Common Stock Purchase Warrants were
repriced from $1.28 to $1.13. The repricing of the warrants had no
effect on the consolidated financial statements.
On August
20, 2008, the Company and Moriah Capital entered into Amendment No. 3 to the
Loan and Security Agreement (“Amendment No. 3”) effective August 7, 2008. The
Company issued Moriah a warrant, which terminates on August 7, 2013, to purchase
up to 370,000 shares of the Company’s common stock at an exercise price of $1.30
per share.
In
addition, the Company and Moriah entered into an Amended and Restated
Securities Issuance agreement (the “Amended and Restated Securities Issuance
Agreement”) on August 20, 2008. On August 7, 2007, in connection with the
Securities Issuance Agreement, (the “Original Securities Issuance Agreement”),
the Company issued Moriah 162,500 shares of the Company’s common stock (the
“2007 Shares”). With respect to the Amended and Restated Securities
Issuance Agreement, Moriah agreed to waive the Company’s obligation to buy
back the 2007 Shares with respect to 125,000 of such shares with a redemption
amount of $150,000 and to extend the Company’s obligation to buy back 37,500 of
such 2007 Shares for an additional 12 month period. The Company issued Moriah
485,000 shares of its Common Stock of which 125,000 shares were issued as
additional consideration for the extension of the loan and security agreement
and 360,000 shares were issued in lieu of the issuance to Moriah of the
Contingent Issued Shares (as described in the Original Securities Issuance
Agreement). Additionally, Moriah has a put option pursuant to which Moriah can
sell to the Company 162,500 shares of its common stock for $195,000,
pro-rated for any portion thereof, relating to the remaining 37,500 shares
subject to the 2007 Put Option and the 125,000 shares issued to extend the loan
and security agreement, the Put Waiver shares. In conjunction with
the issuance of the 360,000 shares, the Company granted Moriah a put option
pursuant to which such shares can be put to the Company for $234,000 (the “2008
Put Option”). The 2007 and 2008 Put Option shall automatically be
deemed exercised by Moriah unless Moriah delivers written notice to the Company
at any time between July 1, 2009 and August 1, 2009 that Moriah does not wish to
exercise the 2007 and 2008 Put options in whole or in part.
The
shares underlying the put options are presented as redeemable common stock
and presented separately from permanent equity. As of December 31,
2008, an aggregate of 522,500 shares related to the 2007 and 2008 put
options are presented on the balance sheet as redeemable common stock in
the amount of $429,000, representing the amount for which the shares may be
redeemed at the option of the holders at such date.
The
Company and Moriah entered into an Amendment to Registration Rights Agreement
(the “Amended Registration Rights Agreement”) and the Company agreed to use its
best efforts to file a registration statement to register the 485,000
shares of the Company’s common stock issued and the shares of common stock
issuable upon exercise of the Warrant.
On August
19, 2008, the Holders of the Amended Notes and the Investors in
the Purchase Agreement consented to the Company’s execution of the Amended
Note, Amendment No. 3, Amended and Restated Securities Issuance Agreement, and
the Amended Registration Rights Agreement. In consideration for the
consent, a total of 144,000 shares of common stock valued at $101,000 were
issued to the Holders and Investors based on individual participation in the
Amended Notes and Purchase Agreement on September 4, 2008.
As a
result of the Amended and Restated Securities Issuance Agreement, the
outstanding 650,000 Series F Common Stock Purchase Warrants that were issued to
participants of the Securities Purchase Agreement dated October 25, 2004, were
repriced from $3.45 to $3.31 and the April 2, 2008 Common Stock Purchase
Warrants were repriced from $1.30 to $1.28. The repricing of the
warrants had no effect on the consolidated financial statements.
On April
2, 2008, the Company entered into a Securities Purchase Agreement (“Purchase
Agreement”), pursuant to which the Company sold and issued 1,586,539 shares of
common stock, par value of $0.001 per share, at a price of $1.04 per share and
warrants to purchase an additional 793,273 shares of common stock for an
aggregate purchase price of approximately $1.65 million. The net
proceeds received after expenses were approximately $1.58
million. The warrants are exercisable at a price of $1.30 per share
and expire on April 2, 2013.
As a
result of the Purchase Agreement, the outstanding 650,000 Series F Common Stock
Purchase Warrants that were issued to participants of the Securities Purchase
Agreement dated October 25, 2004, were repriced from $4.09 to $3.45. The
repricing of the warrants had no effect on the consolidated financial
statements.
A
registration rights agreement was entered into on April 2, 2008 in connection
with the private placement which required the Company to file a registration
statement for the resale of the common stock and the shares underlying the
warrants within 45 days of the signing of the agreement. The Company
must use its best efforts to have the registration statement declared effective
within 90 days of the signing of the agreement or if a SEC review occurs, 120
days. In addition, the Company must use its best efforts to maintain
the effectiveness of the registration statement until all common stock has been
sold or may be sold without volume restrictions pursuant to Rule 144(k) of the
Securities Act.
74
The
Company filed the registration statement within the 45 day period however the
Company was notified that the registration statement was under review by the
SEC. The amended registration statement was not filed by August 2,
2008 which was the 120th day from the signing of the purchase agreement and
therefore the registration statement is not effective. As of December 31, 2008,
the registration statement is not effective.
The
Company accounted for the registration payment arrangement under the guidance of
EITF 00-19-2, “Accounting for Registration Payment Arrangements”, (“EITF
00-19-2”) which requires the contingent obligation to make future payments be
recognized and measured in accordance with FASB Statement No. 5, “Accounting for
Contingencies”, (“Statement 5”) and FASB Interpretation No. 14, “Reasonable
Estimation of the Amount of a Loss”, (“Interpretation 14”). The Company
estimated $399 thousand to be the maximum potential damages that the Company may
be required to pay the investors if the registration statement is not effective
within three years of the signing of the agreement. The Company estimated $186
thousand to be a reasonable estimate of the potential damages that may be due to
the investors. As a result, the Company recorded a liability of $186
thousand in the consolidated balance sheets and the associated expense in other
income (expense) in the consolidated statements of
operations. Effective March 25, 2008, the Company amended the Warrant
Issuance Agreement (“Amended Warrant Agreement”) with Moriah. In connection with
such amendment, the Company issued a Warrant to purchase an additional 250,000
shares of its common stock at a price of $1.50 expiring March 25,
2013.
On
January 30, 2008, the Company amended and restated its Loan and Security
Agreement (“Amended Loan Agreement”) with Moriah. As part of the
amended agreement, the Loan Conversion agreement was terminated which eliminated
the optional conversion of principal up to $2.0 million into common stock at
$1.50. In connection with the Amended Loan agreement, the Company
issued a Warrant to purchase 750,000 shares of its common stock at a price of
$1.50 per share with an expiration date of January 29, 2013. Effective March 25,
2008, the
Company
amended the Warrant Issuance Agreement with Moriah. In connection with such
amendment, the Company issued a Warrant to purchase an additional 250,000 shares
of its common stock at a price of $1.50 expiring March 25, 2013.
The
Company determined the fair value of the 1,000,000 warrants issued to Moriah to
be $729 thousand. The Company valued the warrants using a Black-Scholes
option pricing model. The Company recorded $168 thousand as interest
expense and the remaining $561 thousand was recorded as deferred debt
issuance costs and amortized over the life of the loan. The
following assumptions were used to determine the fair value of the
warrants: dividend yield of 0%; risk free interest rates of 2.61 %
and 2.96%; expected volatility of 90.9% and 92.3%; and expected contractual term
of 5 years.
For the
year ended December 31, 2008, there were no stock options and warrants
exercised. For the year ended December 31, 2008, the Company also
issued approximately 326,000 shares of common stock for payment of approximately
$303 thousand for services rendered and to be rendered in the
future. As such, the Company recorded the fair value
of the services rendered in prepaid expenses and
selling, general and administrative expenses in the accompanying
consolidated statement of operations for the year ended December 31,
2008.
2007
On August
16, 2007, an investor elected to convert approximately $58 thousand of the
Amended Note. The investor received 76,923 shares of Common Stock at the
conversion price of $0.75.
On August
7, 2007, the Company entered into a loan agreement
with Moriah Capital, L.P. (“Moriah) and established a
revolving line of credit (the “Loan”) of $2.5 million. As part of the
transaction, the Company issued 162,500 shares of unregistered common stock
valued at $195 thousand, recognized as deferred financing costs, and paid a
servicing fee of $82,500 to Moriah which was amortized to interest expense over
the life of the agreement. For the year ended December 31, 2007
approximately $116 thousand was amortized to interest expense. In
conjunction with entering into this loan and issuing unregistered common stock,
the Company granted Moriah registration rights. The Loan was
convertible into shares of the Company’s common stock pursuant to the terms of
the Loan Conversion agreement. The Loan matured on August 8, 2008
however the Company had the option of extending it an additional
year. On January 30, and March 25, 2008, the loan agreement was
amended.
75
A
registration rights agreement was entered into in connection with the Loan which
requires the Company to file a registration statement for the resale of the
common stock issued. The Company must use its best efforts to have
the registration statement declared effective by the end of a specified grace
period and also maintain the effectiveness of the registration statement until
all shares of common stock have been sold or may be sold without volume
restrictions pursuant to Rule 144(k) of the Securities Act.
Additionally,
the Company granted Moriah a put option pursuant to which Moriah can sell to the
Company the 162,500 shares of its common stock for $195 thousand, or prorated
for any portion thereof ("the Put Option"). The Put Option expires if the Put
Option is not exercised during the Put Period which is the earlier of a) ten
business days commencing on the anniversary date of the loan agreement or b) ten
business days commencing on the date which is nine months after the registration
statement for the registration of the issued 162,500 shares of common stock is
declared effective. The shares underlying the put option are presented as
redeemable common stock on the accompanying consolidated balance sheet and
presented separately from permanent equity.
On July
23, 2007, the Company entered into Agreements with the note holders and agreed
to issue each holder an Amended Note in the principal amount equal to the
principal amount outstanding as of July 23, 2007 which was in total
approximately $6.0 million. The Amended Notes were convertible into 8,407,612
shares of the Company’s common stock. The conversion price for $5.8
million of principal was at a conversion price of $0.75 and the conversion price
for $250 thousand of principal remains the same at $0.35. The
Agreement adjusted the exercise price of the amended Warrants from $3.60 to
$1.03 per share for 1,553,468 shares of common stock and required the issuance
of warrants for an additional 3,831,859 shares of common stock at $1.03 per
share with an expiration date of July 21, 2011. The warrants
are subject to anti-dilution adjustment rights. 50% of the Amended
Notes were convertible into the Company’s newly designated Series A Senior
Secured Convertible Preferred Stock which was convertible into common stock at
the same rate as the Amended Notes.
The
Company had recorded the fair value of the warrants associated with the Note as
a liability as the warrant agreement required a potential net-cash settlement in
the first year of the warrant agreement if the registration statement is not
effective as required by EITF 00-19 “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF
00-19”). The liability was adjusted to fair value at each reporting
period. As of July 23, 2007, the potential net-cash settlement had
expired. As a result, the fair value of the warrant liability on July
23, 2007, approximately $2.7 million, was reversed. For the year
ended December 31, 2007, the Company recorded losses of approximately $0.8
million from the change in the fair value of the warrant derivative liability.
The change in the fair value of the warrant liability was recorded in the
Consolidated Statement of Operations as other income (expense).
On July
23, 2007, an investor converted $250 thousand of the principal amount of the
Original Note due on July 23, 2007 and approximately $2 thousand of accrued and
unpaid interest totaling $252 thousand and received 720,476 shares of Common
Stock at the conversion price of $0.35. On August 16, 2007, an
investor elected to convert approximately $58 thousand of the Amended Note. The
investor received 76,923 shares of Common Stock at the conversion price of
$0.75.
On March
28, 2007, the Company entered into a Note Purchase Agreement for the sale of
$500 thousand of 6% senior secured convertible debentures (the “Note”) and
warrants to purchase approximately 1,000,000 shares of common stock, par value
$.001 per share. The investor purchased the Note with a conversion
price of $0.35 per share that may convert into approximately 1,400,000 shares of
common stock and issued warrants exercisable at $0.48 per share for
approximately 1,000,000 shares of common stock expiring in July
2011. On April 9, 2007, the Company closed the transaction and
received approximately $460 thousand, net of offering costs of approximately $40
thousand, which are amortized over the life of the Note. The
Note was amended on July 23, 2007 as described in Footnote
8: Debt.
As a
result of the issuance of the Note, the outstanding 116,573 Series A Common
Stock Purchase Warrants, that were issued to certain accredited and/or
institutional investors pursuant to the Securities Purchase Agreement dated
January 9, 2004, were re-priced from $2.60 to $0.35 and the outstanding 650,000
Series F Common Stock Purchase Warrants, that were issued to certain accredited
and/or institutional investors pursuant to the Securities Purchase Agreement
dated October 25, 2004, were re-priced from $8.60 to $7.12. As a result of the
issuance of the Amended Notes the outstanding 650,000 Series F Common Stock
Purchase Warrants that were issued to certain accredited and/or institutional
investors pursuant to the Securities Purchase Agreement dated October 25, 2004,
were re-priced from $7.12 to $4.39 in accordance with the anti-dilution
provision of the original agreement. These warrants were further
re-priced in connection with the loan agreement with Moriah from $4.39 to
$4.09. The repricing of the warrants had no effect on the
consolidated financial statements.
For the
year ended December 31, 2007, there were no stock options exercised and the
Company received approximately $3 thousand in proceeds for warrants exercised.
For the year ended December 31, 2007, the Company also issued approximately 1.3
million shares of common stock for payment of approximately $1.1 million for
services rendered and to be rendered in the future. In addition, the
Company issued 162,500 shares of common stock subject to a put option for
payment of approximately $0.2 million for services rendered. As
such, the Company recorded the fair value of the services
rendered in prepaid expenses and selling, general and
administrative expenses in the accompanying consolidated statement of
operations for the year ended December 31, 2007.
2006
At the
Company’s 2006 Annual Meeting of Shareholders held on October 20, 2006, the
Company’s shareholders approved an amendment to the Company’s certificate of
incorporation to effect a reverse stock split of the issued and outstanding
common stock on a ratio of 1-for-10. On November 3, 2006, the reverse
stock split became effective. The Company has adjusted its shareholders’ equity
accounts by reducing its stated capital and increasing its additional paid-in
capital by approximately $91 thousand as of December 31, 2006 and 2005 to
reflect the reduction in outstanding shares as a result of the reverse stock
split.
76
On July
21, 2006, the Company entered into several Note Purchase Agreements for the sale
of approximately $5.99 million of senior secured debentures (the “Notes”) and
warrants to purchase approximately 1.8 million shares of common stock, par value
$.001 per share. The investors purchased $5.99 million principal
amount of Notes with conversion prices of $2.60 per share that may convert into
approximately 2.3 million shares of common stock and 5 year warrants exercisable
at $3.60 per share into approximately 1.6 million shares of common
stock. If the Notes are not converted, 50% of the principal amount
will be due on July 23, 2007 and the remaining 50% will be due on January 21,
2008. Commencing September 1, 2006, 6% interest is payable in
quarterly installments on outstanding notes. For the year ended
December 31, 2006, the Company paid approximately $124 thousand of interest to
investors. The Company received approximately $5.4 million, net of deferred
financing costs of approximately $0.6 million which are amortized over the life
of the Notes. The Company amortized approximately $221 thousand
of deferred financing costs in 2006. For the year ended December 31, 2006, two
note holders converted their promissory notes valued at approximately $220
thousand and were issued an aggregate of approximately 85,000
shares.
Under
EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in, a Company’s Own Stock”, the fair value of the warrants,
$3.6 million, have been recorded as a liability since the warrant agreement
requires a potential net-cash settlement in the first year of the warrant
agreement if the registration statement is not effective. As of
December 31, 2006, the registration statement is effective. The
liability will be adjusted to fair value at each reporting
period. The change in the fair value of the warrants will be recorded
in the Consolidated Statement of Operations as other income
(expense). For the twelve months ended December 31, 2006, the Company
recorded approximately $2.4 million of gain from the change in the fair value of
the derivative liability.
An
additional $0.5 million was to be invested through the exercise of a warrant to
purchase approximately 192,000 shares of common stock at $2.60 per share on or
prior to December 14, 2006, or at the election of the Company, by the purchase
of additional Notes and warrants. The Company determined the relative
fair value of the warrants to be approximately $157,000 which was recorded as an
other asset. The following assumptions were used to determine the
fair value of the warrant:
Dividend
yield
|
0 | % | ||
Risk
free interest rates
|
5.25 | % | ||
Expected volatility
|
122 | % | ||
Expected
term (in years)
|
0.4
years
|
The
investor elected not to exercise its warrants prior to December 14,
2006. The fair value of the warrants which was recorded as an other
asset was written off as a sales, general and administrative
expense.
In
connection with the Notes, a registration rights agreement was entered into
which requires the Company to file a registration statement for the resale of
the common stock underlying the Notes and the warrants. The Company
must use its best efforts to have the registration statement declared effective
by the end of a specified grace period and also maintain the effectiveness of
the registration statement until all shares of common stock underlying the Notes
and the warrants have been sold or may be sold without volume restrictions
pursuant to Rule 144(k) of the Securities Act. If the Company fails
to have the registration statement declared effective within the grace period or
fails to maintain the effectiveness as set forth in the preceding sentence, the
Company is required to pay each investor cash payments equal to 1.0% of the
aggregate purchase price monthly until the failure is cured. If the
Company fails to pay the liquidated damages, interest at 16.0% will accrue until
the liquidated damages are paid in full. The registration statement
was filed and declared effective by the Securities and Exchange Commission
within the specified grace period.
The
Company accounts for the registration rights agreement as a separate
freestanding instrument and accounts for the liquidated damages provision as a
derivative liability subject to SFAS 133. The estimated fair value of
the derivative liability is based on an estimate of the probability and costs of
cash penalties being incurred. The Company determined that the fair
value of the liability was immaterial and it is not recorded in accrued
liabilities. The Company will revalue the potential liability at each
balance sheet date.
As a
result of the issuance of the Notes, the outstanding 116,576 Series A Common
Stock Purchase Warrants, that were issued to certain accredited and/or
institutional investors pursuant to the Securities Purchase Agreement dated
January 9, 2004, were re-priced from $5.50 to $2.60 and the outstanding 650,001
Series F Common Stock Purchase Warrants, that were issued to certain accredited
and/or institutional investors pursuant to the Securities Purchase Agreement
dated October 25, 2004, were re-priced from $10.90 to $8.60.
For the
year ended December 31, 2006, the Company received approximately $10 thousand
for the exercise of 5,000 options and there were no warrants
exercised. For year ended December 31, 2006, the Company issued
approximately 254,000 shares of common stock in lieu of cash payments in the
amount of approximately $580 thousand as compensation for services rendered
and to be rendered in the future. The fair value of the services was
measured at market value of the common stock at the time of
payment. As such, the Company recorded the fair value of the services
rendered in selling, general and administrative expenses in the accompanying
consolidated statement of operations for the year ended December 31,
2006.
77
Note
11 - STOCK COMPENSATION
Employee
stock purchase plan
In 2005,
the stockholders approved the 2005 Employee Stock Purchase Plan
(“ESPP”). The ESPP provides the Company’s employees with the
opportunity to purchase common stock through payroll deductions. Employees
purchase stock semi-annually at a price that is 85% of the fair market value at
certain plan-defined dates. At December 31, 2008, the number of shares of common
stock available for issuance was 300,000. As of December 31, 2008,
the plan had not been implemented.
Incentive
compensation plans
In 2000,
the Company established the 2000 Stock Option Plan (the "2000 Plan"). The Plan
permits the granting of options and stock purchase rights to employees and
consultants of the Company. The 2000 Plan allows for the grant of incentive
stock options meeting the requirements of Section 422 of the Internal Revenue
Code of 1986 (the "Code") or non-qualified stock options which are not intended
to meet such requirements.
In 2003,
the Company established the 2003 Stock Option Plan (the "2003 Plan"). The 2003
Plan provided for the granting of options to purchase an aggregate of 920,000
shares of the common stock to employees and consultants. On July 2, 2003, the
shareholders approved the plan and the 2003 Plan was subsequently amended by the
Board of Directors on July 2, 2003 to reduce the number of additional shares
that may be provided for issuance under the "evergreen" provisions of the 2003
Plan. The amended 2003 Plan provides for an increase of 200,000 shares in
January 2004 and an annual increase on January 1 of each year for a period of
nine (9) years commencing on January 1, 2005 of 3% of the diluted shares
outstanding. The shareholders approved an amendment to the 2003 Plan
to provide grants of shares of common stock in addition to options to purchase
shares of common stock.
The 2008
Incentive Stock Plan (“the 2008 Plan”) adopted and approved by the Board of
Directors on November 5, 2008 provides for shares of common stock and
options to purchase shares of common stock to employees, officers, directors and
consultants. The 2008 Plan has an aggregate of 2,000,000 shares.
As of December 31, 2008, no options or shares of common stock were granted
from this plan.
Vesting
terms of the options range from immediate vesting to a ratable vesting period of
5 years. Option activity for the years ended December 31, 2008, 2007 and 2006 is
summarized as follows:
Number
of Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life (In Years)
|
Aggregate
Intrinsic Value
|
||||||||||
Balances
at December 31, 2005
|
1,805,264
|
$
|
10.90
|
||||||||||
Options
granted
|
185,744
|
4.30
|
|||||||||||
Options
exercised
|
(5,000
|
)
|
2.10
|
||||||||||
Options
forfeited
|
(453,115
|
)
|
7.47
|
||||||||||
Options
cancelled
|
(467,148
|
)
|
11.97
|
||||||||||
Balances
at December 31, 2006
|
1,065,745
|
$
|
2.94
|
||||||||||
Options
granted
|
228,577
|
1.41
|
|||||||||||
Options
exercised
|
—
|
—
|
|||||||||||
Options
forfeited
|
(203,943
|
)
|
2.90
|
||||||||||
Options
cancelled
|
(196,056
|
)
|
2.67
|
||||||||||
Balances
at December 31, 2007
|
894,323
|
$
|
2.62
|
||||||||||
Options
granted
|
927,253
|
0.89
|
|||||||||||
Options
exercised
|
—
|
—
|
|||||||||||
Options
forfeited
|
(205,903
|
)
|
2.29
|
||||||||||
Options
cancelled
|
—
|
—
|
|||||||||||
Balances
at December 31, 2008
|
1,615,673
|
$
|
1.63
|
6.43
|
$
|
1,440
|
|||||||
Vested
or expected to vest at
December
31, 2008(1)
|
1,568,953
|
$
|
1.51
|
6.43
|
$
|
—
|
|||||||
Exercisable
at December 31, 2008
|
1,148,476
|
$
|
1.79
|
6.61
|
$
|
—
|
(1) The
expected to vest options are the result of applying the pre-vesting forfeiture
rate assumptions to total unvested options.
78
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 options that were in-the-money. As of
December 31, 2008 there were 8,000 options that were
in-the-money. The Company’s closing stock price was $0.54 as of
December 31, 2008. The Company issues new shares of common stock upon exercise
of stock options.
The
following table summarizes information about stock options outstanding at
December 31, 2008:
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||||||
Number
Outstanding
|
Weighted
Average Remaining Contractual Life (In Years)
|
Weighted
Average Exercise Price
|
Number
Exercisable
|
Weighted
Average Exercisable Price
|
|||||||||||||||
$
|
0.34
- $0.97
|
759,553
|
7.39
|
$
|
0.80
|
404,620
|
$
|
0.79
|
|||||||||||
$
|
1.00
- $1.44
|
388,577
|
8.71
|
1.38
|
358,397
|
1.41
|
|||||||||||||
$
|
2.60
- $2.70
|
430,343
|
2.98
|
2.61
|
352,959
|
2.61
|
|||||||||||||
$
|
3.50
- $5.80
|
8,000
|
3.55
|
5.51
|
8,000
|
5.51
|
|||||||||||||
$
|
6.60
- $22.50
|
29,200
|
2.57
|
10.91
|
24,500
|
10.90
|
|||||||||||||
1,615,673
|
6.43
|
$
|
1.63
|
1,148,476
|
$
|
1.79
|
On July
21, 2006, certain employees and Directors of the Company agreed to cancel
approximately 467,000 shares underlying existing stock options in return for the
re-pricing of approximately 869,000 existing options at $2.60 per share having a
weighted average original exercise price of $11.97. Option grants
that have not been re-priced remain unchanged. The unvested options
which were re-priced continue to vest on original vesting schedules, but in no
event vest prior to January 19, 2007. Previously vested options which
were re-priced were fully vested on January 19, 2007. Re-priced
grants will be forfeited if the individual leaves voluntarily. The
Company has accounted for the re-pricing and cancellation transactions as a
modification under SFAS No. 123R.
Stock
based compensation
The
Company accounts for the measurement and recognition of compensation expense for
all share-based payment awards made to employees and directors under Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment , (SFAS 123(R)). Under SFAS 123(R), the fair value of
stock awards 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 stock-based compensation to expense
categories for the years ended December 31, 2008, 2007 and 2006 (in
thousands):
For
the years ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Cost
of revenue
|
$
|
134
|
$
|
215
|
$
|
343
|
||||||
Research
and development
|
237
|
357
|
435
|
|||||||||
Selling,
general, and administrative
|
557
|
1,080
|
2,113
|
|||||||||
Total
stock compensation expense
|
$
|
928
|
$
|
1,652
|
$
|
2,891
|
At
December 31, 2008, total unrecognized compensation costs related to stock
options was approximately $0.6 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 total
fair value of the shares that vested in 2008 was $0.6 million.
The
Company recognizes compensation expense for options granted to non-employees in
accordance with the provision of Emerging Issues Task Force (“EITF”) consensus
Issue 96-18, “Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services,”
which requires using a fair value options pricing model and re-measuring such
stock options to the current fair market value at each reporting period as the
underlying options vest and services are rendered.
79
For
the years ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Dividend
yield
|
0
|
%
|
0
|
%
|
0
|
%
|
||||||
Risk
free interest rates
|
1.71%
- 3.37
|
%
|
3.28%
- 4.23
|
%
|
4.59%
- 4.82
|
%
|
||||||
Expected volatility
|
87%
-92
|
%
|
105%
-106
|
%
|
123%
- 126
|
%
|
||||||
Expected
term ( in
years)
|
5
years
|
5
years
|
5
years
|
We have
not declared or paid any dividends and do not currently expect to do so in the
near future. The risk-free interest rate used in the Black-Scholes
option pricing model is based on the implied yield currently available 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 most recent five year period. The
expected term of options represents the period that eMagin’s stock-based awards
are expected to be outstanding and was determined based on historical experience
and vesting schedules of similar awards.
Warrants
At
December 31, 2008, 12,279,239 warrants to purchase shares of common stock are
outstanding and exercisable at exercise prices ranging from $0.35 to $24.10 and
expiration dates ranging from January 8, 2009 to December 22, 2013.
Outstanding
Warrants
|
||||||||
Shares
|
Weighted
Average Exercise Price
|
|||||||
Balances
at December 31, 2005
|
2,619,725
|
$
|
10.20
|
|||||
Warrants
granted
|
1,805,037
|
3.49
|
||||||
Warrants
exercised
|
—
|
—
|
||||||
Warrants
expired
|
(876,588
|
)
|
6.90
|
|||||
Balances
at December 31, 2006
|
3,548,174
|
$
|
7.05
|
|||||
Warrants
granted
|
4,831,859
|
0.88
|
||||||
Warrants
exercised
|
(9,524
|
)
|
0.35
|
|||||
Warrants
expired
|
(30,000
|
)
|
4.26
|
|||||
Balances
at December 31, 2007
|
8,340,509
|
$
|
2.65
|
|||||
Warrants
granted
|
4,038,740
|
1.22
|
||||||
Warrants
exercised
|
—
|
—
|
||||||
Warrants
expired
|
(100,009
|
)
|
27.60
|
|||||
Balances
at December 31, 2008
|
12,279,239
|
$
|
1.88
|
Royalties
The Company, in accordance with
a royalty agreement with Eastman Kodak, is obligated to make
minimum annual royalty payments of $125 thousand which commenced on January
1, 2001. Under this agreement, the Company must pay to Eastman Kodak a certain
percentage of net sales with respect to certain products, which
percentages are defined in the agreement. The percentages are on a sliding scale
depending on the amount of sales generated. Any minimum royalties
paid will be credited against the amounts due based on the percentage of
sales. The royalty agreement terminates upon the expiration of the issued
patent which is the last to expire.
Effective
May 30, 2007, Kodak and eMagin entered into an intellectual property agreement
where eMagin assigned Kodak the rights, title, and interest to a Company owned
patent currently not being used by the Company and in consideration, Kodak
waived the royalties due under existing licensing agreements for the first six
months of 2007, and reduced the royalty payments by 50% for the second half of
2007 and for the entire calendar year of 2008. In addition, the minimum royalty
payment was delayed until December 1st for the years 2007 and
2008. The Company recorded approximately $556 thousand and $868
thousand for the years ended December 31, 2008 and 2007, respectively, as income
from the license of intangible assets and included this amount in other income
on the Consolidated Statement of Operations.
For the
years ended December 31, 2008, 2007, and 2006, royalty expense of approximately
$1.1 million, $1.2 million, and $515 thousand, respectively, is
included in cost of goods sold.
80
The
Company leases office facilities and office, lab and factory equipment under
operating leases expiring in 2009. The Company currently has
lease commitments for space in Hopewell Junction, New York and Bellevue,
Washington.
The
Company’s manufacturing facilities are leased from IBM in Hopewell Junction, New
York. eMagin leases approximately 40,000 square feet to house its
equipment for OLED microdisplay fabrication and for research and development, an
assembly area and administrative offices. The lease expires May 31,
2009. The Company is currently in negotiations to extend the
lease.
In July
2005, eMagin signed a sub-lease agreement for approximately 19,000 square feet
in Bellevue Washington. The leased space is used as the Company’s corporate
headquarters. This lease will expire August 31, 2009. The
Company is currently reviewing potential office spaces for lease.
The
future minimum lease payments through 2009 are $619 thousand. Rent expense for
the years ended December 31, 2008, 2007, and 2006 was approximately $1.3
million, $1.3 million, and $1.3 million, respectively.
Employee
benefit plans
eMagin
has a defined contribution plan (the 401(k) Plan) under Section 401(k) of the
Internal Revenue Code, which is available to all employees who meet established
eligibility requirements. Employee contributions are generally limited to 15% of
the employee's compensation. Under the provisions of the 401(k) Plan, eMagin may
match a portion of the participating employees' contributions. There was no
matching contribution to the 401(k) Plan for the years ended December 31, 2008,
2007 and 2006.
Legal
proceedings
A former
employee (“plaintiff”) of the Company commenced legal action in the United
States District Court for the Southern District of New York, on or about October
12, 2007, alleging that the plaintiff was subject to gender based discrimination
and retaliation in violation of Title VII of the Civil Rights Act of 1964 ( Case
No. 07-CV-8827 (KMK) . The plaintiff seeks unspecified compensatory
damages, punitive damages and attorneys’ fees. On November 26, 2007,
the Company served and filed its Answer, in which it denied the material
allegations of the Complaint and asserted numerous affirmative
defenses. This action is presently in the discovery
stage. The Company disputes the allegations of the Complaint and
intends on vigorously defending this action.
On
December 6, 2005, New York State Urban Development Corporation commenced action
against eMagin in the Supreme Court of the State of New York, County of New York
asserting breach of contract and seeking to recover a $150,000 grant which was
made to eMagin based on goals set forth in the agreement for recruitment of
employees. On July 13, 2006, eMagin agreed to a settlement with the
New York State Urban Development Corporation to repay $112,200 of the $150,000
grant. The settlement requires that repayments be made on a monthly basis in the
amount of $3,116.67 per month commencing August 1, 2006 and ending on July 1,
2009. As of December 31, 2008, approximately $59,617 remains
outstanding to the New York Urban Development Corporation, of which $37,800 will
be forgiven if payments are timely.
Note
13 – RELATED PARTY TRANSACTIONS
2008
On
December 22, 2008, the Company entered into a Securities Purchase Agreement with
Stillwater LLC, a beneficial owner of more than 5%, pursuant to which the
Company sold and issued an aggregate of 4,033 shares of its Preferred Stock –
Series B for an aggregate price of approximately $4.03 million and warrants to
purchase 1,875,467 shares of common stock at $1.03 per share. The proceeds from
the Securities Purchase Agreement were used to pay approximately $4.01 million
of the outstanding principal of its Amended Notes and approximately $0.02
million of accrued interest. One employee had an Amended Note of $10
thousand which was repaid. Alexandra Global Master Fund Ltd (“Alexandra”), a
beneficial owner of more than 5% of the Company’s common stock, had its Amended
Note of $3 million repaid.
In
addition, the Company entered into an Exchange Agreement (the “Exchange
Agreement”) with three holders (“Holders”) of its outstanding Amended
Notes. Pursuant to the Exchange Agreement, the Holders exchanged $1.7
million of their outstanding Amended Notes and unpaid interest, $6 thousand, and
received 1,706 shares of the Preferred Stock. Paul Cronson,
Board member, through Navacorp III, LLC - a Note holder,
exchanged an Amended Note of $200 thousand for 200 shares of Preferred Stock –
Series B. Rainbow Gate Corporation, a corporation whose investment
manager is the sole member of Stillwater LLC and whose controlling shareholder
is the same as Ginola Limited’s, exchanged an Amended Note of $700 thousand and
accrued interest of $3 thousand for 703 shares of Preferred Stock – Series
B. Ginola Limited, a beneficial owner of more than 5%, exchanged an
Amended Note of $800 thousand and accrued interest of $3 thousand for 803 shares
of Preferred stock – Series B. Stillwater LLC disclaims
beneficial ownership of shares owned by Rainbow Gate Corporation. On
December 22, 2008, Stillwater LLC converted its $250 thousand Amended Note and
accrued interest of approximately $1.2 thousand to 717,620 shares of Common
Stock.
81
Stillwater
LLC, as a beneficial owner of more than 5%, invested $500 thousand and received
480,769 shares of common stock and warrants to purchase additional 240,385
shares of common stock. Ginola Limited, as a beneficial owner of more
than 5%, invested $250 thousand and received 240,385 shares of common stock and
warrants to purchase an additional 120,193 shares of common stock. Crestflower
Corporation invested $250 thousand and received 240,385 shares of common stock
and warrants to purchase additional 120,193 shares of common
stock. Ginola Limited and Crestflower share the same directors;
however, Ginola Limited disclaims beneficial ownership of shares owned by
Crestflower Corporation.
2007
On July
23, 2007, the Company entered into Agreements with the note holders and issued
8% Amended Senior Secured Convertible Notes (“Amended Notes”) to the note
holders in the principal amount equal to the principal amount outstanding as of
July 23, 2007. The due date for the principal payment was extended to December
21, 2008 and the interest rate increased to 8%. The Amended Notes were
convertible into 8,407,612 shares of the Company’s common stock. The conversion
price for approximately $5,770,000 of principal was revised from $2.60 to $.75
per share and the conversion price of $.35 per share for $250,000 of principal
was unchanged. $3,010,000 of the Notes were convertible into 3,010 shares of the
Company’s newly formed Series A Convertible Preferred Stock (the “Preferred”) at
a conversion price of $1,000 per share. The Preferred was convertible into
common stock at the same price allowable by the Amended Notes, subject to
adjustment as provided for in the Certificate of Designations. The Amended Notes
adjusted the exercise price from $3.60 to $1.03 per share for 1,553,468 warrants
and required the issuance of 3,831,859 warrants exercisable at $1.03 per share
pursuant to which the note holders may acquire common stock until July 21,
2011.
Stillwater
LLC was a beneficial owner of more than 5% of the Company’s common
stock. Rainbow Gate Corporation, a corporation whose investment
manager is the sole member of Stillwater LLC and whose controlling shareholder
is the same as Ginola Limited’s, had an Amended Note of $700 thousand which was
convertible into 933,333 shares and received 653,333 warrants exercisable at
$1.03 per share. Ginola Limited had an Amended Note of $800 thousand
which was convertible into 1,066,333 shares and received 746,666 warrants
exercisable at $1.03 per share. Stillwater LLC disclaimed beneficial
ownership of shares owned by Rainbow Gate Corporation.
Two
employees and one board member participated in the Agreements. Olivier Prache,
Senior VP of Display Operations, had an Amended Note of $10 thousand which was
convertible into 13,333 shares, received 9,333 warrants which are exercisable at
$1.03 per share, and has 5,385 warrants which are exercisable at $3.60 per
share. John Atherly, former CFO as of January 2, 2008, had an Amended
Note of $40 thousand which was convertible into 53,333 shares and received
37,333 warrants which are exercisable at $1.03 per share. Paul
Cronson, Board member, through Navacorp III, LLC, had an Amended Note of $200
thousand which was convertible into 266,666 shares and received 186,666 warrants
which are exercisable at $1.03 per share.
Alexandra
Global Master Fund Ltd (“Alexandra”) was a beneficial owner of more than 5% of
the Company’s common stock. Alexandra had an Amended Note of $3
million which was convertible into 4 million shares and received 2.8 million
warrants exercisable at $1.03 per share.
On March
28, 2007, the Company entered into an amendment to the Stillwater Agreement,
originally dated July 21, 2006. On April 9, 2007, the sale of the Stillwater
Note and Warrant was complete and the Company issued a 6% Senior Secured
Convertible Note in the principal amount of $500,000 and warrants to purchase
1,000,000 shares of the Company’s common stock at an exercise price of $0.48. On
July 23, 2007, Stillwater elected to convert $250,000 of the principal amount of
the Note and approximately $2,167 of accrued and unpaid interest. Stillwater
received 720,476 shares of Common Stock at the conversion price of
$0.35. The remaining 50% was amended to an 8% Amended Senior Secured
Convertible Note on July 23, 2007.
A family
member of an outside director of eMagin was the holder of a Series A warrant to
purchase an aggregate of 4,286 shares of common stock. As a result of the
Stillwater transaction, the exercise price of all Series A warrants was reduced
from $5.50 to $0.35 per share.
On July
21, 2006, the Company entered into several Note Purchase Agreements for the sale
of approximately $5.99 million of senior secured debentures (the “Notes”) and
warrants to purchase approximately 1,800,000 shares of common stock, par value
$.001 per share. The investors purchased $5.99 million principal
amount of Notes with conversion prices of $2.60 per share that may convert into
approximately 2.3 million shares of common stock and 5 year warrants exercisable
at $3.60 per share into approximately 1,600,000 million shares of common
stock. If the Notes are not converted, 50% of the principal amount
will be due on July 23, 2007 and the remaining 50% will be due on January 21,
2008. Commencing September 1, 2006, 6% interest was payable in
quarterly installments on outstanding notes. The Notes were amended
on July 23, 2007.
82
Stillwater
LLC is a beneficial owner of more than 5% of the Company’s common
stock. Rainbow Gate Corporation, a corporation whose investment
manager is the sole member of Stillwater LLC and whose controlling shareholder
is the same as Ginola Limited’s, purchased a $700 thousand promissory note which
may be converted into 269,231 shares and received 188,462 warrants exercisable
at $3.60 per share. Ginola Limited purchased an $800 thousand
promissory note which may be converted into 307,693 shares and received 215,385
warrants exercisable at $3.60 per share. Stillwater LLC disclaims
beneficial ownership of shares owned by Rainbow Gate Corporation. The
Notes were amended on July 23, 2007.
A family
member of an outside director of eMagin is the holder of a Series A warrant to
purchase an aggregate of 4,286 shares of common stock. As a result of the Note
Purchase transaction, the exercise price of all Series A warrants was reduced
from $5.50 to $2.60 per share. Family members of an outside
director of eMagin are holders of Series F warrants to purchase an aggregate of
10,000 shares of common stock. As a result of the Note Purchase
transaction, the exercise price of all Series F warrants was reduced from $10.90
to $8.60 per share.
eMagin
has entered into a financial advisory agreement with Larkspur Capital
Corporation. Paul Cronson, a director of eMagin, is a founder and shareholder of
Larkspur Capital Corporation. The Company has agreed to pay a minimum fee of
$500 thousand to Larkspur Capital Corporation in the event certain transactions
occur, i.e. sale of the Company’s assets or change of control.
Note
14 – SEPARATION AND EMPLOYMENT AGREEMENTS
Effective
January 1, 2006, the Company entered into a revised executive employment
agreement with Susan K. Jones, Chief Marketing and Strategy Officer. The
agreement is effective for an initial term of three years. The agreement
provides for an annual salary, benefits made available by the Company to its
employees and eligibility for an incentive bonus pursuant to one or more
incentive compensation plans established by the Company from time to time. The
Company may terminate the employment of Ms. Jones at any time with or without
notice and with or without cause (as such term is defined in the
agreements). If Ms. Jones’ employment is terminated without cause, or if
Ms. Jones resigns with good reason (as such term is defined in the agreements),
or Ms. Jones’ position is terminated or significantly changed as result of
change of control (as such term is defined in the agreements), Ms. Jones shall
be entitled to receive salary until the end of the agreement’s full term or
twelve months, whichever is greater, payment for accrued vacation, and bonuses
which would have been accrued during the term of the agreement. If Ms. Jones
voluntarily terminates employment with the Company, other than for good reason
or is terminated with cause (as such term is defined in the agreement), she
shall cease to accrue salary, vacation, benefits, and other compensation on the
date of the voluntary or with cause termination. The Executive Employment
Agreement includes other conventional terms and also contains invention
assignment, non-competition, non-solicitation and non-disclosure
provisions. On April 17, 2006, the parties entered into amendments to
the employment agreements pursuant to which the parties clarified that the
Company has agreed to pay for health benefits equivalent to medical and dental
benefits provided during Ms. Jones’ full time employment until the end of the
agreement’s full term or twenty-four (24) months, whichever is
greater.
Effective
January 30, 2008, the Company entered into an amended employment agreement with
Susan K. Jones, Chief Business Officer. The amended agreement
provides for an annual base salary of $315 thousand, an extension of the term of
the agreement to January 31, 2010, modification and clarification of the basis
for the incentive component of her salary, and extension of the
change-of-control/material change/termination-without-cause compensation payout
periods to the greater of 18 months or the remaining term of the amended
employment agreement.
Effective
January 31, 2008, K.C. Park resigned as Interim Chief Executive Officer,
President and Director. Dr. Park and the Company entered into a
Separation Agreement and General Release (“Separation
Agreement”). The Company recorded severance expense of
$60,000. Dr. Park and the Company also entered into a Consulting
Agreement (“Agreement”) for the term, February 1 through August 1,
2008. Dr. Park was paid a sum of $75,000. In addition
to the compensation, Dr. Park received non-qualified stock options to acquire
56,250 shares of common stock which are fully vested and exercisable on the
dates of the grant. On May 1, 2008, Dr. Park received
non-qualified stock options to acquire 51,703 shares of common stock at the fair
market value and are fully vested. Effective
January 2, 2008, John Atherly resigned as Chief Financial
Officer. There was no separation agreement executed between Mr.
Atherly and the Company.
83
Effective
December 27, 2007, Michael D. Fowler became the Company’s Interim Chief
Financial Officer. Effective April 14, 2008, Michael D. Fowler, the
Company’s Interim Chief Financial Officer, resigned his position with the
Company. There was no separation agreement executed between Mr. Fowler and the
Company.
Effective
April 15, 2008, Mr. Paul Campbell began serving as the Company’s Interim Chief
Financial Officer pursuant to an agreement between the Company and Tatum, LLC,
dated April 2, 2008 (the “Tatum Agreement”). Pursuant to the Tatum
Agreement, for a minimum term of three months, Mr. Campbell will be paid a
salary of $24,500 per month and the Company will also pay Tatum a fee of $10,500
per month plus $300 per business day. The Tatum Agreement was
modified in January 2009 to exclude the $300 per business day. Either party may
terminate the Tatum Agreement by providing the other with at least 30 days
notice.
Effective
June 1, 2008, Andrew G. Sculley became the Company’s Chief Executive Officer,
President and Director pursuant to an employment agreement dated May 13, 2008.
Pursuant to the agreement, Mr. Sculley will be paid a salary of $300,000,
per annum, increasing to $310,000, per annum, after six months and to $320,000,
per annum, at the end of the first year. Mr. Sculley was granted 500,000
qualified stock options. The options vest as
follows: 166,667 shares vest immediately, 166,667 vests on the first
anniversary date, and 166,666 vests on the second anniversary
date. If Mr. Sculley voluntarily terminates his employment with
the Company, other than for good reason as defined in the employment agreement,
he shall cease to accrue salary, personal time off, benefits and other
compensation on the date of voluntary termination. The Company may
terminate Mr. Sculley’s employment with or without cause. If the Company
terminates without cause, Mr. Sculley will be entitled to one year of
salary.
Note
15 - CONCENTRATIONS
The
Company had two customers that each accounted for 11% of its total revenue in
2008. There were no customers that accounted for more than 10% of its
total revenue in 2007. In 2006, the Company had one customer that
accounted for 13% of its total revenue.
For the
year ended December 31, 2008, approximately 61% of the company’s net revenues
were derived from customers in the United States and approximately 39% of the
Company’s net revenues were derived from international customers. For
the year ended December 31, 2007, approximately 51% of the Company’s net
revenues were derived from customers in the United States and approximately 49%
of the Company’s net revenues were derived from international
customers. For the year ended December 31, 2006, approximately 59% of
the Company's net revenues were derived from customers in the United States and
approximately 41% of the Company's net revenues were derived from international
customers.
At
December 31, 2008 and 2007, there were five customers which comprised 60% and
54%, respectively, of the outstanding accounts receivable. The
Company had two customers that each accounted for 19% and one customer accounted
for 12% of its outstanding accounts receivable in 2008. There were two customers
that accounted for 11% and 20% of its outstanding accounts receivable in
2007.
The
Company purchases principally all of its silicon wafers from a single supplier
located in Taiwan.
84
Summarized
quarterly financial information for 2008 and 2007 are as follows (in thousands
except per share data):
Quarters
Ended
|
||||||||||||||||
March
31, 2008
|
June
30, 2008
|
September
30, 2008
|
December
31, 2008
|
|||||||||||||
Revenues
|
$ | 2,665 | $ | 5,619 | $ | 5,185 | $ | 5,270 | ||||||||
Gross
margin
|
$ | 352 | $ | 2,623 | $ | 2,384 | $ | 2,707 | ||||||||
Net
(loss) income
|
$ | (2,674 | ) | $ | (122 | ) | $ | 361 | $ | 576 | ||||||
Net
(loss) income per share – basic
|
$ | (0.21 | ) | $ | (0.01 | ) | $ | 0.02 | $ | 0.04 | ||||||
Net
(loss) income per share – diluted
|
$ | (0.21 | ) | $ | (0.01 | ) | $ | 0.02 | $ | 0.03 | ||||||
Weighted
average number of shares outstanding – basic
|
12,621 | 14,321 | 14,617 | 15,113 | ||||||||||||
Weighted
average number of shares outstanding –diluted
|
12,621 | 14,321 | 23,430 | 23,907 | ||||||||||||
Quarters
Ended
|
||||||||||||||||
March
31, 2007
|
June
30, 2007
|
September
30, 2007
|
December
31, 2007
|
|||||||||||||
Revenues
|
$ | 3,609 | $ | 4,232 | $ | 5,071 | $ | 4,642 | ||||||||
Gross
margin
|
$ | 494 | $ | 1,286 | $ | 2,012 | $ | 1,134 | ||||||||
Net
loss
|
$ | (2,937 | $ | (1,728 | $ | (12,651 | $ | (1,172 | ) | |||||||
Net
loss per share – basic and diluted
|
$ | (0.27 | $ | (0.15 | $ | (1.06 | $ | (0.10 | ) | |||||||
Weighted
average number of shares outstanding – basic and diluted
|
10,792 | 11,176 | 11,935 | 12,249 |
85
eMAGIN
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share data)
September
30, 2009
(unaudited)
|
December
31, 2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
3,709
|
$
|
2,404
|
||||
Investments
– held to maturity
|
97
|
97
|
||||||
Accounts
receivable, net
|
4,111
|
3,643
|
||||||
Inventory
|
2,065
|
2,374
|
||||||
Prepaid
expenses and other current assets
|
885
|
796
|
||||||
Total
current assets
|
10,867
|
9,314
|
||||||
Equipment,
furniture and leasehold improvements, net
|
811
|
381
|
||||||
Intangible
assets, net
|
44
|
47
|
||||||
Other
assets
|
92
|
—
|
||||||
Deferred
financing costs, net
|
—
|
362
|
||||||
Total
assets
|
$
|
11,814
|
$
|
10,104
|
||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
728
|
$
|
1,026
|
||||
Accrued
compensation
|
807
|
837
|
||||||
Other
accrued expenses
|
985
|
804
|
||||||
Advance
payments
|
116
|
694
|
||||||
Deferred
revenue
|
220
|
164
|
||||||
Debt
|
—
|
1,691
|
||||||
Other
current liabilities
|
715
|
798
|
||||||
Total
current liabilities
|
3,571
|
6,014
|
||||||
Commitments
and contingencies
|
||||||||
Redeemable
common stock: 522,500 redeemable shares as of December 31,
2008
|
—
|
429
|
||||||
Shareholders’
equity:
|
||||||||
Preferred
stock, $.001 par value: authorized 10,000,000
shares:
|
—
|
—
|
||||||
Series
B Convertible Preferred stock, (liquidation preference of
$5,739,000)
stated
value $1,000 per share, $.001 par value: 10,000 shares
designated and 5,739 issued
and
outstanding at September 30, 2009 and December 31,
2008.
|
—
|
—
|
||||||
Common
stock, $.001 par value: authorized 200,000,000 shares, issued
and
outstanding,
16,961,902 shares as of September 30, 2009 and 15,213,959 as
of
December
31, 2008, net of redeemable common stock
|
17
|
15
|
||||||
Additional
paid-in capital
|
206,475
|
204,818
|
||||||
Accumulated
deficit
|
(198,249
|
)
|
(201,172
|
)
|
||||
Total
shareholders’ equity
|
8,243
|
3,661
|
||||||
Total
liabilities and shareholders’ equity
|
$
|
11,814
|
$
|
10,104
|
See notes
to Condensed Consolidated Financial Statements.
86
eMAGIN
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except share and per share data)
(unaudited)
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenue:
|
||||||||||||||||
Product
|
$ | 5,260 | $ | 4,181 | $ | 14,560 | $ | 11,139 | ||||||||
Contract
|
847 | 1,004 | 2,543 | 2,330 | ||||||||||||
Total
revenue, net
|
6,107 | 5,185 | 17,103 | 13,469 | ||||||||||||
Cost
of goods sold:
|
||||||||||||||||
Product
|
1,996 | 2,412 | 5,817 | 7,030 | ||||||||||||
Contract
|
611 | 389 | 1,528 | 1,080 | ||||||||||||
Total
cost of goods sold
|
2,607 | 2,801 | 7,345 | 8,110 | ||||||||||||
Gross
profit
|
3,500 | 2,384 | 9,758 | 5,359 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Research
and development
|
463 | 306 | 1,376 | 1,614 | ||||||||||||
Selling,
general and administrative
|
1,772 | 1,293 | 5,083 | 4,797 | ||||||||||||
Total
operating expenses
|
2,235 | 1,599 | 6,459 | 6,411 | ||||||||||||
Income
(loss) from operations
|
1,265 | 785 | 3,299 | (1,052 | ) | |||||||||||
Other
income (expense):
|
||||||||||||||||
Interest
expense
|
(76 | ) | (508 | ) | (417 | ) | (1,677 | ) | ||||||||
Other
income, net
|
1 | 84 | 41 | 294 | ||||||||||||
Total
other income (expense)
|
(75 | ) | (424 | ) | (376 | ) | (1,383 | ) | ||||||||
Net
income (loss)
|
$ | 1,190 | $ | 361 | $ | 2,923 | $ | (2,435 | ) | |||||||
Income
(loss) per share, basic
|
$ | 0.07 | $ | 0.02 | $ | 0.18 | $ | (0.18 | ) | |||||||
Income
(loss) per share, diluted
|
$ | 0.04 | $ | 0.02 | $ | 0.12 | $ | (0.18 | ) | |||||||
Weighted
average number of shares outstanding:
|
||||||||||||||||
Basic
|
16,513,101 | 14,617,235 | 16,133,646 | 13,854,860 | ||||||||||||
Diluted
|
26,592,267 | 23,430,416 | 24,471,486 | 13,854,860 |
See notes
to Condensed Consolidated Financial Statements.
87
eMAGIN
CORPORATION
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(In
thousands)
Preferred
Stock
|
Common
Stock
|
Additional
Paid-in
|
Accumulated
|
Total
Shareholders’
|
||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
||||||||||||||||||||||
Balance,
December 31, 2008
|
6
|
$
|
—
|
15,214
|
$
|
15
|
$
|
204,818
|
$
|
(201,172
|
)
|
$
|
3,661
|
|||||||||||||||
Issuance
of common stock for services
|
—
|
—
|
499
|
—
|
304
|
—
|
304
|
|||||||||||||||||||||
Expiration
of put options
|
—
|
—
|
522
|
1
|
428
|
—
|
429
|
|||||||||||||||||||||
Exercise
of common stock warrants
|
—
|
—
|
727
|
1
|
(1
|
)
|
—
|
—
|
||||||||||||||||||||
Stock-based
compensation
|
—
|
—
|
—
|
—
|
926
|
—
|
926
|
|||||||||||||||||||||
Net
income
|
—
|
—
|
—
|
—
|
—
|
2,923
|
2,923
|
|||||||||||||||||||||
Balance,
September 30, 2009 (unaudited)
|
6
|
$
|
—
|
16,962
|
$
|
17
|
$
|
206,475
|
$
|
(198,249
|
)
|
$
|
8,243
|
See notes to Condensed Consolidated Financial
Statements .
88
eMAGIN
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
Nine
Months Ended
|
||||||||
September
30,
|
||||||||
2009
|
2008
|
|||||||
(unaudited)
|
||||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$
|
2,923
|
$
|
(2,435
|
)
|
|||
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
65
|
183
|
||||||
Amortization
of deferred financing and waiver fees
|
362
|
1,152
|
||||||
(Reduction
of) increase in provision for sales returns and doubtful
accounts
|
(423
|
)
|
241
|
|||||
Stock-based
compensation
|
926
|
845
|
||||||
Amortization
of common stock issued for services
|
178
|
88
|
||||||
Amortization
of discount on notes payable
|
—
|
25
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(45
|
)
|
(1,860
|
)
|
||||
Inventory
|
309
|
(163
|
)
|
|||||
Prepaid
expenses and other current assets
|
(54
|
)
|
254
|
|||||
Deferred
revenue
|
56
|
(54
|
)
|
|||||
Accounts
payable, accrued compensation, other accrued expenses, and advance
payments
|
(725
|
)
|
94
|
|||||
Other
current liabilities
|
(121
|
)
|
(277
|
)
|
||||
Net
cash provided by (used in) operating activities
|
3,451
|
(1,908
|
)
|
|||||
Cash
flows from investing activities:
|
||||||||
Purchase
of equipment
|
(492
|
)
|
(236
|
)
|
||||
Net
cash used in investing activities
|
(492
|
)
|
(236
|
)
|
||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from sale of common stock, net of issuance costs
|
—
|
1,580
|
||||||
Proceeds
from debt
|
—
|
1,934
|
||||||
Payments
related to deferred financing costs
|
—
|
(117
|
)
|
|||||
Payments
of debt and capital leases
|
(1,654
|
)
|
(694
|
)
|
||||
Net
cash (used in) provided by financing activities
|
(1,654
|
)
|
2,703
|
|||||
Net
increase in cash and cash equivalents
|
1,305
|
559
|
||||||
Cash
and cash equivalents beginning of period
|
2,404
|
713
|
||||||
Cash
and cash equivalents end of period
|
$
|
3,709
|
$
|
1,272
|
||||
Cash
paid for interest
|
$
|
67
|
$
|
524
|
||||
Cash
paid for taxes
|
$
|
46
|
$
|
31
|
||||
Common
stock issued for services charged to prepaid
expenses
|
$
|
126
|
$
|
202
|
||||
See notes
to Condensed Consolidated Financial Statements.
89
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1: Description of the Business and Summary of Significant Accounting
Policies
The
Business
eMagin
Corporation (the “Company”) designs, develops, manufactures, and markets OLED
(organic light emitting diode) on silicon microdisplays, 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. Certain information and footnote disclosure normally
included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to instructions, rules and regulations prescribed
by the Securities and Exchange Commission (“SEC”). The Company
believes that the disclosures provided herein are adequate to make the
information presented not misleading when these unaudited condensed consolidated
financial statements are read in conjunction with the audited consolidated
financial statements contained in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2008. The results of operations for the
period ended September 30, 2009 are not necessarily indicative of the results to
be expected for the full year.
Reclassifications
Certain
operating expense amounts have been reclassified from Selling, General, and
Administrative to Research and Development in order to conform with prior year’s
presentation.
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. Management bases its estimates and judgments on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from those
estimates.
Revenue
and Cost Recognition
Revenue is recognized when
persuasive evidence of an arrangement exists, delivery has
occurred, selling price is fixed or determinable and collection is
reasonably assured. The Company records a reserve for estimated sales
returns, which is reflected as a reduction of revenue at the time of revenue
recognition. The Company defers revenue recognition on products sold
directly to the consumer with a maximum thirty day right of
return. Revenue is recognized upon the expiration of the right of
return.
The Company also earns revenues from certain
R&D activities under
both firm fixed-price contracts and cost-type
contracts, including some cost-plus-fee contracts.
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. These rates are subject to audit by the other
party.
90
Research
and Development Costs
Research
and development costs are expensed as incurred.
Note
2: Recently Issued Accounting Pronouncement
In June
2009, the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“Codification” or “ASC”) became the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (“GAAP”) except
for additional authoritative rules and interpretive releases issued by the SEC.
The Codification did not create any new GAAP standards but incorporated existing
accounting and reporting standards into a new topical structure with a new
referencing system to identify authoritative accounting standards, replacing the
prior references to Statement of Financial Accounting Standards (“SFAS”),
Emerging Issues Task Force (“EITF”), FASB Staff Position (“FSP”),
etc. Authoritative standards included in the Codification are
designated by their ASC topical reference, and new standards will be designated
as Accounting Standards Updates (“ASU”), with a year and assigned sequence
number. Beginning with the interim report for this third quarter, the
Company adopted the Codification and it had no effect on its financial position,
results of operations, or cash flows.
Note
3: Receivables
The
majority of the Company’s commercial accounts receivable are due from Original
Equipment Manufacturers ("OEM’s”). Credit is extended based on evaluation of a
customer’s financial condition and, generally, collateral is not required.
Accounts receivable are payable in U.S. dollars, are due within 30-90 days and
are stated at amounts due from customers, net of an allowance for doubtful
accounts. Any account outstanding longer than the contractual payment terms is
considered past due.
The
Company determines the allowance for doubtful accounts
by considering a number of factors, including the length of time the
trade accounts receivable are past due, historical experience, the
customer's current ability to pay its obligations, and the condition
of the general economy and the industry as a whole. The Company will
record a specific reserve for individual accounts when the Company becomes aware
of a customer's inability to meet its financial obligations, such as in the case
of bankruptcy filings or deterioration in the customer's operating results or
financial position. If circumstances related to customers change, the
Company would further adjust estimates of the recoverability of
receivables.
Receivables
consisted of the following (in thousands):
September
30, 2009
(unaudited)
|
December
31, 2008
|
|||||||
Accounts
receivable
|
$
|
4,545
|
$
|
4,500
|
||||
Less
allowance for doubtful accounts
|
(434
|
)
|
(857
|
)
|
||||
Net
receivables
|
$
|
4,111
|
$
|
3,643
|
Note
4: Net Income (Loss) per Common Share
The net
income (loss) per common share ("basic EPS") is computed by
dividing net income (loss) by the weighted average number of common
shares outstanding and excluding any potential dilution.
Net income (loss) per common share assuming dilution ("diluted EPS") is computed
by reflecting potential dilution from the exercise of
stock options, warrants, convertible preferred stock and redeemable
stock.
The
following table presents a reconciliation of the numerator and denominator of
the basic and diluted EPS calculations (in thousands, except share and per share
data):
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Numerator:
|
||||||||||||||||
Net
income (loss)
|
$
|
1,190
|
$
|
361
|
$
|
2,923
|
$
|
(2,435
|
)
|
|||||||
Adjustment
for interest expense on convertible notes, net of
taxes
|
—
|
121
|
—
|
—
|
||||||||||||
$
|
1,190
|
$
|
482
|
$
|
2,923
|
$
|
(2,435
|
)
|
||||||||
Denominator:
|
||||||||||||||||
Weighted
average shares outstanding for basic earnings per
share
|
16,513,101
|
14,617,235
|
16,133,646
|
13,854,860
|
||||||||||||
Effective
of dilutive shares:
|
||||||||||||||||
Dilution
from stock options and warrants
|
2,427,166
|
365,216
|
685,840
|
—
|
||||||||||||
Redeemable
stock
|
—
|
117,277
|
—
|
—
|
||||||||||||
Convertible
notes
|
—
|
8,330,688
|
—
|
—
|
||||||||||||
Convertible
preferred stock
|
7,652,000
|
—
|
7,652,000
|
—
|
||||||||||||
Dilutive
potential common shares
|
10,079,166
|
8,813,181
|
8,337,840
|
—
|
||||||||||||
Weighted
average shares outstanding for diluted earnings per
share
|
26,592,267
|
23,430,416
|
24,471,486
|
13,854,860
|
For the
three and nine months ended September 30, 2009, there were stock options and
warrants outstanding to acquire 3,498,592 and 10,226,638 shares, respectively,
of the Company common stock which were excluded from the calculation of its
diluted earnings per share as their effect would be anti-dilutive.
The convertible preferred stock is included in the calculation of diluted
earnings per share as all shares are assumed converted.
For the
three and nine months ended September 30, 2008, there were stock options,
warrants and convertible notes outstanding to acquire 10,901,343 and 20,376,584
shares, respectively, of the Company’s common stock which were excluded from the
computation of diluted loss per share because their effect would be
anti-dilutive. For the three and nine months ended September 30, 2008, the
Company also excluded 360,000 and 522,500 redeemable shares, respectively as
their effect would be anti-dilutive. The convertible notes are
included in the calculation of diluted earnings per share as all shares are
assumed converted.
91
Note
5: Inventory
Inventory
is stated at the lower of cost or market. Cost is determined using the first-in
first-out method. The Company reviews the value of its inventory and
reduces the inventory value to its net realizable value based upon current
market prices and contracts for future sales. The
components
of inventories are as follows (in thousands):
September
30,
2009
(unaudited)
|
December
31, 2008
|
|||||||
Raw
materials
|
$
|
824
|
$
|
1,109
|
||||
Work
in process
|
324
|
280
|
||||||
Finished
goods
|
917
|
985
|
||||||
Total
inventory
|
$
|
2,065
|
$
|
2,374
|
Note
6: Prepaid Expenses and Other Current Assets:
Prepaid
expenses and other current assets consist of the following (in
thousands):
September
30,
2009
(unaudited)
|
December
31, 2008
|
|||||||
Vendor
prepayments
|
$
|
418
|
$
|
180
|
||||
Other
prepaid expenses *
|
467
|
383
|
||||||
Other
assets
|
—
|
233
|
||||||
Total
prepaid expenses and other current assets
|
$
|
885
|
$
|
796
|
*No individual amounts greater
than 5% of current assets.
Note
7: Debt
Debt, all
of which is current, is as follows (in thousands):
September
30,
|
||||||||
2009
(unaudited)
|
December
31,
2008
|
|||||||
Line
of credit
|
$
|
—
|
$
|
1,631
|
||||
Other
debt
|
—
|
60
|
||||||
Total
debt
|
$
|
—
|
$
|
1,691
|
The
Company’s line of credit with Moriah Capital, L.P. (“Moriah”) matured on August
7, 2009 and the Company repaid a total of approximately $232 thousand in
principal due on the line of credit. The Company did not renew its
loan agreement with Moriah.
The
Company entered into an agreement effective as of September 1, 2009 (the
“Agreement”), with Access Business Finance, LLC (“Access”) pursuant to which it
may borrow an amount not to exceed $3,000,000. The Agreement provides
that from time to time the Company may request advances in an amount equal
to the lesser of (i) Borrowing Base less the Availability Reserves and (ii) the
Maximum Amount as defined in the Agreement. The interest on the line
of credit is equal to the Prime Rate plus 4.00% but may not be less than
7.25%. The term of the Agreement is for one year and will
automatically renew for successive one year terms unless, at least 60 days’
prior to the end of the current term, the Company gives Access prior
written notice of its intent not to renew or if Access, at least ten
days prior to the end of the current term, gives the Company written notice
of its intent not to renew. The Company’s obligations under the Agreement are
secured by its assets. As of September 30, 2009, the Company
had not borrowed on its line of credit. The Company paid $25,000 in
annual loan fees to Access which were charged to prepaid expense and will be
amortized over the life of the Agreement. As of September 30, 2009,
$2,000 had been amortized to interest expense.
In the
three and nine months ended September 30, 2009, approximately $61 thousand and
$362 thousand, respectively, of deferred debt issuance costs were amortized to
interest expense. For the three and nine months ended September 30,
2009, interest expense includes interest paid or accrued of approximately $15
thousand and $55 thousand, respectively, on outstanding
debt.
Note
8: 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.
92
The
following table summarizes the allocation of non-cash stock-based compensation
to the expense categories for the three and nine month periods ended September
30, 2009 and 2008 (in thousands):
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Cost
of revenue
|
$
|
25
|
$
|
31
|
$
|
111
|
$
|
106
|
||||||||
Research
and development
|
39
|
58
|
165
|
192
|
||||||||||||
Selling,
general and administrative
|
317
|
149
|
650
|
547
|
||||||||||||
Total
stock compensation expense
|
$
|
381
|
$
|
238
|
$
|
926
|
$
|
845
|
At
September 30, 2009, total unrecognized non-cash compensation cost related to
stock options was approximately $415 thousand, net of
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 1.2 years.
Options
granted to non-employees are measured at the grant date using a fair value
options pricing model and remeasured to the current fair market value at each
reporting period as the underlying options vest and services are
rendered. For the nine months ended September 30, 2009, there were
60,000 options granted to consultants. The following assumptions were
used in the Black-Scholes option pricing model to determine the fair value of
stock options granted: dividend yield – 0%; risk free interest rates
– 1.44% to 1.64%; expected volatility – 71.4% to 84.1%; and expected term – 3
years.
There
were 411,600 and 1,278,841 options granted to employees and directors during the
three and nine months ended September 30, 2009 and 171,000 and 919,253 options
granted to employees and directors during the three and nine months ended
September 30, 2008. The following key assumptions were used in the Black-Scholes
option pricing model to determine the fair value of stock options
granted:
For
the Nine Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Dividend
yield
|
0
|
%
|
0
|
%
|
||||
Risk
free interest rates
|
2.02
to 2.51
|
%
|
2.46
to 3.37
|
%
|
||||
Expected volatility
|
80.3
to 86.4
|
%
|
88.4
to 92.3
|
%
|
||||
Expected
term (in years)
|
4.0
to 5.5
|
5
|
The
Company has not declared or paid any dividends and do not currently expect to do
so in the near future. The risk-free interest rate used in the
Black-Scholes option pricing model is based on the implied yield currently
available 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 most recent five
year period. The expected term of 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.
The 2008
Incentive Stock Plan (“the 2008 Plan”) adopted and approved by the Board of
Directors on November 5, 2008 provides for shares of common stock and
options to purchase shares of common stock to employees, officers, directors and
consultants. The 2008 Plan has an aggregate of 2,000,000
shares. As of September 30, 2009, 1,278,841 options were granted from this
plan with a fair value of approximately $814 thousand and 498,533 shares
were issued with a fair value of approximately $304 thousand. At September
30, 2009, there were 222,626 shares available for
grant.
93
A summary
of the Company’s stock option activity for the nine months ended September 30,
2009 is presented in the following tables:
Number
of Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life (In Years)
|
Aggregate
Intrinsic Value
|
|||||||||||||
Outstanding
at January 1, 2009
|
1,615,673
|
$
|
1.63
|
|||||||||||||
Options
granted
|
1,278,841
|
1.03
|
||||||||||||||
Options
exercised
|
—
|
|||||||||||||||
Options
forfeited
|
(71,598
|
)
|
2.60
|
|||||||||||||
Options
cancelled
|
—
|
|||||||||||||||
Outstanding
at September 30, 2009
|
2,822,916
|
$
|
1.33
|
6.37
|
$
|
1,549,944
|
||||||||||
Vested
or expected to vest at September 30, 2009 (1)
|
2,740,781
|
$
|
1.29
|
6.37
|
$
|
1,068,090
|
||||||||||
Exercisable
at September 30, 2009
|
2,001,564
|
$
|
1.39
|
6.71
|
$
|
1,068,090
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
Number
Outstanding
|
Weighted
Average Remaining Contractual Life (In Years)
|
Weighted
Average Exercise Price
|
Number
Exercisable
|
Weighted
Average Exercisable Price
|
||||||||||||||||||
$
|
0.34
- $0.98
|
1,226,793
|
6.56
|
$
|
0.83
|
895,127
|
$
|
0.81
|
||||||||||||||
$
|
1.00
- $1.44
|
1,200,177
|
7.40
|
1.20
|
773,390
|
1.24
|
||||||||||||||||
$
|
2.60
- $2.70
|
358,746
|
2.75
|
2.62
|
298,847
|
2.61
|
||||||||||||||||
$
|
3.50
- $22.50
|
37,200
|
2.03
|
9.75
|
34,200
|
9.54
|
||||||||||||||||
2,822,916
|
6.37
|
$
|
1.33
|
2,001,564
|
$
|
1.39
|
(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. There were 2,417,970 options in-the-money at
September 30, 2009. The Company’s closing stock price was $1.65
as of September 30, 2009. The Company issues new shares of common stock upon
exercise of stock options.
Note
9: Shareholders’ Equity
Preferred
Stock
The
Company has designated 10,000 shares of the Company’s preferred stock as
Preferred Stock – Series B at a stated value of $1,000 per share. The
Preferred Stock – Series B is convertible into common stock at a conversion
price of $0.75 per share. The Preferred Stock – Series B does not pay
interest. The holders of the Preferred Stock – Series B are not
entitled to receive dividends unless the Company’s Board of Directors declare a
dividend for holders of the Company’s common stock and then the dividend shall
be equal to the amount that such holder would have been entitled to receive if
the holder converted its Preferred Stock – Series B into shares of the Company’s
common stock. Each share of Preferred Stock – Series B has voting rights
equal to (i) the number of shares of Common Stock issuable upon conversion of
such shares of Preferred Stock – Series B at such time (determined without
regard to the shares of Common Stock so issuable upon such conversion in respect
of accrued and unpaid dividends on such share of Preferred Stock) when the
Preferred Stock – Series B votes together with the Company’s Common Stock or any
other class or series of stock of the Company and (ii) one vote per share of
Preferred Stock when such vote is not covered by the immediately preceding
clause. In the event of a liquidation, dissolution, or winding up of the
Company, the Preferred Stock – Series B is entitled to receive liquidation
preference before the Common Stock. The Company may at its option
redeem the Preferred Stock – Series B by providing the required notice to the
holders of the Preferred Stock – Series B and paying an amount equal to $1,000
multiplied by the number of shares for all of such holder’s shares of
outstanding Preferred Stock – Series B to be redeemed. As of
September 30, 2009, there were 5,739 shares of Preferred Stock – Series B issued
and outstanding.
94
Common
Stock
For the
three and nine months ended September 30, 2009 and 2008, there were no stock
options exercised. For the three and nine months ended September 30,
2009, there were 2.9 million warrants exercised on a cashless basis resulting in
727 thousand shares of common stock issued. No warrants were exercised for the
three and nine months ended September 30, 2008.
For the
three and nine months ended September 30, 2009, the Company issued 42,857 and
498,533 shares of common stock, respectively, for payment of approximately $45
thousand and $304 thousand, respectively, for services rendered and to be
rendered in the future. For the three and nine months ended September
30, 2008, the Company issued 629,400 and 811,400 shares of common stock,
respectively, for payment of approximately $441 thousand and $643 thousand,
respectively, for services rendered and to be rendered in the
future. The Company recorded the fair value of the services rendered
and to be rendered in the future in prepaid expenses and selling, general and
administrative expenses in the accompanying unaudited condensed consolidated
financial statements for the three and nine months ended September 30, 2009 and
2008.
At
December 31, 2008, the 522,500 shares underlying the 2007 and 2008 put options
(“put options”) granted to Moriah were presented on the balance sheet as
redeemable common stock in the amount of $429,000 which represented the amount
for which the shares may be redeemed at the option of
Moriah. On August 7, 2009, the put options expired when Moriah
elected not to exercise its put options. At September 30, 2009, the
522,500 shares were classified as permanent equity on the balance
sheet.
Note 10: Income
Taxes
The
Company accounts for income taxes under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company’s
financial statements or tax returns. The effect on deferred tax
assets and liabilities of changes in tax rates will be recognized as income or
expense in the period that the change occurs. A valuation allowance
for deferred tax assets is recorded when it is more likely than not that some or
all of the benefit from the deferred tax asset will not be
realized. Changes in circumstances, assumptions and clarification of
uncertain tax regimes may require changes to any valuation allowances associated
with the Company’s deferred tax assets.
The tax
years 2005-2008 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 general and administrative expense.
Note
11: Commitments and Contingencies
Royalty
Payments
The Company, in accordance with
a royalty agreement with Eastman Kodak, must pay to Eastman Kodak a
certain percentage of net sales with respect to certain
products, which percentages are defined in the agreement. The percentages
are on a sliding scale depending on the amount of sales generated. Any
minimum royalties paid will be credited against the amounts due based on
the percentage of sales. The royalty agreement terminates upon the
expiration of the issued patent which is the last to expire.
Effective
May 30, 2007, Kodak and eMagin entered into an intellectual property agreement
where eMagin has assigned Kodak the rights, title, and interest to a Company
owned patent currently not being used by the Company and in consideration, Kodak
waived the royalties due under the existing licensing agreements for the first
six months of 2007, and reduced the royalty payments by 50% for the second half
of 2007 and for the entire calendar year of 2008. In addition, the minimum
royalty payment was delayed until December 1st for the years 2007 and
2008. The Company recorded approximately $142 thousand and $396
thousand for the three and nine months ended September 30, 2008, respectively,
as income from the license of intangible assets and included this amount as
other income in the condensed consolidated statements of operations. Royalty
expense (including amounts imputed – see above) was approximately $284 thousand
and $792 thousand, respectively, for the three and nine months ended September
30, 2008.
Effective
January 1, 2009, the royalty payments are to be calculated at
100%. The minimum annual royalty payment of $125 thousand was
paid in January 2009.
In late
2008, the Company began evaluating the status of its manufacturing process and
the use of the IP associated with its license agreement. After this
analysis and after making a few changes to its manufacturing process, the
Company determined it was no longer using the IP covered under the license
agreement. As such, future royalty payments will be limited to the minimum
royalty payment amount of $125,000 plus any residual royalties on sales of
product produced prior to the manufacturing process change if such amount
exceeds the minimum royalty payment. The associated royalty liability has
been reduced to royalties on inventory produced prior to the manufacturing
process changes. The Company is in discussions with the licensor
regarding its position on the license agreement and the final outcome of these
discussions is yet to be determined. As of September 30, 2009, the
Company believes that the total royalty owed is $250 thousand which is based on
applying the royalty formula to only the sold displays produced prior to the
manufacturing process changes. Until a final outcome is reached, the Company
will continue to recognize the reduced royalty liability as stated
above. For the nine months ended September 30, 2009, the Company
estimated that the royalty would be approximately $1.0 million if the Company
applied the royalty formula to all sold displays produced without consideration
of the change in the manufacturing process. For the nine months ended
September 30, 2009, the Company recorded $250 thousand as royalty expense in its
consolidated statements of operations and the associated liability on its
consolidated balance sheet as the Company believes that is the amount due under
the agreement.
95
Contractual
Obligations
The Company leases
office facilities and office, lab and factory equipment under operating
leases. Certain leases provide for payments of monthly operating expenses.
The Company currently has lease commitments for space in Hopewell Junction, New
York and Bellevue, Washington. In May 2009, the Company renewed its
lease with IBM until May 31, 2014 with the option of extending the lease for
five years. The Company’s prior lease in Bellevue, Washington expired
August 31, 2009. The Company signed a lease agreement for 5,100
square feet of office space effective September 1, 2009 through August 31, 2014
which will reduce the Company’s monthly rent by approximately $26 thousand. Rent
expense was approximately $336 thousand and $1.1 million, respectively, for the
three and nine months ended September 30, 2009 and $332 thousand and $996
thousand, respectively, for the three and nine months ended September 30,
2008.
Note
12: Subsequent Events
In
preparing the Company’s financial statements, the Company evaluated events and
transactions for potential recognition or disclosure through November 12, 2009,
the date on which this Quarterly Report on Form 10-Q was filed with the
SEC.
96
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
NATURE
OF EXPENSE AMOUNT
SEC
Registration fee
|
$
|
357
|
||
Accounting
fees and expenses
|
25,000
|
*
|
||
Legal
fees and expenses
|
30,000
|
*
|
||
Miscellaneous
|
0
|
|||
TOTAL
|
$
|
55,357
|
*
|
* Estimated.
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our
Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware that our directors or officers shall not be personally liable to us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our By
Laws also provide that the Board of Directors may also authorize us to indemnify
our employees or agents, and to advance the reasonable expenses of such persons,
to the same extent, following the same determinations and upon the same
conditions as are required for the indemnification of and advancement of
expenses to our directors and officers. As of the date of this Registration
Statement, the Board of Directors has not extended indemnification rights to
persons other than directors and officers.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES.
As
previously reported on a Form 8-K that was filed with the Securities and
Exchange Commission on December 23, 2008, pursuant to a Securities Purchase
Agreement (the “Securities Purchase Agreement”) entered into on December 18,
2008 between the Company and an accredited
Investor ("Investor") on December 22, 2008 (the “Closing”), the
Company sold the Investor for an aggregate purchase price of $4,033,000 an
aggregate of 4,033 shares of its Series B Convertible Preferred Stock (the
“Preferred Stock”), which have a stated value of $1,000 per share, a conversion
price of $0.75 per share and have the rights and preferences set forth in the
Certificate of Designations of Series B Convertible Preferred Stock filed with
the Secretary of State for the State of Delaware on December 19, 2008 (the
“Certificate of Designations”), and warrants to purchase 1,875,467 shares of
common stock at $1.03 per share. The warrants terminate on December 22,
2013.
On
December 22, 2008, the Company entered into an Exchange Agreement (the “Exchange
Agreement”) with three holders (“Exchange Holders”) of its outstanding Amended
Notes (as defined below). Pursuant to the Exchange Agreement, on
December 22, 2008, the Exchange Holders exchanged $1,700,000 of their
outstanding Amended Notes and accrued and unpaid interest thereon and
received 1,706 shares of the Preferred Stock (the amount of the outstanding
principal and accrued and unpaid interest due on the Amended Notes
exchanged divided by $1,000).
On August
26, 2008, the Company and Moriah Capital, L.P. (“Moriah”) entered into Amendment
No. 3 to the Loan and Security Agreement dated as of August 20, 2008 (the
“Amendment No. 3”). Pursuant to Amendment No. 3, the Company issued Moriah
a warrant, which terminates on August 7, 2013, to purchase up to 370,000 shares
of the Company’s common stock at an exercise price of $1.30 per
share.
97
On August
19, 2008, the Holders (as defined below) of the Amended Notes and the
Investors in the Purchase Agreement (as defined below) consented to the
Company’s execution of the Amendment No. 3, Amended and Restated Securities
Issuance Agreement, and the Amended Registration Rights Agreement. In
consideration for the consent, a total of 144,000 shares of common stock were
issued to the Holders and Investors based on individual participation in the
Amended Notes and Securities Purchase Agreement on September 4,
2008.
On April
2, 2008, the Company entered into a Securities Purchase Agreement, pursuant to
which it sold to certain qualified institutional buyers and accredited investors
an aggregate of 1,586,539 shares of the Company’s common stock, par value $0.001
per share, and warrants to purchase an additional 793,273 shares of common
stock, for an aggregate purchase price of $1,650,000. The purchase price of the
common stock was $1.04 per share and the strike price of the corresponding
warrant was $1.30 per share. The warrants expire April 2, 2013. The
warrants contain provisions protecting against dilution resulting from the sale
of additional shares of the Company's common stock for less than the exercise
price of the warrants, or the market price of the common stock, on the date of
such issuance or sale. On December 22, 2008, the outstanding warrants were
re-priced to $1.13.
The
Company and Moriah entered into Amendment No. 2 to the Loan and Security
Agreement dated as of March 25, 2008 (the “Amendment No.
2”). Pursuant to the Amendment No. 2, Moriah waived the Company’s
noncompliance with Sections 7.2, 7.3, 8.11, 9.1, 9.3, 9.5(c) and 11.5 of the
Loan and Security Agreement to the extent such noncompliance resulted solely
from the Company’s inadvertently misstating the amount of its inventory that
contained defective parts (the “Defective Inventory Count”), provided that on or
before April 8, 2008 the Company repays Moriah all prior Advances (as defined in
the Loan and Security Agreement), which exceed the Maximum Credit (as defined in
the Loan and Security Agreement) if any, as a result of the Defective Inventory
Count. Pursuant to the Amendment No. 2, the Company has advised
Moriah of certain delays in implementing the Lockbox Agreement, as required
under the Loan and Security Agreement, which, if unwaived, would
result in the Company’s noncompliance with section 2.1(f) of the Loan and
Security Agreement and with Section 3 of the Post-Closing Agreement between the
Company and Moriah, dated August 7, 2007. Moriah agreed to waive
noncompliance with Sections 2.1(f) of the Loan and Security Agreement and
Section 3 of the Post-Closing Agreement in reliance on the Company’s
representation and warranty that all lockbox arrangements required to be
implemented under Section 2.1(f) of the Loan and Security Agreement and under
Section 3 of the Post-Closing Agreement have been consummated and are in full
force and effect as of March 12, 2008.
On
January 30, 2008, the Company and Moriah entered into a Warrant Issuance
Agreement (the “Warrant Issuance Agreement”). The Company and Moriah
entered into Amendment No. 1 to the Warrant Issuance Agreement. Pursuant to the
Amendment No. 1 to Warrant Issuance Agreement, the Company issued Moriah a
Warrant to purchase 250,000 shares of the Company’s common stock at an exercise
price of $1.50 per share until March 25, 2013 (the “March 2008 Warrant”).
Pursuant to the Amendment No. 1 to the Warrant Issuance Agreement, Section 3.2
of the Warrant Issuance Agreement was amended to provide that the Company has to
file by April 29, 2008 a registration statement with the Securities and Exchange
Commission to register 1,000,000 shares of the Company’s common stock issuable
upon exercise of warrants issued to Moriah (including the March 2008 Warrant and
a warrant to purchase 750,000 shares of the Common Stock which was previously
issued to Moriah).
The
Company entered into a Loan and Security Agreement, effective as of August 7,
2007 with Moriah. In connection with the transaction, the Company
issued 162,500 shares of its common stock, which shares had an aggregate market
value at the Closing Date of $195,000. On July
23, 2007, the Company entered into Amendment Agreements with the holders of the
Notes (as defined below) issued July 21, 2006 and March 28, 2007 (each a
“Holder” and collectively, the “Holders”) and agreed to issue each Holder an
amended and restated Note (the “Amended Notes”) in the principal amount equal to
the principal amount outstanding as of July 23, 2007 and an amended and restated
Warrant (as defined below) (the “Amended Warrant”).
98
●
|
The
due date for the outstanding Notes (totaling after conversions an
aggregate of $6,020,000) has been extended to December 21,
2008;
|
●
|
The
Amended Notes are convertible into (i) 8,407,612 shares of the Company’s
common stock. The conversion price for $5,770,000 of principal was revised
from $2.60 to $0.75 per share. The conversion price of $0.35 per share for
$250,000 of principal was unchanged;
|
●
|
$3,010,000
of the Amended Notes can convert into (ii) 3,010 shares of the Company’s
newly formed Series A Convertible Preferred Stock (the “Preferred”) at a
conversion price of $1,000 per share. The Preferred is convertible into
common stock at the same price allowable by the Amended Notes,
subject to adjustment as provided for in the Certificate of
Designations;
|
●
|
Except
for the Stillwater Note (as defined below), the Amendment
Agreements adjusted the exercise price of the Amended Warrants
from $3.60 to $1.03 per share for 1,553,468 shares of common stock
and require the issuance of warrants exerciseable for an
additional 3,831,859 shares of common stock exercisable at $1.03 per
share pursuant to which the Holders may acquire common stock, until July
21, 2011; and
|
●
|
As
of July 23, 2007 the interest rate was raised from 6% to
8%.
|
On March
28, 2007, we entered into an amendment of the Note Purchase Agreement (the
“Stillwater Note Purchase Agreement”) for the sale of $500 thousand of senior
secured debentures (the “Stillwater Note”) and warrants to purchase
approximately 1.0 million shares of common stock, par value $.001 per share. The
investor purchased the Stillwater Note with a conversion price of $0.35 per
share that may convert into approximately 1.4 million shares of common stock and
warrants exercisable at $0.48 per share into approximately 1.0 million shares of
common stock expiring in 4.2 years. If the Stillwater Notes are not converted,
50% of the principal amount will be due on July 21, 2007 and the remaining 50%
will be due on January 21, 2008. 6% interest is payable in quarterly
installments on outstanding notes with the first installment to be paid June 1,
2007. On April 9, 2007, we closed the transaction and received approximately
$460 thousand, net of offering costs of approximately $40 thousand which are
amortized over the life of the Stillwater Note.
In 2006,
we issued options to purchase an aggregate of 114,855 shares of common stock at
a weighted average price of $2.64 per share to employees as compensation for
services performed on behalf of our company. In addition, we issued options to
purchase an aggregate of 3,900 shares of common stock at a price equal to $2.60
per share to a director as compensation for services performed on our behalf as
his capacity as director of our company.
On
October 20, 2005, the Company entered into a Securities Purchase Agreement,
pursuant to which the Company sold and issued 1,661,906 shares of common stock,
par value $0.001 per share, at a price of $5.50 per share and warrants to
purchase up to 997,143 shares of common stock for an aggregate purchase price of
approximately $9.14 million. The warrants are exercisable at a price of $10.00
per share and expire on April 20, 2011. Of the 997,143 warrants, 664,763 of the
warrants are exercisable on or after May 20, 2006. The remaining 332,381 are
exercisable after March 31, 2007.
In 2005,
we issued options to purchase an aggregate of 267,900 shares of common stock at
a weighted average price of $12.10 per share to employees as compensation for
services performed on behalf of our company. In addition, we issued options to
purchase an aggregate of 49,750 shares of common stock at a weighted average
price of $6.80 per share to directors as compensation for services performed on
our behalf in each of their capacities as directors of our company.
On
January 9, 2004, the Company entered into a Securities Purchase Agreement with
several accredited institutional and private investors whereby such investors
purchased an aggregate of 333,336 shares of common stock and 431,221 warrant
shares for an aggregate purchase price of approximately $4.2 million. The shares
of common stock were priced at a 20% discount to the average closing price of
the stock from December
30, 2003 to January 6, 2004, which ranged from $13.80 to $19.40 per share during
the period for an average closing price of $12.60 per share. In addition, the
investors received warrants to purchase an aggregate of 200,002 shares of common
stock (subject to anti-dilution adjustments) exercisable at a price of $17.40
per share for a period of five (5) years. The warrants were priced at a 10%
premium to the average closing price of the stock for the pricing period. In
connection with the Securities Purchase Agreement, eMagin also issued additional
warrants to the investors to acquire an aggregate of 231,219 shares of common
stock. On April 9, 2007, the 116,573 outstanding Series A Common Stock Purchase
Warrants were re-priced to $0.35.
In
February 2004, the Company and all of the holders of the Secured Convertible
Notes (the "Notes"), which were due in November 2005, entered into an agreement
whereby the holders agreed to an early conversion of 100% of the principal
amount of the Notes aggregating $7.825 million, together with all of the accrued
interest of approximately $742,000 on the Notes, into 1,139,462 shares of the
Company's common stock. In consideration of the Noteholders agreeing to the
early conversion of the Notes, eMagin agreed to issue the Noteholders warrants
to purchase an aggregate of 250,000 shares of common stock (the "warrants"),
which warrants are exercisable at a price of $27.60 per share. 150,000 of the
warrants (series D warrants) expired on December 31, 2005. The remaining 100,000
of the warrants (series E warrants) are exercisable until June 10, 2008.
n August
2004, the Company and certain of the holders of its outstanding Class A, B and C
common stock purchase warrants entered into an agreement pursuant to which the
Company and the holders of the warrants agreed to the $9.00 re-pricing and
exercise of Class A, B and C common stock purchase warrants. As a condition to
the transaction, the holders of the warrants agreed to limit the right of
participation that they were granted in January 9, 2004. As a result of the
transaction, the holders agreed to re-price and exercise approximately, 209,989
Class A, B and/or C common stock purchase warrants for an aggregate of
$1,889,900.
99
On
October 21, 2004, the Company entered into a Securities Purchase Agreement,
pursuant to which eMagin sold and issued 1,033,453 shares of common stock, and
series F common stock warrants to purchase 512,976 of common stock for an
aggregate purchase price of $10,772,500. The common stock was priced at $10.50.
The Series F Warrants are exercisable from April 25, 2005 until April 25, 2010
at an exercise price of $12.10 per share, subject to adjustment upon the
occurrence of specific events, including stock dividends, stock splits,
combinations or reclassifications of the Company’s common stock or distributions
of cash or other assets. In addition, the Series F Warrants contain provisions
protecting against dilution resulting from the sale of additional shares of the
Company’s common stock for less than the exercise price of the Series F
Warrants, or the market price of the common stock, on the date of such issuance
or sale.
In 2004, we issued options to
purchase an aggregate of 313,300 shares of common stock at a weighted average
price of $15.30 per share to employees as compensation for services performed on
behalf of our company. In addition, we issued options to purchase an aggregate
of 16,250 shares of common stock at a weighted average price of $17.70 per share
to directors as compensation for services performed on our behalf in each of
their capacities as directors of our company.
*All of
the above issuances and sales were deemed to be exempt under Rule 506 of
Regulation D and Section (2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of eMagin or executive officers of
eMagin, and transfer was restricted by eMagin in accordance with the requirement
of the Securities Act of 1933. In addition to representations by the
above-reference persons, we have made independent determinations that 11 of the
above-referenced person were accredited or sophisticated investors, and that
they were capable of analyzing the merits and risks of their investment, and
that they understood the speculative nature of their investment. Furthermore,
all of the above-referenced persons were provided with access to our Securities
and Exchange Commission filings.
100
The
following exhibits and financial statement schedule: Schedule II –
Valuation and Qualifying Accounts are included as part of this Form S-1/A.
References to “the Company” in this Exhibit List mean eMagin Corp., a Delaware
corporation.
Description
|
|||
2.1
|
Agreement
and Plan of Merger between Fashion Dynamics Corp., FED Capital Acquisition
Corporation and FED Corporation dated March 13, 2000 (incorporated by
reference to exhibit 2.1 to the Registrant's Current Report on Form 8-K/A
filed on March 17, 2000).
|
||
3.1
|
Amended
and Restated Articles of Incorporation (incorporated by reference to
exhibit 99.2 to the Registrant's Definitive Proxy Statement filed on June
14, 2001).
|
||
3.2
|
Amended
Articles of Incorporation (incorporated by reference to exhibit A to the
Registrant's Definitive Proxy Statement filed on June 13,
2003).
|
||
3.3
|
Bylaws
of the Registrant (incorporated by reference to exhibit 99.3 to the
Registrant's Definitive Proxy Statement filed on June 14,
2001).
|
||
3.4
|
Certificate
of Designations of Series B Convertible Preferred Stock (incorporated by
reference to Exhibit 4.2 of the Registrant’s current report on Form 8-K
filed on December 23, 2008).
|
||
4.1
|
Form
of Warrant dated as of April 25, 2003 (incorporated by reference to
exhibit 4.3 to the Registrant's Current Report on Form 8-K filed on April
28, 2003).
|
||
4.2
|
Form
of Series A Common Stock Purchase Warrant dated as of January 9, 2004
(incorporated by reference to exhibit 4.1 to the Registrant's Current
Report on Form 8-K filed on January 9, 2004).
|
||
4.3
|
Form
of Series B Common Stock Purchase Warrant dated as of January 9, 2004
(incorporated by reference to exhibit 4.2 to the Registrant’s Current
Report on Form 8-K filed on January 9, 2004).
|
||
4.4
|
Form
of Series C Common Stock Purchase Warrant dated as of January 9, 2004
(incorporated by reference to exhibit 4.3 to the Registrant's Current
Report on Form 8-K filed on January 9, 2004).
|
||
4.5
|
Form
of Series D Warrant (incorporated by reference to exhibit 4.1 to the
Registrant's current report on Form 8-K filed on March 4,
2004).
|
||
4.6
|
Form
of Series E Warrant (incorporated by reference to exhibit 4.2 to the
Registrant's current report on Form 8-K filed on March 4,
2004).
|
||
4.7
|
Form
of Common Stock Purchase Warrant (incorporated by reference to exhibit 4.1
to the Registrant's current report on Form 8-K filed on August 26,
2008).
|
||
4.8
|
Form
of Amended and Restated Secured Revolving Loan Note (incorporated by
reference to exhibit 4.2 to the Registrant's current report on Form 8-K
filed on August 26, 2008).
|
||
4.9
|
Form
of Series F Warrant (incorporated by reference to exhibit 4.1 to the
Registrant's current report on Form 8-K filed on October 26,
2004).
|
||
4.10
|
Form
of Common Stock Purchase Warrant dated October 20, 2005, filed October 31,
2005, as filed in the Registrant's Form 8-K incorporated herein by
reference.
|
||
4.11
|
Form
of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1
to the Registrant’s current report on Form 8-K filed on December 23,
2008).
|
||
5.1
|
Consent
of Sichenzia Ross Friedman Ference LLP (filed herewith).
|
101
10.1
|
2000
Stock Option Plan, (incorporated by reference to Annex A to Exhibit 99.1
to the Registrant's Registration Statement on Form S-8 filed on March 14,
2000).*
|
||
10.2
|
Form
of Agreement for Stock Option Grant pursuant to 2003 Stock Option Plan
(incorporated by reference to exhibit 99.2 to the Registrant's
Registration Statement on Form S-8 filed on March 14,
2000).*
|
||
10.3
|
Nonexclusive
Field of Use License Agreement relating to OLED Technology for miniature,
high resolution displays between the Eastman Kodak Company and FED
Corporation dated March 29, 1999 (incorporated by reference to exhibit
10.6 to the Registrant's Annual Report on Form 10-K/A for the year ended
December 31, 2000 filed on April 30, 2001).
|
||
10.4
|
Amendment
Number 1 to the Nonexclusive Field of Use License Agreement relating to
the LED Technology for miniature, high resolution displays between the
Eastman Kodak Company and FED Corporation dated March 16, 2000
(incorporated by reference to exhibit 10.7 to the Registrant's Annual
Report on Form 10-K/A for the year ended December 31, 2000 filed on April
30, 2001).
|
||
10.5
|
Lease
between International Business Machines Corporation and FED Corporation
dated May 28, 1999 (incorporated by reference to exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2000 filed on March 30, 2001).
|
||
10.6
|
Amendment
Number 1 to the Lease between International Bushiness Machines Corporation
and FED Corporation dated July 9, 1999 (incorporated by reference to
exhibits 10.8 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000 filed on March 30, 2001)
|
||
10.7
|
Amendment
Number 2 to the Lease between International Business Machines Corporation
and FED Corporation dated January 29, 2001 (incorporated by reference to
exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2000 filed on March 30, 2001).
|
||
10.8
|
Amendment
Number 3 to Lease between International Business Machines Corporation and
FED Corporation dated May 28, 2002 (incorporated by reference to the
Company’s Form S-1A as filed November 12, 2008).
|
||
10.9
|
Amendment
Number 4 to Lease between International Business Machines Corporation and
FED Corporation dated December 14, 2004 (incorporated by reference to the
Registrant’s Current Report on Form 8-K filed on December 20,
2004).
|
||
10.10
|
Securities
Purchase Agreement dated as of April 25, 2003 by and among eMagin and the
investors identified on the signature pages thereto, filed April 28, 2003,
as filed in the Registrant's Form 8-K incorporated herein by
reference.
|
||
10.11
|
Registration
Rights Agreement dated as of April 25, 2003 by and among eMagin and
certain initial investors identified on the signature pages thereto
(incorporated by reference to exhibit 10.3 to the Registrant's Current
Report on Form 8-K filed on April 28, 2003).
|
||
10.12
|
Securities
Purchase Agreement dated as of January 9, 2004 by and among eMagin and the
investors identified on the signature pages thereto (incorporated by
reference to exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed on January 9, 2004).
|
||
10.13
|
Registration
Rights Agreement dated as of January 9, 2004 by and among eMagin and
certain initial investors identified on the signature pages thereto
(incorporated by reference to exhibit 10.2 to the Registrant's Current
Report on Form 8-K filed on January 9, 2004).
|
||
10.14
|
Master
Amendment Agreement dated as of February 17, 2004 by and among eMagin and
the investors identified on the signature pages thereto (incorporated by
reference to exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed on March 4, 2004).
|
||
10.15
|
Registration Rights Agreement dated
as of February 17, 2004 by and among eMagin and certain initial
investors identified on the signature
pages thereto (incorporated by reference
to exhibit 10.2 to the Registrant's
Current Report on Form 8-K filed on March 4, 2004).
|
||
10.16
|
Letter
Agreement amending the Master Amendment Agreement
dated as of March 1, 2004 by
and among eMagin and
the parties to
the Master Amendment
Agreement (incorporated by reference to exhibit 10.3 to the
Registrant's Current Report on Form 8-K filed on March 4,
2004).
|
102
Lease
between International Business Machines Corporation and
FED Corporation dated May 28, 1999, as
filed in the Registrant's Form 10-K/A for the year
ended December 31, 2000 (incorporated by
reference to the Form 10-K filed on March 30,
2001).
|
|||
10.18
|
Amendment Number 2 to the Lease between International Business
Machines Corporation and
FED Corporation dated January 29, 2001,
as filed in the Registrant's Form 10-K/A for the
year ended December 31, 2000 (incorporated by reference to Form
10-K filed March 30, 2001).
|
||
10.19
|
Secured
Note Purchase Agreement entered into as of November 27, 2001,
by and among eMagin Corporation and
certain investors named therein,
as filed in
the Registrant's Form 8-K dated December 18, 2001
(incorporated by reference to Form 8-K filed December 18,
2001).
|
||
10.20
|
2004
Non-Employee Compensation Plan, filed July 7, 2004, as filed in the
Registrant’s Form S-8, incorporated herein by reference.*
|
||
10.21
|
Form
of Letter Agreement by and among eMagin and the holders of the Class A,
Class B and Class C common stock purchase warrants, filed August 9, 2004 ,
as filed in the Registrant's Form 8-K incorporated herein by
reference.
|
||
10.22
|
Securities
Purchase Agreement dated as of October 21, 2004 by and among eMagin and
the purchasers listed on the signature pages thereto, filed October 26,
2004 as filed in the Registrant's Form 8-K incorporated herein by
reference.
|
||
10.23
|
Placement
Agency Agreement dated as of October 21, 2004 by and among eMagin and W.R.
Hambrecht & Co., LLC, filed October 26, 2004, as filed in the
Registrant's Form 8-K incorporated herein by reference.
|
||
10.24
|
Agreement,
dated as of June 29, 2004, by and between eMagin and Larkspur Capital
Corporation, filed October 26, 2004, as filed in the Registrant's Form 8-K
incorporated herein by reference.
|
||
10.25
|
Sublease
Agreement dated as of July 14, 2005 by and between eMagin and
Cap Gemini U.S., LLC, filed August 2, 2005, as filed in the
Registrant's Form 8-K incorporated herein by reference.
|
||
10.26
|
Amended
and Restated 2003 Stock Option Plan, filed September 1, 2005, as filed in
the Registrant’s Definitive Proxy Statement, incorporated herein by
reference.*
|
||
10.27
|
Amended
and Restated 2004 Non-Employee Compensation Plan, filed September 1, 2005,
as filed in the Registrant’s Definitive Proxy Statement, incorporated
herein by reference.*
|
||
10.28
|
2005
Employee Stock Purchase Plan, filed September 1, 2005, as filed in the
Registrant’s Definitive Proxy Statement, incorporated herein by
reference.*
|
||
10.29
|
Securities
Purchase Agreement dated as of October 20, 2005, by and among eMagin and
the purchasers listed on the signature pages thereto, filed October 31,
2005, as filed in the Registrant's Form 8-K incorporated herein by
reference.
|
||
10.30
|
Registration
Rights Agreement dated as of October 20, 2005, by and among eMagin and the
purchasers listed on the signature pages thereto, filed October 31, 2005,
as filed in the Registrant's Form 8-K incorporated herein by
reference.
|
||
10.31
|
Employment
Agreement effective as of January 1, 2006 by and between eMagin and Gary
Jones, filed January 27, 2006, as filed in the Registrant's Form 8-K
incorporated herein by reference.
|
||
10.32
|
Employment
Agreement effective as of January 1, 2006 by and between eMagin and Susan
Jones, filed January 27, 2006, as filed in the Registrant's Form 8-K
incorporated herein by reference.
|
||
10.33
|
Amendment
to Employment Agreement as of April 17, 2006 by and between eMagin and
Gary Jones.
|
||
10.34
|
Amendment
to Employment Agreement as of April 17, 2006 by and between eMagin and
Susan Jones.
|
103
Form
of Note Purchase Agreement dated July 21, 2006, by and among the Company
and the investors named on the signature pages thereto, (incorporated by
reference to the Company’s Form S-1A as filed November 12,
2008).
|
|||
10.36
|
Form
of Note Purchase Agreement dated July 21, 2006, by and between the Company
and Stillwater LLC, (incorporated by reference to the Company’s Form S-1A
as filed November 12, 2008).
|
||
10.37
|
2004
Amended and Restated Non-Employee Compensation Plan, filed September 21,
2006, as filed in the Registrant's Definitive Proxy Statement incorporated
herein by reference.*
|
||
10.38
|
Executive
Separation and Consulting Agreement dated as of January 11, 2007 by and
between eMagin Corporation and Gary W. Jones, filed January 19, 2007, as
filed in the Registrant's Form 8-K/A incorporated herein by
reference.
|
||
10.39
|
Letter
Agreement dated as of February 12, 2007 by and between eMagin Corporation
and Dr. K.C. Park, filed February 16, 2007, as filed in the Registrant's
Form 8-K incorporated herein by reference.
|
||
10.40
|
Allonge
to the 6% Senior Secured Convertible Notes Due 2007-2008 of eMagin
Corporation dated as of March 9, 2007, filed March 13, 2007, as filed in
the Registrant's Form 8-K incorporated herein by
reference.
|
||
10.41
|
First
Amendment to Note Purchase Agreement as of March 28, 2007 by and between
eMagin Corporation and Stillwater LLC, as filed in the Registrant's
Form 8-K dated April 26, 2007 incorporated herein by
reference.
|
||
10.42
|
Note
Purchase Agreement as of April 9, 2007 by and between eMagin
Corporation and Stillwater LLC, as filed in the Registrant's Form 8-K
dated April 25, 2007 (incorporated by reference to the Company’s Form S-1A
as filed November 12, 2008).
|
||
10.43
|
6%
Senior Secured Convertible Note, dated April 9, 2007, by and between the
Company and Stillwater LLC, incorporated by reference to the Company’s
Form 8-K as filed on April 26, 2007.
|
||
10.44
|
Common
Stock Purchase Warrant, dated April 9, 2007, by and between the Company
and Stillwater LLC, incorporated by reference to the Company’s Form 8-K as
filed on April 26, 2007.
|
||
10.45
|
Employment
Agreement between the Company and Tatum, LLC, dated December 26, 2007,
incorporated by reference to the Company’s Form 8-K as filed on January 3,
2008.
|
||
10.46
|
Form
of Common Stock Purchase Warrant, incorporated by reference to the
Company’s Form 8-K/A as filed on February 8, 2008.
|
||
10.47
|
Amendment
No. 1 to Loan and Security Agreement, dated as of January 30, 2008, to the
Loan and Security Agreement, dated August 7, 2007, incorporated by
reference to the Company’s Form 8-K/A as filed February 8,
2008.
|
||
10.48
|
Warrant
Issuance Agreement, dated January 30, 2008, incorporated by reference to
the Company’s Form 8-K/A as filed February 8, 2008.
|
||
10.49
|
Form
of Common Stock Purchase Warrant, incorporated by reference to the
Company’s Form 8-K, as filed on March 31, 2008.
|
||
10.50
|
Amendment
No. 2 to Loan and Security Agreement, dated as of March 25, 2008 to the
Loan and Security Agreement, dated August 7, 2007, as amended on January
30, 2008, incorporated by reference to the Company’s Form 8-K, as filed
March 31, 2008.
|
||
10.51
|
Amendment
No. 1 to Warrant Issuance Agreement, dated as of March 25, 2008, as
amended on January 30, 2008, incorporated by reference to the Company’s
Form 8-K, as filed March 31, 2008.
|
||
10.52
|
Form
of Common Stock Purchase Warrant, incorporated by reference to the
Company’s Form 8-K, as filed on April 4, 2008.
|
||
10.53
|
Securities
Purchase Agreement, dated as of April 2, 2008, incorporated by reference
to the Company’s Form 8-K, as filed April 4, 2008 (incorporated by
reference to the Company’s Form S-1A as filed November 12,
2008).
|
104
Registration
Rights Agreement, dated as of April 2, 2008, incorporated by reference to
the Company’s Form 8-K, as filed April 4, 2008.
|
|||
10.55
|
Agreement
between the Company and Tatum, LLC, incorporated by reference to the
Company’s Form 8-K, filed April 18, 2008.
|
||
10.56
|
Employment
Agreement effective as of June 1, 2008 by and between eMagin and Andrew
Sculley, incorporated by reference to the Company’s Form 8-K/A as filed
August 19, 2008.
|
||
10.57
|
Amendment
No. 3 to Loan and Security Agreement, dated as of August 20,
2008 to the Loan and Security Agreement, dated August 7, 2007,
incorporated by reference to the Company’s Form 8-K, as filed August 26,
2008.
|
||
10.58
|
Warrant
Issuance Agreement No. 2, dated August 20, 2008, incorporated by reference
to the Company’s Form 8-K as filed August 26, 2008.
|
||
10.59
|
Amended
and restated Securities Issuance Agreement, dated as of August 20, 2008,
incorporated by reference to the Company’s Form 8-K, as filed August 26,
2008.
|
||
10.60
|
Amendment,
dated August 20, 2008, to Registration Rights Agreement, dated as of
August 7, 2007, incorporated by reference to the Company’s Form 8-K, as
filed August 26, 2008.
|
||
10.61
|
Loan
and Security Agreement between Moriah Capital, L.P. and eMagin
Corporation, dated as of August 7, 2007, (incorporated by reference to the
Company’s Form S-1A as filed February 2, 2009)**
|
||
10.62
|
Amendment
Agreement, dated as of July 23, 2007, incorporated by reference to the
Company’s Form 8-K as filed on July 25, 2007.
|
||
10.63
|
Form
of Amended and Restated 8% Senior Secured Convertible Note due 2008,
incorporated by reference to the Company’s Form 8-K as filed on July 25,
2007.
|
||
10.64
|
Form
of Amended and Restated Common Stock Purchase Warrant, incorporated by
reference to the Company’s Form 8-K as filed on July 25,
2007.
|
||
10.65
|
Form
of Amendment No. 1 to Patent and Security Agreement, , filed July 25,
2007, Incorporated by reference to the Company’s Form 8-K as filed on July
25, 2007.
|
||
10.66
|
Form
of Lockbox Agreement, filed July 25, 2007, incorporated by reference to
the Company’s Form 8-K as filed on July 25, 2007.
|
||
10.67
|
Securities
Purchase Agreement, dated December 18, 2008 (incorporated by reference to
exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on
December 22, 2008).
|
||
10.68
|
Registration
Rights Agreement, dated December 18, 2008 (incorporated by reference to
exhibit 99.2 of the Registrant’s Current Report on Form 8-K filed on
December 22, 2008).
|
||
10.69
|
Exchange
Agreement, dated December 18, 2008 (incorporated by reference to exhibit
99.3 of the Registrant’s Current Report on Form 8-K filed on December 22,
2008).
|
||
10.70
|
Employment
Agreement effective as of May 8, 2009 by and between eMagin and Paul
Campbell, incorporated by reference to the Company’s Form 8-K as filed May
14, 2009.
|
||
10.71
|
Amendment
Number 6 to the lease between International Business Machines Corporation
and eMagin Corporation dated May 27, 2009 (incorporated by reference to
the Registrant’s Current Report on Form 8-k filed on June 19,
2009).
|
||
10.72
|
Lease
between Northup Building LLC and eMagin dated May 28, 2009 (incorporated
by reference to the Registrant’s Current Report on Form 8-k filed on June
19, 2009).
|
||
23.1
|
Consent
of Sichenzia Ross Friedman Ference LLP (included in Exhibit
5.1).
|
||
23.2
|
Consent
of Independent Registered Public Accounting Firm (filed
herewith).
|
||
*
Each of the Exhibits noted by an asterisk is a management compensatory
plan or arrangement.
|
** The
confidential portions of this exhibit have been omitted and flied separately
with the Securities and Exchange Commission.
105
ITEM
16.
eMAGIN
CORPORATION
SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS
Allowance
for doubtful accounts
Year
Ended
|
Beginning
Balance
|
Charged
to Expenses
|
Amounts
Written Off
|
Ending
Balance
|
||||||||||||
(In
thousands)
|
||||||||||||||||
December
31, 2008
|
$
|
(358
|
)
|
$
|
509
|
$
|
10
|
$
|
(857
|
)
|
||||||
December
31, 2007
|
$
|
(443
|
)
|
$
|
—
|
$
|
85
|
$
|
(358
|
)
|
||||||
December
31, 2006
|
$
|
(487
|
)
|
$
|
—
|
$
|
44
|
$
|
(443
|
)
|
The
undersigned registrant hereby undertakes to:
(1) File,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement to:
(i)
Include any prospectus required by Section 10(a) (3) of the Securities Act of
1933, as amended (the “Securities Act”);
(ii)
Reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of the securities offered would not exceed
that which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) under the Securities Act if,
in the aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration statement,
and,
(iii)
Include any additional or changed material information on the plan of
distribution.
(2) For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3) File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(4) For
purposes of determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For
the purpose of determining liability of the registrant under the Securities Act
of 1933 to any purchaser in the initial distribution of the securities: The
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
1.
|
Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
|
2.
|
Any
free writing prospectus relating to the offering prepared by or on behalf
of the undersigned registrant or used or referred to by the undersigned
registrant;
|
3.
|
The
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant;
and
|
Any
other communication that is an offer in the offering made by the
undersigned registrant to the
purchaser.
|
106
(7)
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(8) Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering shall be deemed to be part of and included in the
registration statement as of the date it is first used after effectiveness.
Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.
107
Pursuant
to the requirements of the Securities Act of 1933, the registrant certifies that
it has reasonable grounds to believe that it meets all of the requirements for
filing on Form S-1 and has duly caused this registration statement to be signed
on its behalf by the undersigned, in the City of Bellevue, State of Washington
on November 23, 2009.
EMAGIN
CORP.
|
|
Date: November
23, 2009
|
By:
/s/ ANDREW
G. SCULLEY
|
Andrew
G. Sculley
|
|
Chief
Executive Officer and President
(Principal
Executive Officer)
|
|
Date: November
23, 2009
|
By:
/s/ PAUL
CAMPBELL
|
Paul
Campbell
|
|
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting
Officer)
|
Each
person whose signature appears below constitutes and appoints Andrew G. Sculley
his true and lawful attorneys-in-fact and agent with full powers of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, any Amendments thereto and any Registration
Statement of the same offering which is effective upon filing pursuant to Rule
462(b) under the Securities Act, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Commission,
granting unto said attorney-in-fact and agent, each acting alone, full powers
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
said attorney-in-fact and agent, acting alone, or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed below by the following persons in the capacities and
on the dates indicated below.
Signature
|
Title
|
Date
|
||
/s/
Andrew G. Sculley
|
Chief
Executive Office and President
(Principal
Executive Officer)
|
November
23, 2009
|
||
Andrew
G. Sculley
|
||||
/s/
Paul Campbell
|
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting Officer)
|
November
23, 2009
|
||
Paul
Campbell
|
||||
/s/
Thomas Paulsen
|
Director
|
November
23, 2009
|
||
Thomas
Paulsen
|
/s/
Claude Charles
|
Director
|
November
23, 2009
|
||
Claude
Charles
|
||||
/s/
Paul Cronson
|
Director
|
November
23, 2009
|
||
Paul
Cronson
|
||||
/s/
Irwin Engelman
|
Director
|
November
23, 2009
|
||
Irwin
Engelman
|
|
Director
|
November
23, 2009
|
||
Dr.
Jacob E. Goldman
|
||||
/s/
Brig. Gen. Stephen Seay
|
Director
|
November
23, 2009
|
||
Brig.
Gen. Stephen Seay
|