U.S. Securities and Exchange Commission W
ashington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2003
[ ] Transition report pursuant section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to ____________
eMAGIN CORPORATION
(Exact name of small business issuer as specified in its charter)
Commission file number: 000-24757
DELAWARE 56-1764501
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2070 Route 52
Hopewell Junction, New York 12533
(Address of principal executive offices)
(845) 892-1900
(Issuer's telephone number)
-------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Not applicable
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 20, 2003 the Registrant had
37,859,063 shares of Common Stock outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one): Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
Index Page Number
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet as of March 31, 2003 and 3
December 31, 2002
Consolidated Statements of Operations for the Three-Months ended
March 31, 2003 and March 31, 2002 4
Consolidated Statements of Cash Flows for the Three-Months ended
March 31, 2003 and March 31, 2002 5
Consolidated Statement of Changes in Stockholder Equity from
December 31, 2002 to March 31, 2003 6
Selected Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation 13
Item 3. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURE 28
CERTIFICATION
Exhibit 99.1 Certification of the CEO and Acting CFO pursuant to
18 USC Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 29
2
eMAGIN CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 2003 December 31, 2002
-----------------------------------
CURRENT ASSETS: (Restated)
Cash and cash equivalents ...................................................... $ 65,254 $ 82,951
Trade receivables, net of allowance for doubtful accounts of $36,144 and $36,144 350,664 240,136
at March 31, 2003 and December 31, 2002, respectively
Unbilled costs and estimated profits on contracts in progress .................. 75,359 125,359
Inventory ...................................................................... 375,839 250,998
Prepaid expenses and other current assets ...................................... 113,240 113,849
-----------------------------------
Total current assets ........................................................ 980,356 813,293
EQUIPMENT AND LEASEHOLE IMPROVEMENTS: ............................................. 2,232,002 2,230,674
Less: Accumulated Depreciation ................................................... (1,721,944) (1,596,142)
-----------------------------------
Total equipment and leasehold improvements, net ................................... 510,058 634,532
Intangible Assets ................................................................. 18,020,000 18,020,000
Less: Accumulated Amortization .................................................... (18,020,000) (17,688,558)
-----------------------------------
Total intangible assets, net ...................................................... -- 331,442
Other long-term assets ............................................................ 47,873 55,117
-----------------------------------
Total assets ................................................................ $ 1,538,287 $ 1,834,384
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................... $ 7,350,964 $ 6,381,036
Accrued payroll and benefits ................................................... 1,249,387 1,031,958
Other accrued expenses ......................................................... 1,723,693 1,207,693
Current portion of long-term debt .............................................. 51,426 49,275
Deferred Revenue ............................................................... 500 30,400
Other short term debt .......................................................... 5,710,889 5,690,889
Other current liabilities ...................................................... 2,274 23,505
-----------------------------------
Total current liabilities ................................................... 16,089,133 14,414,756
-----------------------------------
LONG-TERM DEBT .................................................................... 227,577 227,742
SHAREHOLDERS' EQUITY:
Common Stock, par value $0.001 per share
Shares authorized - 100,000,000
Shares issued and outstanding - 31,285,838 and 30,854,980 ................... 31,286 30,855
Additional paid-in capital ..................................................... 119,544,643 119,221,277
Deferred compensation .......................................................... (351,598) (462,983)
Accumulated deficit ............................................................ (134,002,754) (131,597,263)
-----------------------------------
Total shareholders' equity .................................................. (14,778,423) (12,808,114)
-----------------------------------
-----------------------------------
Total liabilities and shareholders' equity .................................. 1,538,287 1,834,384
===================================
See selected notes to financial statements
3
eMAGIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Three Months
Ended Ended
March 31, 2003 March 31, 2002
----------------------------------
REVENUE:
Contract revenue $ - $ 14,108
Product revenue, net of returns 465,379 143,919
----------------------------------
Total Revenue 465,379 158,027
----------------------------------
Cost of Goods Sold:
Production Costs 1,134,868 -
Sales Commissions 15,000 -
----------------------------------
Total Cost of Goods Sold 1,149,868 -
----------------------------------
Gross Profit (loss) (684,489) 158,027
COSTS AND EXPENSES:
Research and development, net of funding 21,848 2,144,766
Amortization of purchased intangibles 331,442 552,415
Selling, general and administrative 1,116,732 2,971,974
----------------------------------
Total costs and expenses, net 1,470,022 5,669,155
----------------------------------
OTHER INCOME (EXPENSE):
Interest expense (250,980) (936,132)
Interest income - (42,254)
----------------------------------
Other income (expense) (250,980) (978,386)
----------------------------------
Loss before provision for income taxes (2,405,491) (6,489,514)
----------------------------------
PROVISION FOR INCOME TAXES - -
Net loss $ (2,405,491) $ (6,489,514)
==================================
Basic and diluted loss per common share $ (0.08) $ (0.24)
Weighted average common shares outstanding 30,731,934 26,669,919
See selected notes to financial statements.
4
eMAGIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months
ended ended
March 31, 2003 March 31, 2002
------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,405,491) ($6,489,514)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 124,474 663,440
Amortization of intangibles 331,442 -
Non-cash charge for stock based compensation 111,385 1,336,926
Non-cash interest related charges 245,962 936,132
Non-cash charge for services received 163,134 307,657
Proceeds from sale of equipment, net 139,095
Changes in operationg assets and liabilities, net of acquisition:
Trade receivables 110,528 318,705
Unbilled costs and estimated profits on contracts in progress (50,000) 191,953
Inventory 124,841 -
Prepaid expenses and other current assets (609) (217,538)
Other long-term assets (7,244) 4,226
Advanced payment on contracts to be completed - (13,583)
Deferred Revenue (29,900) -
Accounts payable, accrued expenses and accrued payroll 1,109,701 757,605
Other current liabilities (21,231) -
------------------------------------------
Net cash used in operating activities (53,913) (2,203,991)
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases/Sales of equipment - (84,745)
Net cash used in investing activities - (84,745)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance costs - 2,465,517
Proceeds from exercise of stock options and warrants 50,000 887
Proceeds from long and short term debt - 1,000,000
Payments of long term debt and capital leases (13,692) (250,000)
------------------------------------------
Net cash provided by financing activities 36,308 3,216,404
------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENT'S (17,606) 927,668
CASH AND CASH EQUIVALENTS, beginning of period 82,951 738,342
------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 65,345 $ 1,666,010
==========================================
See selected notes to financial statements
5
eMAGIN CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Common Stock Deferred paid-in Accumulated
Shares Compensation Capital Deficit Total
Balance, December 31, 2002 30,854,980 $ 30,855 $ (462,923) $ 119,221,276 $ (131,597,263) $(12,808,115)
================ =============== ================= =============== ================= ==============
Stock warrants exercised 91,425 91 49,909 50,000
-----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for
services 339,433 340 273,457 273,796
-----------------------------------------------------------------------------------------------------------------------------------
Amortization of deferred
compensation 111,385 111,385
-----------------------------------------------------------------------------------------------------------------------------------
Net loss for period (2,405,491) (2,405,491)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2003 $ 31,285,838 $ 31,286 $ (351,598) $ 119,544,643 $ (134,002,754) $(14,778,425)
================ =============== ================= =============== ================= ==============
The accompanying notes are an integral part of these financial statements.
6
eMAGIN CORPORATION
Selected Notes to Consolidated Financial Statements
Note 1 - BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Certain information or footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. The results of operations for the
period ended March 31, 2003 are not necessarily indicative of the results to be
expected for the full year.
Note 2 - NATURE OF BUSINESS
Fashion Dynamics Corporation (FDC) was organized January 23, 1996, under the
laws of the State of Nevada. FDC had no active business operations other than to
acquire an interest in a business. On March 16, 2000, FDC acquired FED
Corporation ("FED") (the Merger). The merged company changed its name to eMagin
Corporation (the "Company" or "eMagin") (Note 3). eMagin is a developer and
manufacturer of optical systems and microdisplays for use in the electronics
industry. eMagin's wholly-owned subsidiary, Virtual Vision Inc., develops and
markets microdisplay systems and optics technology for commercial, industrial
and military applications. Following the Merger, the business conducted by the
Company is the business conducted by FED prior to the Merger.
As of January 1, 2003 the Company has completed its development stage, as
defined by Statement of Financial Accounting Standards ("SFAS") No. 7,
Accounting and Reporting by Development Stage Enterprises". The financial
statements results as of December 31, 2002 and the period ended March 31, 2002
have been restated to reflect the current status. The Company expects its
product revenues to increase as we concentrate on trade revenue, once additional
supplies begin to arrive and shipments of finished product again begin to ship.
The effects on accounting for 2003 will be substantial. The majority of sales
before 2003 were Contract Revenue in which our costs were treated as overall
company losses. In 2002 we started minimal production. We initially shipped only
developer kits and sample quantities of our SVGA+ OLED microdisplay product. We
expanded the product line with a SVGA 3D product. We now provide both color and
several variations of monochrome versions of these products. Our customers
generally spend six to over twelve months evaluating and testing our product and
developing their own end product, which uses our display before committing to
larger orders. We expect the quantities of products shipped to increase as we
receive the materials and supplies we ordered after our recent financing and we
hire additional staff to increase our manufacturing capacity, enabling us to
begin shipping products to fulfill our backlog of orders as well as ship new
orders.
The cost of the products we sold in 2002 were predominately recorded in R&D and
Direct Contracts as we modified our product to create commercial products. In
the third quarter of 2002, we developed a glass cover that improved the
robustness of our products.. In the fourth quarter of 2002, we purchased a
machine that allowed us to produce the products in production quantities. In the
first quarter of 2003, the machine came on-line.
7
In 2003 we will keep track of costs of production, classifying direct and
indirect costs to costs of goods sold and tracking our gross profit. Although
R&D is no longer our primary focus, we have a few employees that will work on
projects to create new products and enhance existing products. We are working to
secure new, R&D contracts to help create the next generation of lower cost
and/or higher resolution products, as well as to develop other performance and
life-luminance product enhancements. Contract R&D is expected to continue in
2003, but at proportionately much smaller levels than in prior years.
There can be no assurance that the Company will generate sufficient revenues to
provide positive cash flows from operations. These and other factors raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments that might result should the Company be unable to continue in
existence.
Note 3 - FED ACQUISITION
On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the
terms of the agreement, FDC issued approximately 10.5 million shares of its
common stock and approximately 3.9 million options and warrants to purchase
common stock to FED shareholders. The total preliminary purchase price of the
transaction was approximately $98.5 million, including $73.4 million of value
relating to the shares issued (at a fair value of $7 per share, the value of the
simultaneous private placement transaction of similar securities), $20.9 million
of value relating to the options and warrants exchanged, $0.3 million of
acquisition costs and $3.8 million of assumed liabilities. The transaction was
accounted for using the purchase method of accounting. Under the purchase method
of accounting, the assets and liabilities were recorded based upon their fair
values at the date of acquisition.
Note 4 - REVENUE AND COST RECOGNITION
The Company has historically earned revenues from certain of its research and
development activities under both firm fixed-price contracts and cost-type
contracts, including some cost-plus-fee contract. Revenues relating to firm
fixed-price contracts are generally recognized on the percentage-of-completion
method of accounting as costs are incurred (cost-to-cost basis). Revenues on
cost-plus-fee contracts include costs incurred plus a portion of estimated fees
or profits based on the relationship of costs incurred to total estimated costs.
Contract costs include all direct material and labor costs and an allocation of
allowable indirect costs as defined by each contract, as periodically adjusted
to reflect revised agreed upon rates. These rates are subject to audit by the
other party. Amounts can be billed on a bi-monthly basis. Billing is based on
subjective cost investment factors. At present eMagin has no current research
and development contracts.
In addition, the Company has product sales, which are recognized when
merchandise is shipped and such revenue is recorded net of estimated sales
returns based upon past experience. Adjustments to such returns are made as new
information becomes available.
In 2003 we will keep track of costs of production, classifying direct and
indirect costs to cost of goods sold and tracking our gross profit. Although R&D
as our primary focus will end, we have a few employees that will occasionally
work on projects to create new products and enhance existing products. At
present, we have no direct contracts we are billing to, but we may at times be
asked to work on a completed contract. Although we will not have any income from
that work, it may provide a foundation for future contracts and we will record
those costs in Direct Contracts.
8
Note 5 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. To date, activities of
the Company (and its predecessor) have included the performance of research and
development under cooperative agreements with United States Government agencies.
Funding from such research and development contracts is recognized as a
reduction in operating expenses during the period in which the services are
performed and related direct expenses are incurred.
Note 6 - NET LOSS PER COMMON SHARE
In accordance with SFAS No. 128, net loss per common share amounts ("basic EPS")
were computed by dividing net loss by the weighted average number of common
shares outstanding and excluding any potential dilution. Net loss per common
share assuming dilution ("diluted EPS") was computed by reflecting potential
dilution from the exercise of stock options and warrants. Common equivalent
shares totaling 39,686,573 have been excluded from the computation of diluted
EPS for the three months ended March 31, 2003.
Note 7 - DEBT
On January 14, 2002, the Company entered into a $1.0 million bridge loan
arrangement with a private investor in connection with a secured note purchase
agreement executed by the Company on November 27, 2001. This transaction
increased the total amount of the secured convertible loan outstanding under
this arrangement to $1,625,000, including amounts previously made available to
the Company in connection with the November 27, 2001 secured note arrangement,
net of repayments of $250,000 to certain investors who elected not to reinvest.
The secured convertible notes accrue interest at a rate of 9.00% per annum and
mature on November 1, 2005 as a result of a financing we completed in April
2003. Terms of the notes issued on January 14, 2002 also included a fixed
conversion rate of $0.5264 per share. The Company also granted warrants
purchasing 921,161 shares of common stock with an exercise price of $0.5468 per
share to the Investor. Such warrants are exercisable through January 2005.
Certain investors (the Investors") of the November 27, 2001 financing who
elected to remain in the new bridge loan arrangement received reset provisions
of the previous conversion rate and warrant exercise prices issued in November
2001 equivalent to the terms granted to the investors in January 2002.
The total of the intrinsic value of the warrants issued to the new Investor and
the incremental intrinsic value of the repriced warrants of certain existing
investors of approximately $480,000 has been recorded as original issue
discount, resulting in a reduction in the carrying value of this debt. The
original issue discount was amortized into interest expense over the original
period of the debt.
In addition, based on the terms of the bridge loan arrangement, the conversion
terms of the debt provide for a beneficial conversion feature. The total value
of the beneficial feature of the new debt and the incremental value of the reset
conversion feature of the existing debt of approximately $780,000 was recorded
at January 14, 2002 as non-cash interest expense in the accompanying unaudited
consolidated statements of operations.
In April 2003, we completed a financing pursuant to a global restructuring and
secured note purchase agreement. In connection with such financing, the Investor
agreed, to (a) amend the secured note issued to them, (b) terminate the security
agreement dated November 20, 2001 that was entered into in connection with the
purchase of the original secured notes and allow the new investors to enter into
a new security agreement with them on a pari passu basis in order for eMagin to
continue its operations as a developer of virtual imaging technology, and (c)
simultaneously participate in the new financing. The amendments to the notes
included (i) extending the maturity dates of the note from June 30, 2003 to
November 1, 2005, and (ii) revising and clarifying certain of the other terms
and conditions of the note, including provisions relating to interest payments,
conversions, default and assignment of the note.
9
On June 20, 2002, the Company entered into a $0.2 million Secured Note Purchase
Agreement with an Investor. The secured note accrues interest at 11% per annum
and was due to mature on November 1, 2005 as a result of a financing we
completed in April 2003. The Company also granted warrants, exercisable for a
period of five years, to purchase 300,000 shares of common stock with an
exercise price of $0.4257 per share to the investor; provided, however, this
warrant may not be exercised by the investor so long as the investor is the
beneficial owner, directly or indirectly, of more than ten percent (10%) of the
common stock of eMagin for purposes of Section 16 of the Securities Exchange Act
1934. The fair value of the warrants issued to this Investor, which approximated
$84,000, has been recorded as original issue discount, resulting in a reduction
in the carrying value of this debt. The original issue discount was amortized
into interest expense over the period of the debt. Pursuant to the April 2003
financing described above, the investor agreed, to (a) amend the secured note
issued to them, (b) terminate the security agreement dated June 20, 2002 that
was entered into in connection with the purchase of the original secured notes
and allow the new investors to enter into a new security agreement with them on
a pari passu basis in order for eMagin to continue its operations as a developer
of virtual imaging technology, and (c) simultaneously participate in the new
financing. The amendments to the note included (i) amending the note issued on
June 20, 2002 so as to provide that the note shall be convertible and will have
the same conversion price as the notes issued pursuant to the April 2003 secured
note purchase agreement, (ii) extending the maturity dates of the note from June
30, 2003 to November 1, 2005, and (iii) revising and clarifying certain of the
other terms and conditions of the note, including provisions relating to
interest payments, conversions, default and assignment of the note.
On August 21, 2002, the Company issued two Series B Convertible Debentures in
the amount of $121,739 each. The debentures bear interest at the rate of 8% per
annum and are due August 21, 2004. The Debenture also includes a fixed
conversion rate of $0.18 per share. Based on the terms of the loan arrangement,
the conversion terms of the debt provide for a beneficial conversion feature.
Due to the fact that the note holder had the option to convert the note
immediately upon execution of the agreement, the value of the beneficial
conversion feature of approximately $108,000 was recognized immediately as
interest expense.
As of March 31, 2003, the Company was not in compliance with a certain debt
covenant on its $3,000,000 debt payable to SK Corporation, as defined, and
consequently defaulted on the note, causing the maturity date of the notes to
accelerate and become immediately due (the "default"). Accordingly, at March 31,
2003, the original liability of the notes of $3,000,000, plus accrued but unpaid
interest, is included in current liabilities in the accompanying consolidated
balance sheet. In April 2003, the Company entered into an agreement to convert
the principal and accrued interest to Common Stock at $1.28 per share, for a
total of 2,495,833 shares. This transaction includes the original $3,000,000 net
of approximately $114,000 original issue discount as well as approximately
$43,000 in financing costs not amortized as of March 31, 2003.
The company has completed negotiations with various creditors. We have been
mostly successful in obtaining lower negotiated payment requirements from our
larger creditors. The company has begun to make negotiated payments on its debt,
and expects to complete the negotiated payment amounts by June 30, 2003 as funds
from the April 2003 financing arrive.
Note 8 - STOCKHOLDERS' EQUITY
The authorized common stock of the Company consists of 100,000,000 shares with a
par value of $0.001 per share.
10
Prior to the Merger on March 16, 2000, net proceeds of approximately $23.3
million was raised through the private placement issuance of approximately 3.5
million shares of common stock. Additionally, approximately 9.4 million shares
of common stock held by FDC's principal shareholders were cancelled at the time
of the Merger.
On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the
terms of the agreement, FDC issued approximately 10.5 million shares of its
common stock to FED shareholders, and issued approximately 3.9 million options
and warrants in exchange for existing FED options and warrants. The total
purchase price of the transaction was approximately $98.5 million, including
$73.4 million of value relating to the shares issued (at a fair value of $7 per
share, the value of the simultaneous private placement transaction of similar
securities), $20.9 million of value relating to the options and warrants
exchanged, based on the difference between the fair value and the exercise price
of said equity instruments and $3.8 million of assumed liabilities. The
transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the fair value of assets
acquired and liabilities assumed.
In January 2002, the Company negotiated settlement of amounts due to a related
party for services previously rendered via issuance of 192,493 shares of common
stock. As such, the Company recorded the fair value of the services received of
approximately $135,000 in selling, general and administrative expenses in the
accompanying unaudited consolidated statement of operations for the three months
ended March 31, 2002.
On February 27, 2002, the Company completed a private placement of securities
with several institutional and individual investors of 3,617,128 shares of
common stock at a price per share of $0.6913, generating gross proceeds of
approximately $2,500,000, less issuance costs of approximately $35,000. In
connection with the financing arrangement, the Company issued to the investors
warrants to purchase 1,446,852 shares of common stock of the Company at an
exercise price of $0.7542 per share. Also, the Company issued to an institution
warrants to purchase 36,164 shares of common stock in connection with a finder
fee arrangement entered into between the two parties. Such warrants are
exercisable through February 2005.
In April 2002, the Company announced a strategic investment from ROHM Company
LTD. ROHM purchased 1,282,051 shares of eMagin Common Stock at $0.78 per share
as well as warrants to purchase an additional 512,820 shares of Common Stock at
a conversion price of $0.85 per share for an investment of $1,000,000. The fair
value of each warrant was estimated on the date of grant using the Black-Scholes
option pricing model. Such warrants are exercisable through April 2005.
In March 2003, the Company negotiated settlement of amounts due and amounts for
future services to related parties for services rendered via issuance of 339,433
shares of common stock. As such, the Company recorded the fair value of the
services received of approximately $273,796 in selling, general and
administrative expenses, prepaid expenses and reduction of accounts payable in
the accompanying audited consolidated statement of operations for the three
months ended March 31, 2002. Also in March, we received $50,000 for the exercise
of 91,415 warrants in exchange for shares of common stock used for general
operating expenses.
Note 9 - STOCK COMPENSATION
As of March 31, 2003, we have outstanding options to purchase 5,811,681 shares.
On October 9, 2002 the Company granted ten-year options to certain employees,
officers and directors, as an incentive, to purchase an aggregate of 5,185,000
shares of common stock of the Company at an exercise price of $0.21 per share,
as follows: (i) option grants to three officers of the Company and its
subsidiaries to purchase an aggregate of 3,500,000 shares, exercisable
commencing October 9, 2004; (ii) option grant to other employees, to purchase an
aggregate of 1,425,000 shares, exercisable commencing October 9, 2004; (iii)
option grant to two outside directors of the Company to purchase 200,000 shares,
exercisable commencing October 9, 2004. The options have not been issued,
11
pending the future availability of common shares for the options under the
company's qualified option plan, or the approval of the 2003 Plan. Upon
availability, the company may issue these options at which time the strike price
will remain $0.21 and the difference between the strike price and the fair
market value, if the strike price is under the fair market value at the date of
issue, will be recognized as compensation expense. As of March 31, 2003, there
were only approximately 100,000 shares available within the 2002 plan. The
number of shares actually granted may be prorated to a much smaller number.
The Company has elected to follow Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options. Under APB No. 25,
when the exercise price of employee stock options equals the market price of the
underlying stock on the date of grant no compensation expense is recorded. The
Company discloses information relating to the fair value of stock-based
compensation awards in accordance with Statement of Financial Accounting
Standards No.123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation."
The following table illustrates the effect on net loss and loss per share as if
the Company had applied the fair value recognition provision of SFAS No. 123.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in the first quarter of 2003 and 2002, respectively: (1) average expected
volatility of 162% and 150%, (2) average risk-free interest rates of 3.64% and
6.00%, and (3) expected lives of five and ten years for the period ended March
31, 2003 and expected lives of five and eight years for year ended December 31,
2002.
The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect
the portion of the estimated fair value of awards that were earned for the three
months ended March 31, 2003 and 2002.
----------------------------------------------- --------------------- ---------------------
For the three months ended March 31, (In 2003 2002
thousands, except per share
amounts)
----------------------------------------------- --------------------- ---------------------
Net loss applicable to common stockholders', $ (2,405,491) $ (6,489,514)
as reported
----------------------------------------------- --------------------- ---------------------
Adjust: Stock-based employee compensation
expense determined under fair value method (1,441,445) (3,116,892)
----------------------------------------------- --------------------- ---------------------
Pro forma net loss. $ (3,846,836) $ (9,606,406)
----------------------------------------------- --------------------- ---------------------
Net loss per share applicable to common
stockholders':
----------------------------------------------- --------------------- ---------------------
Basic and diluted , as reported $ (0.08) $ (0.24)
----------------------------------------------- --------------------- ---------------------
Basic and diluted, pro forma $ (0.13) $ (0.36)
----------------------------------------------- --------------------- ---------------------
Note 10 - EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB, issued SFAS, No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS No. 143 addresses
financial accounting and reporting for the retirement obligation of an asset.
This statement provides that companies should recognize the asset retirement
cost at its fair value as part of the cost of the asset and classify the accrued
amount as a liability. The asset retirement liability is then accreted to the
ultimate payout as interest expense. The initial measurement of the liability
would be subsequently updated for revised estimates of the discounted cash
outflows. The Statement will be effective for fiscal years beginning after June
15, 2002. On January 31, 2003, eMagin adopted SFAS No. 143. The adoption of this
standard did not have a significant impact on eMagin's consolidated financial
position, results of operations or cash flows.
12
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement eliminates the requirement under SFAS 4 to aggregate and classify
all gains and losses from extinguishment of debt as an extraordinary item, net
of related income tax effect. This statement also amends SFAS 13 to require that
certain lease modifications with economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
In addition, SFAS No. 145 requires reclassification of gains and losses in all
prior periods presented in comparative financial statements related to debt
extinguishment that do not meet the criteria for extraordinary item in
Accounting Principles Board Opinion ("APB") 30. The statement is effective for
fiscal years beginning after May 15, 2002 with early adoption encouraged. The
Company adopted SFAS No. 145 on January 1, 2003, the adoption had no effect on
the financial results of the Company..
On July 30, 2002, The FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. eMagin adopted
SFAS No. 146 as of January 1, 2003. Upon adoption of SFAS 146, there was no
effect on its financial position, cash flows or results of operations.
In November 2002, the EITF reached a consensus on Issue 00-21 ("EITF 00-21"),
"Multiple-Deliverable Revenue Arrangements." EITF 00-21 addresses how to account
for arrangements that may involve the delivery or performance of multiple
products, services, and/or rights to use assets. The consensus mandates how to
identify whether goods or services or both that are to be delivered separately
in a bundled sales arrangement should be accounted for separately because they
are separate units of accounting. The guidance can affect the timing of revenue
recognition for such arrangements, even though it does not change rules
governing the timing or pattern of revenue recognition of individual items
accounted for separately. The final consensus will be applicable to agreements
entered into in fiscal years beginning after June 15, 2003 with early adoption
permitted. Additionally, companies will be permitted to apply the consensus
guidance to all existing arrangements as the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, "Accounting
Changes." The Company is assessing, but at this point does not believe the
adoption of EIFT 00-21 will have a material impact on its financial position,
cash flows or results of operations.
On April 30, 2003, the FASB issued Statement No. 149 ("SFAS No. 149"),
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
SFAS No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133. In particular, this statement
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative as discussed in Statement No. 133, and
it clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003 and is to be applied prospectively.
The Company has not yet completed its analysis of SFAS No. 149 and, therefore,
the effect on the Company's combined financial statements of the implementation
of SFAS No. 149, when effective, has not yet been determined. On May 15, 2003,
the FASB issued Statement No. 150 ("FAS No. 150"), Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. FAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). FAS No. 150 affects the
issuer's accounting for three types of freestanding financial instruments.
13
o mandatorily redeemable shares, which the issuing company is obligated
to buy back in exchange for cash or other assets
o instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets; includes put options and
forward purchase contracts
o obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as a
market index, or varies inversely with the value of the issuers'
shares.
FAS No. 150 does not apply to features embedded in a financial instrument
that is not a derivative in its entirety. Most of the guidance in FAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company has not yet completed its analysis of
SFAS No. 150 and, therefore, the effect on the Company's combined financial
statements of the implementation of SFAS 150, when effective, has not yet been
determined.
Note 11 - RECLASSIFICATIONS
Certain amounts in the March 31, 2002 financial statements have been
reclassified to conform to the March 2003 classification. As of January 1, 2003
the Company has completed its development stage, as defined by Statement of
Financial Accounting Standards ("SFAS") No. 7, Accounting and Reporting by
Development Stage Enterprises". The financial statements results as of December
31, 2002 and the period ended March 31, 2002 have been restated to reflect the
current status.
NOTE 12 - SUBSEQUENT EVENTS
On April 25, 2003, we entered into a global restructuring and secured note
purchase agreement with a group of several accredited institutional and
individual investors whereby the Investors agreed to lend us $6,000,000 in
exchange for (i) the issuance of $6,000,000 principal amount of 9.00% secured
convertible promissory notes due on November 1, 2005 and (ii) warrants to
purchase an aggregate of 7,749,921 shares of common stock of eMagin (subject to
certain customary anti-dilution adjustments), such warrants are exercisable for
a period of three (3) years.
Interest is payable on the notes at a rate of 9% per annum and, at our option,
may be paid through the delivery of shares of our common stock (registered
pursuant to the registration rights agreement referred to below) in lieu of cash
interest payments. Subject to certain limitations, the notes may be converted,
at the option of the holder, in whole or in part, into common shares with a
conversion price equal to 105% of the volume weighted average of the closing
price of our common shares as reported on The American Stock Exchange by the
Wall Street Journal, New York City edition, for the five (5) trading days
immediately preceding the closing date.
The exercise price of the warrants on a per share basis is $.8110, an amount
equal to 110% of the volume weighted average of the closing price of our common
shares as reported on The American Stock Exchange by the Wall Street Journal,
New York City edition, for the five (5) trading days immediately preceding the
closing date.
As part of the transactions, the existing the holders of an aggregate of
$1,625,000 principal amount of secured notes that were purchased pursuant to a
secured note purchase agreement entered into as of November 27, 2001, and the
holder of a $200,000 principal amount secured note that was purchased pursuant
to a secured note purchase agreement entered into as of June 20, 2002, agreed to
(a) amend their respective notes issued to them, (b) terminate the respective
security agreements dated November 20, 2001 and June 20, 2002 that were entered
into in connection with the purchase of their notes and allow the new investors
to enter into a new security agreement with them on a pari passu basis in order
14
for eMagin to continue its operations as a developer of virtual imaging
technology, and (c) simultaneously participate in this new round of financing
(subject to the terms and conditions set forth in the secured note purchase
agreement). The amendments to the notes included (i) amending the note issued on
June 20, 2002 so as to provide that the note shall be convertible and will have
the same conversion price as the notes issued pursuant to the secured note
purchase agreement, (ii) extending the maturity dates of the notes from June 30,
2003 to November 1, 2005, and (iii) revising and clarifying certain of the other
terms and conditions of the notes, including provisions relating to interest
payments, conversions, default and assignments of the notes.
In connection with the completion of the transactions under the securities
purchase agreement, we also entered into a security agreement with the Investors
dated as of April 25, 2003, and a registration rights agreement dated as of
April 25, 2003 providing the investors with certain registration rights under
the Securities Act of 1933, as amended, with respect to our common stock issued
or issuable in lieu of cash interest payments on the notes, upon conversion of
the notes and/or exercise of the warrants.
In addition to the foregoing, as a condition to and simultaneously with the
closing of the transaction pursuant to the secured note purchase agreement,
certain holders of our convertible notes agreed to convert approximately $4.9
million of notes and accrued interest into shares of our common stock, subject
to a "lock up" arrangement allowing only limited sales through private
transactions for their remaining shares through December 31, 2003. Specifically,
The Travelers Insurance Company agreed to convert their $1 million convertible
note plus related interest into our common stock at a conversion price of
approximately $0.53 per share, and SK Corporation has agreed to convert its $3
million convertible note and accrued interest into our common stock at an
approximate conversion price of approximately $1.28 per share. As further
conditions to the closing of the transaction pursuant to the secured note
purchase agreement, we have also entered into settlement or restructuring
agreements with certain of our other creditors to whom we owed approximately
$5.2 million of current payables, pursuant to which the creditors have agreed to
accept shares of our common stock in full or partial satisfaction of the amount
owed to them, or which allow us to either make discounted payments to them or to
make payments under more favorable payment terms than previously were in place.
The company is currently assessing the impact of these transactions. We estimate
that approximately $3.6 million accounts payable will be written down and/or
reclassed to short and long term debt, as well as approximately $5.7 of short
term debt will be reclassed to long term debt.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Statement of Forward-Looking Information
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue," the negative of
such terms, or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those in the
forward-looking statements as a result of various important factors. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, such should not be regarded as a representation by the Company, or
any other person, that such forward-looking statements will be achieved. The
business and operations of the Company are subject to substantial risks, which
increase the uncertainty inherent in the forward-looking statements contained in
this release.
We undertake no duty to update any of the forward-looking statements, whether as
a result of new information, future events or otherwise. Readers are cautioned
not to place undue reliance on the forward-looking statements contained in this
report.
Overview
We design and manufacture miniature display modules, which we refer to as
OLED-on-silicon-microdisplays, primarily for incorporation into the products of
other manufacturers. Microdisplays are typically smaller than a postage stamp,
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 them. 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, we derived substantially all 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 March 31, 2003, we had
recognized approximately $2.6 million from sales of our products, and have a
backlog of more than $27 million in products ordered for delivery through 2004.
These products are being applied or considered for near-eye and headset
applications in products such as entertainment and gaming headsets, handheld
Internet and telecommunication appliances, viewfinders, and wearable computers
to be manufactured by original equipment manufacturer (OEM) customers. We have
also shipped a limited number of prototypes of our eGlass II Head-wearable
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. Through our wholly owned subsidiary, Virtual
Vision, Inc., we are also developing head-wearable displays that incorporate our
Microviewer.
16
We license our core OLED technology from Eastman Kodak and we have developed our
own technology to create high performance OLED-on-silicon microdisplays and
related optical systems. We believe our technology licensing agreement with
Eastman Kodak, coupled with our own intellectual property portfolio, gives us a
leadership position in OLED and OLED-on-silicon microdisplay technology. We are
the only company to demonstrate publicly and market full-color OLED-on-silicon
microdisplays.
Company History
eMagin Corporation was originally incorporated as Fashion Dynamics Corporation
on January 23, 1996 under the laws of the State of Nevada. For the three years
prior its acquisition of FED Corporation, Fashion Dynamics Corporation had no
active business operations, and sought to acquire an interest in a business with
long-term growth potential. On March 16, 2000, Fashion Dynamics Corporation
acquired FED Corporation (derived from field emissive device), subsequently
changed its name to eMagin Corporation (derived from "electronic imaging") and
listed its common stock on the American Stock Exchange under the "EMA" trading
symbol.
At our annual meeting of stockholders held on July 16, 2001, the stockholders
approved the reincorporation of eMagin Corporation as a Delaware corporation.
The reincorporation became effective on July 16, 2001 by merging eMagin
Corporation, a Nevada corporation ("eMagin-Nevada"), into its then wholly owned
subsidiary, eMagin Corporation, a Delaware corporation (formerly known as FED
Corporation as described above) ("eMagin-Delaware"). Upon completion of this
merger, eMagin-Nevada ceased to exist as a corporate entity and eMagin-Delaware
succeeded to the assets and liabilities of eMagin-Nevada. Under the merger
agreement for the reincorporation, each outstanding share of eMagin-Nevada
common stock was automatically converted into one share of eMagin-Delaware
common stock at the time the merger became effective. There has been no
interruption in the trading of our common stock as a result of the
reincorporation. The reincorporation also resulted in the implementation of a
new certificate of incorporation and by-laws for the Company, as the existing
certificate of incorporation and by-laws of eMagin-Delaware continues as the
certificate of incorporation and by-laws of the Company and has replaced the
articles of association and by-laws of eMagin-Nevada. No change in the corporate
name, board members, business, management, fiscal year, assets, liabilities,
employee benefit plans or location of principal facilities of eMagin occurred as
a result of the reincorporation.
Our history has been as a developmental stage company. As of January 1, 2003, we
are no longer 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. Most
of our operating expenses are fixed in the near term. If we are unable to
generate significant revenues, our net losses in any given period could be
greater than expected.
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.
Revenue 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 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. Revenue is recognized at shipment and we record a reserve for
estimated sales returns, which is reflected as a reduction of revenue at the
time of revenue recognition.
17
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. Amounts can be
billed on a bi-monthly basis. Billing is based on subjective cost investment
factors.
Results of Operations
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Revenues
Revenues for the three months ended March 31, 2003 were $0.5 million, as
compared to $0.2 million for the three months ended March 31, 2002. Current year
revenues consisted totally of product sales and increased by $0.3 million for
the three months ended March 31, 2003, as compared to the three months ended
March 31, 2002. We ended the first quarter with a backlog of over $27 million
sales orders primarily for delivery through 2004. Government R&D contract
revenues decreased by $14 thousand, from $14,000 to $0 for the three months
ended March 31, 2003, as compared to the three months ended March 31, 2002.
Government R&D contract revenues will remain significantly lower in 2003 as the
company focuses on product revenues rather than performing Government R&D
contracts, although product revenues include sales to government contractors
which are funded by Government development or procurement contracts.
Costs and Expenses
Cost of Goods Sold. Cost of goods sold includes direct and indirect costs
associated with production, inventory loss and outside commissions. Cost of
goods sold for the three months ended March 31, 2003 was $1.1 million. We were
not in full production in 2002 and had no cost of goods sold to compare against.
Gross profit (loss) was ($.7) million for the three months ended March 31, 2003
due primarily to line stoppages resulting from lack of production materials as
well as machinery downtime.
Research and Development. Research and development expenses for previous years
include salaries, development materials, equipment leases and depreciation
expenses, electronics, rent, utilities and costs associated with operating the
Company's manufacturing facility. In 2003, research and development expenses
included salaries, development materials and other costs specifically allocated
to the development of new products. Gross research and development expenses for
the three months ended March 31, 2003 were $22 thousand. For the same period in
2002, the Company's gross research and development expenses were $2.2 million.
Of these amounts, the Company received $0 and $27 thousand, respectively, in
cost sharing from the U.S. Government. The $2.2 million decrease in gross
expenses for the three months ended March 31, 2003, as compared to the three
months ended March 31, 2002, reflects reduction in staffing and reduction in
expenditures related to the company's difficult cash position.
18
Selling, General and Administrative. Selling, general and administrative
expenses consist principally of salaries and fees for professional services,
legal fees incurred in connection with patent filings and related matters,
amortization, as well as other marketing and administrative expenses. Selling,
general and administrative expenses, for the three months ended March 31, 2003
were $1.4 million as compared to $3.5 million for the three months ended March
31, 2002. The $2.1 million decrease was primarily due to decreases in marketing
activity, personnel costs, and patent filings resulting from an overall
management effort to reduce costs. We expect marketing, general and
administrative expenses to increase in future periods as we add to our sales
staff and make additional investments in marketing activities. Included in
selling, general and administrative expenses are non-cash expenses related to
stock-based compensation amortization. Non-cash stock-based compensation expense
for the three months ending March 31, 2003 was $0.1 million as compared to $1.3
million for the three months ended March 31, 2002. The non-cash stock-based
compensation expense for the three months ending March 31, 2003 decreased by
$1.2 million. Non-cash stock-based compensation costs are the result of
amortization of the intrinsic value ascribed for the issuance of stock options
at below fair market values. The amortization is done over the vesting period of
such options.
Amortization of Purchased Intangibles. Amortization and write down of purchased
intangibles expense for the three months ending March 31, 2003 was $0.3 million
as compared to $0.6 million for the three months ended March 31, 2002. The
decrease of $0.3 million in these non-cash charges is the result of the
purchased intangibles being fully amortized.
Other Income (Expense). Other income (expenses) for the three months ending
March 31, 2003 was ($0.2) million as compared to $1.0 million for the three
months ended March 31, 2002. The decrease of $0.8 million in expense for this
non-cash charge was due primarily to the decrease in debt discount from the
beneficial conversion of a bridge loan entered into by the company in and
interest expense and penalties on additional debt in 2002 that was not repeated
in 2003.
Liquidity and Capital Resources
Current Financial Position and Need for Additional Financing
In April 2003, the Company closed on a $6 million financing (see Changes in
Securities and Use of Proceeds, Part II Item - 2). We estimate $6 million to be
the minimum required to support us until we begin realizing profits from
production in sufficient amount to become profitable through production alone,
No assurance can be given that our estimates will prove to be correct, or that
the Company will generate sufficient revenues to provide positive cash flows
from operations. These and other factors raise substantial doubt about the
Company's ability to continue as a going concern.
eMagin has been negotiating with certain creditors regarding operating leases
and certain payables where eMagin is in default on payments. During April 2003,
eMagin reached agreements with certain creditors and these agreements were
primarily conditioned upon actions to be taken and installment payments to be
made by eMagin through June 30, 2003. Although eMagin will make every effort to
comply with the requirements, unforeseen events may make it impossible to
comply. Serious financial consequences could occur in relation to our default on
the agreements.
We currently anticipate that we will continue to experience significant growth
in our operating expenses for the foreseeable future and that our operating
expenses will be the principal use of our cash. In particular, we expect that
salaries for employees engaged in production operations, purchase of inventory
and expenses of increased sales and marketing efforts would be the principle
uses of cash. We expect that our cash requirements over the next 12 months will
be met by a combination of additional equity or debt financing, and revenues
generated by sales. We expect to continue to devote substantial resources to
manufacturing, marketing and selling our products.
19
Substantially all of our revenues to date have been derived from research and
development contracts with the U.S. federal government. We received revenues
from government contracts of $0 for the three months ended March 31, 2003 as
compared to $14 thousand for the three months ended March 31, 2002. These
figures do not include our government contracts in which we provided a
cost-share. We anticipate that our total revenues from government contracts in
2003 will be substantially lower than in previous years. We currently have no
contracts that we are actively engaged on. We plan to submit proposals for
additional development contract funding; however, funding is subject to
legislative authorization and even if funds are appropriated, they may be
withdrawn based on changes in government priorities.
We have received purchase agreements for our products to be delivered now
through 2004 and into early 2005. Management believes that the prospects for
growth of product revenue remain high.
Our customer schedules have been necessarily pushed out due to our financing
issues, but these shipments are being renegotiated now that the funding is
committed. We do not currently anticipate any significant loss of business as a
result of our prior financing related product ramp delays, other than the shift
in out of delivery schedules. We must ramp our supplies and staffing quickly and
efficiently to meet the anticipated shipping schedules. A significant level of
effort will be required.
Orders for supplies were placed during the 2-3 weeks after the financing. A
3-month supply delivery schedule and one month in house production cycle is
anticipated before shipments can begin ramping. Some earmarked supplies are
already in hand for customers that provided prepayments for supplies in late
2002 and for small quantity deliveries. Initial supply orders will be modest
until we insure our supplier quality is high after a long stagnant period of
time. Continuous monthly orders of wafers, Circuit Boards, and other supplies
are planned to insure a continuing product flow to customers, after the supplier
re-qualification cycle.
We are in the early phases of production, although our progress has been impeded
by our prior cash position. Anticipated increased shipments in the first quarter
were delayed, primarily due to our inability to purchase raw materials. Based on
the planned schedule, we should have resolved our supplier issues and be able to
product quantities in the late third Quarter.
Our cash requirements depend on numerous factors, including completion of our
product development activities, ability to commercialize our products, timely
market acceptance of our products and our customer's product, and other factors.
We expect to carefully devote capital resources to continue our development
programs directed at commercializing our products in our target markets, hire
and train additional staff, expand our research and development activities,
develop and expand our manufacturing capacity and begin production activities.
Any delays could change the cash requirements of the company. While we believe
that we are in position to handle a significant production increase, there can
be no assurance that we will not experience some issues relating to yield and
throughput risk that could result in production delays.
Factors Which May Affect Future Results
In evaluating our business, prospective investors and shareholders should
carefully consider the risks factors,, any of which could have a material
adverse impact on our business, operating results and financial condition and
result in a complete loss of your investment.
Risks Related To Our Financial Results
If we cannot operate as a going concern, our stock price will decline and you
may lose your entire investment. Our auditors included an explanatory paragraph
in their report on our financial statements for the year ended December 31, 2002
which states that, due to recurring losses from operations since inception of
20
the Company, there is substantial doubt about our ability to continue as a going
concern. Our financial statements for the three months ended March 31, 2003 do
not include any adjustments that might result from our inability to continue as
a going concern. These adjustments could include additional liabilities and the
impairment of certain assets. If we had adjusted our financial statements for
these uncertainties, our operating results and financial condition would have
been materially and adversely affected.
If we do not obtain additional cash to operate our business, we may not be able
to execute our business plan and may not achieve profitability. In the event
that cash flow from operations is less than anticipated and we are unable to
secure additional funding to cover these added losses, in order to preserve
cash, we would be required to further reduce expenditures and effect further
reductions in our corporate infrastructure, either of which could have a
material adverse effect on our ability to continue our current level of
operations. To the extent that operating expenses increase or we need additional
funds to make acquisitions, develop new technologies or acquire strategic
assets, the need for additional funding may be accelerated and there can be no
assurances that any such additional funding can be obtained on terms acceptable
to us, if at all. If we are not able to generate sufficient capital, either from
operations or through additional financing, to fund our current operations, we
may not be able to continue as a going concern. If we are unable to continue as
a going concern, we may be forced to significantly reduce or cease our current
operations. This could significantly reduce the value of our securities, which
could result in our de-listing from the American Stock Exchange and cause
investment losses for our shareholders.
The financing commitments provided in April 2003 substantially improves our
probability of success, but there is no guarantee that any additional expenses
or delays may not adversely effect our cash requirements beyond that provided by
the recent financing. Any significant delay in revenue or increased expense
could result in the default of the secured note agreement, which could result in
a significant or total loss of any unsecured investments in eMagin.
We may not be able to satisfy The American Stock Exchange's (the "Exchange")
continued listing requirements. To maintain the listing of our common stock on
the Exchange, we are required to meet certain continued listing requirements,
including, but not limited to, the requirement that our common stock not sell
for a substantial period of time at a low price per share, the requirement that
we maintain a minimum of $2 million in shareholder equity. In its review of
whether a share price is too low or whether a reverse split is appropriate, the
Exchange will consider all pertinent factors, including market conditions in
general, the number of shares outstanding, plans which may have been formulated
by management, applicable regulations of the state of incorporation or of any
governmental agency having jurisdiction over eMagin, and the relationship to
other Exchange policies regarding continued listing. If the Exchange were to
determine that our share price is too low and that we should reverse split our
shares but we were unable to comply for any reason, our common stock may be
delisted from the Exchange. Delisting of our common stock could materially
adversely affect the market price, the market liquidity of our common stock and
our ability to raise necessary capital. Moreover, it would likely be more
difficult to trade in or to obtain accurate quotations as to the market price of
our common stock. If the Exchange were to determine that we were filing to
satisfy the minimum shareholder equity standards, then we may be required to
establish a plan to increase the shareholder equity to over $2 million. The
financing that we completed in April 2003 was debt based, and did not directly
21
increase shareholder equity. However, shareholder equity did improve through the
related conversion of other debt to stock and through negotiated write downs of
debt that are expected to be completed before June 30, 2003. Nevertheless, there
will still be a substantial gap remaining that may increase in subsequent
quarters before it beings to improve. If this additional equity cannot be
accomplished through operations, then it may be done through the sale of equity
which could result in additional dilution to existing shareholders. The failure
to satisfy any Exchange concerns regarding the minimum equity standards could
result in a delisting of our common stock from the Exchange. We currently have
no outstanding communications from regulatory agencies concerning noncompliance
with or deficiencies in financial reporting or other practices, other than
requirement for the 2001 annual meeting delay that is currently planned for July
2, 2003 in conjunction with the 2002 annual meeting. Other as yet unidentified
issues may arise that could adversely effect the financial or the potential
listing status of the company.
We have a history of losses since our inception and expect to incur losses for
the foreseeable future. Accumulated losses excluding non-cash transactions as of
March 31, 2003, were $32.1 million and acquisition related non-cash transactions
were $101.9 million, which resulted in an accumulated net loss of $134. million,
the majority of which was related to the March 2000 merger and its subsequent
write-down of its goodwill. The non-cash losses were dominated by the
amortization and write-down of goodwill and purchased intangibles and write-down
of acquired in process research and development related to the March 2000
acquisition, and also included some non-cash stock-based compensation. We have
not yet achieved profitability and we can give no assurances that we will
achieve profitability within the foreseeable future as we fund operating and
capital expenditures in areas such as establishment and expansion of markets,
sales and marketing, operating equipment and research and development. We cannot
assure investors that we will ever achieve or sustain profitability or that our
operating losses will not increase in the future.
We were previously primarily dependent on U.S. government contracts. The
majority of our revenues to date have been derived from research and development
contracts with the U.S. federal government. We cannot continue to rely on such
contracts for revenue. We plan to submit proposals for additional development
contract funding; however, funding is subject to legislative authorization and
even if funds are appropriated such funds may be withdrawn based on changes in
government priorities. No assurances can be given that we will be successful in
obtaining new government contracts. Our inability to obtain revenues from
government contracts could have a material adverse effect on our results of
long-term operations, unless substantial product or non-government contract
revenue offsets any lack of government contract revenue, unless substantial
product or non-government contract revenue offsets any lack of government
contract revenue
Risks Related To Our Intellectual Property
We rely on our license agreement with Eastman Kodak for the development of our
products, and the termination of this license, Eastman Kodak's licensing of its
OLED technology to others for microdisplay applications, or the sublicensing by
Eastman Kodak of our OLED technology to third parties, could have a material
adverse impact on our business. Our principal products under development utilize
OLED technology that we license from Eastman Kodak. We rely upon Eastman Kodak
to protect and enforce key patents held by Eastman Kodak, relating to OLED
display technology. Eastman Kodak's patents expire 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
22
countries. We may be required to expend significant resources to monitor and
police our intellectual property rights. Any future infringement or other claims
or prosecutions related to our intellectual property could have a material
adverse effect on our business. Any such claims, with or without merit, could be
time consuming to defend, result in costly litigation, divert management's
attention and resources, or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. Protection of intellectual
property has historically been a large yearly expense for eMagin. We have not
been in a financial position to properly protect all of our intellectual
property, and may not be in a position to properly protect our position or stay
ahead of competition in new research and the protecting of the resulting
intellectual property.
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. The
viewfinder microdisplay market sector is well established with entrenched
competitors who we must displace.
The microdisplay systems business is intensely competitive. We do business in
intensely competitive markets that are characterized by rapid technological
change, changes in market requirements and competition from both other suppliers
and our potential OEM customers. Such markets are typically characterized by
price erosion. This intense competition could result in pricing pressures, lower
sales, reduced margins, and lower market share. Our ability to compete
successfully will depend on a number of factors, both within and outside our
control. We expect these factors to include the following: our success in
designing, manufacturing and delivering expected new products, including those
implementing new technologies on a timely basis; our ability to address the
needs of our customers and the quality of our customer services; the quality,
performance, reliability, features, ease of use and pricing of our products;
successful expansion of our manufacturing capabilities; our efficiency of
production, and ability to manufacture and ship products on time; the rate at
which original equipment manufacturing customers incorporate our product
solutions into their own products; the market acceptance of our customers'
products; and product or technology introductions by our competitors. Our
competitive position could be damaged if one or more potential OEM customers
decide to manufacture their own microdisplays, using OLED or alternate
technologies. In addition, our customers may be reluctant to rely on a
relatively small company such as eMagin for a critical component. We cannot
assure you that we will be able to compete successfully against current and
future competition, and the failure to do so would have a materially adverse
effect upon our business, operating results and financial condition.
The display industry is cyclical. The display industry is characterized by
fabrication facilities that require large capital expenditures and long lead
times go construct leading to frequent mismatches between supply and demand. The
OLED microdisplay sector may experience overcapacity if and when all of the
facilities presently in the planning stage come on line leading to a difficult
market in which to sell our products.
Competing products may get to market sooner than ours. Our competitors are
investing substantial resources in the development and manufacture of
microdisplay systems using alternative technologies such as reflective liquid
crystal displays (LCDs), LCD-on-Silicon ("LCOS") microdisplays, active matrix
electroluminescence and scanning image systems, and transmissive active matrix
LCDs. Color LCOS displays are currently in initial production, and may be in
higher volume production a year or more earlier than our microdisplays, which
could have a significant detrimental effect on our market opportunity.
Our competitors have many advantages over us. As the microdisplay market
develops, we expect to experience intense competition from numerous domestic and
foreign companies including well-established corporations possessing worldwide
23
manufacturing and production facilities, greater name recognition, larger retail
bases and significantly greater financial, technical, and marketing resources
than us, as well as from emerging companies attempting to obtain a share of the
various markets in which our microdisplay products have the potential to
compete.
Our products are subject to lengthy OEM development periods. We plan to sell
most of our microdisplays to OEMs who will incorporate them into products they
sell. OEMs determine during their product development phase whether they will
incorporate our products. The time elapsed between initial sampling of our
products by OEMs, the custom design of our products to meet specific OEM product
requirements, and the ultimate incorporation of our products into OEM consumer
products is significant. If our products fail to meet our OEM customers' cost,
performance or technical requirements or if unexpected technical challenges
arise in the integration of our products into OEM consumer products, our
operating results could be significantly and adversely affected. Long delays in
achieving customer qualification and incorporation of our products could
adversely affect our business.
Our products will likely experience rapidly declining unit prices. In the
markets in which we expect to compete, prices of established products tend to
decline significantly over time. In order to maintain our profit margins over
the long term, we believe that we will need to continuously develop product
enhancements and new technologies that will either slow price declines of our
products or reduce the cost of producing and delivering our products. While we
anticipate many opportunities to reduce production costs over time, there can be
no assurance that these cost reduction plans will be successful. We may also
attempt to offset the anticipated decrease in our average selling price by
introducing new products, increasing our sales volumes or adjusting our product
mix. If we fail to do so, our results of operations would be materially and
adversely affected
Risks Related To Manufacturing
We expect to depend on semiconductor contract manufacturers to supply our
silicon integrated circuits and other suppliers of key components, materials and
services. We do not manufacture our silicon integrated circuits on which we
incorporate the OLED. Instead, we expect to provide the design layouts to
semiconductor contract manufacturers who will manufacture the integrated
circuits on silicon wafers. We also expect to depend on suppliers of a variety
of other components and services, including circuit boards, graphic integrated
circuits, passive components, materials and chemicals, and equipment support.
Our inability to obtain sufficient quantities of high quality silicon integrated
circuits or other necessary components, materials or services on a timely basis
could result in manufacturing delays, increased costs and ultimately in reduced
or delayed sales or lost orders which could materially and adversely affect our
operating results.
The manufacture of OLED-on-silicon is new and OLED microdisplays have not been
produced in significant quantities. We expect to begin commercial production
during 2003 and 2004 to meet anticipated demand for our products. If we are
unable to produce our products in sufficient quantity, we will be unable to
attract customers. In addition, we cannot assure you that once we commence
volume production we will attain yields at high throughput that will result in
profitable gross margins or that we will not experience manufacturing problems
which could result in delays in delivery of orders or product introductions.
We are dependent on a single manufacturing line. We initially expect to
manufacture our products on a single manufacturing line. If we experience any
significant disruption in the operation of our manufacturing facility 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. Interruptions in our manufacturing could be caused
by manufacturing equipment problems, the introduction of new equipment into the
24
manufacturing process or delays in the delivery of new manufacturing equipment.
Lead-time for delivery of manufacturing equipment can be extensive. No assurance
can be given that we will not lose potential sales or be unable to meet
production orders due to production interruptions in our manufacturing line. In
order to meet the requirements of certain OEMs for multiple manufacturing sites,
we will have to expend capital to secure additional sites and may not be able to
manage multiple sites successfully.
Risks Related To Our Business
Our success depends in a large part on the continuing service of key personnel.
Changes in management could have an adverse effect on our business. We are
dependent upon the active participation of several key management personnel
including Gary W. Jones, our Chief Executive Officer. This is especially an
issue while the company staffing is small. We 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.
Our success depends on attracting and retaining highly skilled and qualified
technical and consulting personnel. We must hire highly skilled technical
personnel as employees and as independent contractors in order to develop our
products. The competition for skilled technical employees is intense and we may
not be able to retain or recruit such personnel. We must compete with companies
that possess greater financial and other resources than we do, and that may be
more attractive to potential employees and contractors. To be competitive, we
may have to increase the compensation, bonuses, stock options and other fringe
benefits offered to employees in order to attract and retain such personnel. The
costs of retaining or attracting new personnel may have a materially adverse
affect on our business and our operating results. In addition, difficulties in
hiring and retaining technical personnel could delay the implementation of our
business plan.
Our business depends on new products and technologies. The market for our
products is characterized by rapid changes in product, design and manufacturing
process technologies. Our success depends to a large extent on our ability to
develop and manufacture new products and technologies to match the varying
requirements of different customers in order to establish a competitive position
and become profitable. Furthermore, we must adopt our products and processes to
technological changes and emerging industry standards and practices on a
cost-effective and timely basis. Our failure to accomplish any of the above
could harm our business and operating results.
We generally do not have long-term contracts with our customers. Our business is
operated on the basis of short-term purchase orders and we cannot guarantee that
we will be able to obtain long-term contracts for some time. Our current
purchase agreements can be cancelled or revised without penalty or a minimal
penalty, depending on the circumstances. In the absence of a backlog of orders
that can only be canceled with penalty, we plan production on the basis of
internally generated forecasts of demand, which makes it difficult to accurately
forecast revenues. If we fail to accurately forecast operating results, out
business may suffer and the value of your investment in the Company may decline.
Our business strategy may fail if we cannot continue to form strategic
relationships with companies that manufacture and use products that could
incorporate our OLED-on-silicon technology. Our prospects will be significantly
affected by our ability to develop strategic alliances with OEMs for
incorporation of our OLED-on-silicon technology into their products. While we
intend to continue to establish strategic relationships with manufacturers of
electronic consumer products, personal computers, chipmakers, lens makers,
equipment makers, material suppliers and/or systems assemblers, there is no
assurance that we will be able to continue to establish and maintain strategic
relationships on commercially acceptable terms, or that the alliances we do
enter in to will realize their objectives. Failure to do so would have a
material adverse effect on our business.
We may need to obtain additional financing, which may not be available on
suitable terms, and as a result our ability to grow or continue existing
operations may be limited. Our future liquidity and capital requirements are
difficult to predict because they depend on numerous factors, including our
success in completing the development of our products, manufacturing and
marketing our products and competing technological and market developments. We
25
may not be able to generate sufficient cash from our operations to meet
additional working capital requirements, support additional capital expenditures
or take advantage of acquisition opportunities. In addition, substantial
additional capital may be required in the future to fund product development and
product launches. No assurance can be given that such additional financing will
be available or that, if available, such financing will be obtainable on terms
favorable to our shareholders or us. To the extent we raise additional capital
by issuing equity or securities convertible into equity, our current
shareholders will suffer dilution in ownership. If needed capital is
unavailable, our ability to continue to operate and grow our business could be
adversely affected. Even if capital is available at acceptable cost, we might
not be able to manage growth effectively.
Our business depends to some extent on international transactions. We purchase
needed materials from companies located abroad and may be adversely affected by
political and currency risk, as well as the additional costs of doing business
with a foreign entity. Some customers in other countries have longer receivable
periods or warranty periods. In addition, many of the OEMs that are the most
likely long-term purchasers of our microdisplays are located abroad exposing us
to additional political and currency risk. We may find it necessary to locate
manufacturing facilities abroad to be closer to our customers which could give
expose us to various risks including management of a multi-national
organization, the complexities of complying with foreign law and custom,
political instability and the complexities of taxation in multiple
jurisdictionsOur business may expose us to product liability claims. Our
business exposes us to potential product liability claims. Although no such
claim has been brought against us to date, and to our knowledge no such claim is
threatened or likely, we may face liability to product users for damages
resulting from the faulty design or manufacture of our products. While we 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.
Our business is subject to environmental regulations and possible liability
arising from potential employee claims of exposure to harmful substances used in
the development and manufacture of our products. We are subject to various
governmental regulations related to toxic, volatile, experimental and other
hazardous chemicals used in our design and manufacturing process. Our failure to
comply with these regulations could result in the imposition of fines or in the
suspension or cessation of our operations. Compliance with these regulations
could require us to acquire costly equipment or to incur other significant
expenses. We develop, evaluate and utilize new chemical compounds in the
manufacture of our products. While we attempt to ensure that our employees are
protected from exposure to hazardous materials we cannot assure you that
potentially harmful exposure will not occur or that we will not be liable to
employees as a result.
Risks Related To Our Stock
The substantial number of shares that are or will be eligible for sale could
cause our common stock price to decline even if the Company is successful. Sales
of significant amounts of common stock in the public market, or the perception
that such sales may occur, could materially affect the market price of our
common stock. These sales might also make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. As of March 31, 2003, we have outstanding options to purchase
5,811,681 shares. There are also outstanding warrants to purchase 6,349,060
shares of common stock. Conversion of the secured notes is not certain, even if
the share price increases substantially. If the secured were to convert, they
would result in additional outstanding common shares.
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 the company. Some of the provisions
of our certificate of incorporation, our bylaws and Delaware law could, together
26
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.
ITEM 3: Controls and Procedures
As of March 31, 2003, an evaluation was performed by our Chief Executive Officer
and Acting Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that evaluation,
Our Chief Executive Officer and Acting Chief Accounting Officer, concluded that
our disclosure controls and procedures were effective as of March 31, 2003.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to March
31, 2003.
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On or about April 21, 2003, eMagin and IBM entered into a Stipulation in order
to settle an eviction proceeding originally commenced by IBM against eMagin on
or about April 9, 2003. Thereafter, in accordance with the Stipulation, on April
23, 2003 the Stipulation was presented to, and approved by, the court, and a
Judgment was issued in favor of IBM. Pursuant to the Judgment and Stipulation,
(i) eMagin paid IBM all rent due and owing to IBM, and (ii) IBM was awarded
possession of the leased premises, was issued a warrant to remove eMagin from
possession of the leased premises, and obtained a monetary judgment for rent
arrears in the sum of Eight Hundred Thirteen Thousand Fifty Five and 65/100
($813,055.65) Dollars, which sum is to be paid in equal monthly installments
during the period commencing May 1, 2003 and ending on March 1, 2004.
Such Judgment is being held in escrow by IBM's attorney and the warrant of
eviction is being stayed, so long as the Company continues to timely pay make
the installment payments during the next 12 months and any additional rent
and/or other sums due under the Lease.
Item 2. Changes in Securities and Use of Proceeds
On April 25, 2003, we entered into a global restructuring and secured note
purchase agreement with a group of several accredited institutional and
individual investors whereby the Investors agreed to lend us $6,000,000 in
exchange for (i) the issuance of $6,000,000 principal amount of 9.00% secured
convertible promissory notes due on November 1, 2005 and (ii) warrants to
purchase an aggregate of 7,749,921 shares of common stock of eMagin (subject to
certain customary anti-dilution adjustments), which Warrants are exercisable for
a period of three (3) years.
Interest is payable on the notes at a rate of 9% per annum and, at our option,
may be paid through the delivery of shares of our common stock (registered
pursuant to the registration rights agreement referred to below) in lieu of cash
interest payments. Subject to certain limitations, the notes may be converted,
at the option of the holder, in whole or in part, into common shares with a
conversion price equal to $0.7742 per share, 105% of the volume weighted average
of the closing price of our common shares as reported on The American Stock
Exchange by the Wall Street Journal, New York City edition, for the five (5)
trading days immediately preceding the closing date (April 25, 2003). The
exercise price of the warrants on a per share basis is $.8110, an amount equal
to 110% of the volume weighted average of the closing price of our common shares
as reported on The American Stock Exchange by the Wall Street Journal, New York
City edition, for the five (5) trading days immediately preceding the closing
date (April 2003) .
As part of the transactions, the existing the holders of an aggregate of
$1,625,000 principal amount of secured notes that were purchased pursuant to a
secured note purchase agreement entered into as of November 27, 2001, and the
holder of a $200,000 principal amount secured note that was purchased pursuant
to a secured note purchase agreement entered into as of June 20, 2002, agreed to
(a) amend their respective notes issued to them, (b) terminate the respective
security agreements dated November 20, 2001 and June 20, 2002 that were entered
into in connection with the purchase of their notes and allow the new investors
to enter into a new security agreement with them on a pari passu basis in order
for eMagin to continue its operations as a developer of virtual imaging
technology, and (c) simultaneously participate in this new round of financing
(subject to the terms and conditions set forth in the April 2003 secured note
purchase agreement). The amendments to the notes included (i) amending the note
issued on June 20, 2002 so as to provide that the note shall be convertible and
will have the same conversion price as the notes issued pursuant to the April
2003 secured note purchase agreement, (ii) extending the maturity dates of the
notes from June 30, 2003 to November 1, 2005, and (iii) revising and clarifying
certain of the other terms and conditions of the notes, including provisions
relating to interest payments, conversions, default and assignments of the
notes.
28
In connection with the completion of the transactions under the April 2003
securities purchase agreement, we also entered into a security agreement with
the Investors dated as of April 25, 2003, and a registration rights agreement
dated as of April 25, 2003 providing the investors with certain registration
rights under the Securities Act of 1933, as amended, with respect to our common
stock issued or issuable in lieu of cash interest payments on the notes, upon
conversion of the notes and/or exercise of the warrants.
In addition to the foregoing, as a condition to and simultaneously with the
closing of the transaction pursuant to the secured note purchase agreement,
certain holders of our convertible notes agreed to convert approximately $4.9
million of notes and accrued interest into shares of our common stock, subject
to a "lock up" arrangement allowing only limited sales through private
transactions for their remaining shares through December 31, 2003. Specifically,
The Travelers Insurance Company agreed to convert their $1 million convertible
note plus related interest into our common stock at a conversion price of
approximately $0.53 per share, and SK Corporation has agreed to convert its $3
million convertible note and accrued interest into our common stock at an
approximate conversion price of approximately $1.28 per share. As further
conditions to the closing of the transaction pursuant to the secured note
purchase agreement, we have also entered into settlement or restructuring
agreements with certain of our other creditors to whom we owed approximately
$5.2 million of current payables, pursuant to which the creditors have agreed to
accept shares of our common stock in full or partial satisfaction of the amount
owed to them, or which allow us to either make discounted payments to them or to
make payments under more favorable payment terms than previously were in place.
The issuance of the shares and the warrants was exempt from registration
requirements of the Securities Act of 1933 pursuant to Section 4(2) of such
Securities Act and Regulation D promulgated thereunder based upon the
representations of each of the Investors that it was an "accredited investor"
(as defined under Rule 501 of Regulation D) and that it was purchasing such
securities without a present view toward a distribution of the securities. In
addition, there was no general advertisement conducted in connection with the
sale of the securities.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
29
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits List
EXHIBIT
NUMBER DESCRIPTION
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 issued by the Chief
Executive Officer and Acting Chief Financial Officer.
(b) Reports on Form 8-K
The Company filed four reports on form 8-K during the quarter ended March 31,
2003. Information regarding the items reported on is as follows:
DATE OF REPORT ITEM REPORTED ON
January 15, 2003 Disclosed that eMagin and Travelers
agreed to extend the maturity date of
the Convertible Promissory Note from
December 31, 2002 to January 31, 2003.
Disclosed that eMagin and Mr. Mortimer
D.A. Sackler agreed to extend the
maturity date of the Secured
Convertible Note December 31, 2002 to
January 31, 2003.
Disclosed that eMagin and
Ginola Limited agreed to extend the
maturity date of the Secured
Convertible Note from December 31, 2002
to January 31, 2003.
Disclosed that eMagin and
Jack Rivkin agreed to extend the
maturity date of the Secured
Convertible Note from December 31, 2002
to January 31, 2003.
February 7, 2003 Disclosed that eMagin and Travelers
agreed to extend the maturity date of
the Convertible Promissory Note from
January 31, 2003 to February 28, 2003.
Disclosed that eMagin and Mr. Mortimer
D.A. Sackler agreed to extend the
maturity date of the Secured
Convertible Note January 31, 2003 to
March 31, 2003.
Disclosed that eMagin and
Ginola Limited agreed to extend the
maturity date of the Secured
Convertible Note from January 31, 2003
to March 31, 2003.
Disclosed that eMagin and
Jack Rivkin agreed to extend the
maturity date of the Secured
Convertible Note from January 31, 2003
to March 31, 2003.
March 7, 2003 Disclosed that eMagin and Travelers
agreed to extend the maturity date of
the Convertible Promissory Note from
February 28, 2003 to June 30, 2003.
Disclosed that eMagin and Mr. Mortimer
D.A. Sackler agreed to extend the
maturity date of the Secured
Convertible Note March 31, 2003 to June
30, 2003.
Disclosed that eMagin and
Ginola Limited agreed to extend the
maturity date of the Secured
Convertible Note from March 31, 2003 to
June 30, 2003.
30
April 28, 2003 Disclosed that eMagin had completed a
$6 million financing as of April 25,
2003, and that the holders of its
Convertible Promissory Note and Secured
Convertible Notes that were set to
mature on June 30, 2003 had either
agreed to convert their debt into
equity of the Company or had agreed to
extend the maturity date of their
Notes to November 1, 2005. Disclosed
that eMagin entered into a registration
agreement with investors above
investors.
31
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
eMAGIN CORPORATION
Dated: May 20, 2003 By:/s/ Gary W. Jones
--------------------------------
Gary W. Jones
Chief Executive Officer and
Acting Chief Financial Officer
Certification of Principal Executive Officer and Acting Chief Financial Officer
I, Gary W. Jones, Chief Executive Officer and Acting Chief Financial
Officer of eMagin Corporation, certify that:
I have reviewed this quarterly report on Form 10-Q of eMagin Corporation;
1. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
2. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
3. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
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(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003
/s/ Gary W. Jones
---------------------------------
Name: Gary W. Jones
Title: Chief Executive Officer
and Acting Chief Financial Officer
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