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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2002
[ ] Transition report pursuant section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to ________________
eMAGIN CORPORATION
(Exact name of 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 August 14, 2002 the Registrant
had 30,294,980 shares of Common Stock outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one): Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
The financial statements set forth below have not been reviewed by independent
public accountants as required by Item 10-01(d) of Regulation S-X promulgated
under the Securities Exchange Act of 1934, as amended. The Company intends to
retain independent public accountants to replace Arthur Andersen LLP, its former
independent accounting firm, but no assurances can be given when or if the
Company will retain such accountants. Upon retaining such a firm, the Company
intends to have its financial statements reviewed and the Company intends to
make additional or supplemental disclosure, if any, as is indicated by such
review.
Index Page Number
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet as of June 30, 2002 (unaudited) 3
and December 31, 2001
Unaudited Consolidated Statements of Operations For the Three-Months 4
ended June 30, 2002 and June 30, 2001
Unaudited Consolidated Statements of Operations For the Six-Months ended
June 30, 2002 and June 30, 2001 and for the period
from inception (January 23, 1996) to June 30, 2002 5
Unaudited Consolidated Statements of Cash Flows for the Six-Months ended
June 30, 2002 and June 30, 2001 and for the period
from inception (January 23, 1996) to June 30, 2002 6
Selected Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 24
Exhibit 99.1 Certification of CEO 25
Exhibit 99.2 Certification of CFO 26
2
eMAGIN CORPORATION
(a development stage corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 2002 December 31, 2001
----------------------------------------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $127,257 $738,342
Contract receivables 214,637 485,021
Unbilled costs and estimated profits on contracts in progress 101,320 293,273
Inventory 65,600 90,720
Prepaid expenses and other current assets 572,205 388,344
----------------------------------------------
Total current assets 1,081,019 1,995,700
Equipment and leasehold improvements, net of accumulated
depreciation of $1,322,241 and $1,122,989, respectively 987,265 1,166,509
Goodwill and purchased intangibles, net of accumulated amortization of
$662,898 and $50,032,701, respectively 994,340 1,657,238
Other long-term assets 103,274 94,367
----------------------------------------------
Total assets $3,165,898 $4,913,814
==============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $3,254,071 $3,731,976
Accrued payroll 992,935 788,302
Advanced payments on contracts to be completed 332,597 289,538
Other Accrued expenses, net dividends 720,327
Current portion of long-term debt 1,908,474 693,197
Other short term debt 1,200,000 1,875,000
Other current liabilities 408,369 108,805
----------------------------------------------
Total current liabilities $8,816,773 $7,486,818
----------------------------------------------
LONG-TERM DEBT 2,352,483 2,305,184
SHAREHOLDERS' EQUITY:
Common Stock, par value $0.001 per share
Shares authorized - 100,000,000
Shares issued and outstanding - 30,294,980 and 25,171,183 30,295 25,171
Additional paid-in capital 120,538,131 114,058,560
Deferred compensation (1,812,838) (2,277,367)
Deficit accumulated during the development stage (126,758,946) (116,684,552)
----------------------------------------------
Total shareholders' equity (8,003,359) (4,878,188)
----------------------------------------------
Total liabilities and shareholders' equity $3,165,898 $4,913,814
==============================================
See selected notes to financial statements
3
eMAGIN CORPORATION
(a development stage corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three-Months Three-Months
ended ended
June 30, 2002 June 30, 2001
-------------------------- --------------------------
CONTRACT REVENUE:
Contract revenue $18,000 $1,417,777
Product sales 293,227 198,228
-------------------------- --------------------------
Total revenue $311,227 $1,616,005
------------------------------------------------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$1,164 and $244,829 respectively $1,569,534 $3,767,491
Amortization of purchased intangibles 110,483 5,851,692
Acquired in-process research and development - -
Write-down of goodwill and purchased intangibles -
Non-cash charge for stock-based compensation 805,160 733,476
Selling, general and administrative 1,295,700 2,061,595
-------------------------- --------------------------
Total costs and expenses, net $3,780,877 $12,414,254
-------------------------- --------------------------
OTHER (EXPENSE)/ INCOME (115,230) (34,507)
-------------------------- --------------------------
Loss before provision for income taxes (3,584,880) (10,832,756)
PROVISION FOR INCOME TAXES 0 0
-------------------------- --------------------------
Net loss ($3,584,880) ($10,832,756)
========================== ==========================
Basic and diluted net loss per common share ($0.12) ($0.43)
========================== ==========================
Basic and diluted weighted average common
shares outstanding 30,294,980 25,074,418
========================== ==========================
See selected notes to financial statements.
4
eMagin Corporation
(a development Stage Corporation)
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Six-Months Six-Months Period From Inception
Ended Ended (January 23, 1996)
June 30, 2002 June 30, 2001 to June 30, 2002
CONTRACT REVENUE
Contract revenue $32,108 $3,433,478 $7,595,352
Product revenue 437,146 212,728 1,278,859
--------------------------------------------------------------------
Total Revenue $469,254 $3,646,206 $8,874,211
COST AND EXPENSES
Research and Development, net of funding under
cost of sharing arrangements of $27,829, $443,020
and $2,911,761 respectively $3,714,300 $7,208,596 $26,073,409
Amortization and write-down of goodwill and
purchased intangibles 662,898 11,703,384 71,627,919
Acquired in-process research and development
- 12,820,000
Non-Cash charge for stock-based compensation 2,142,086 1,469,454 7,522,917
Selling, general, and administrative expense 2,930,748 3,836,996 15,496,968
--------------------------------------------------------------------
Total costs and Expenses Net $9,450,032 $24,218,430 $133,541,213
--------------------------------------------------------------------
OTHER (EXPENSE)/INCOME (1,093,616) 31,033 (2,091,944)
--------------------------------------------------------------------
Loss before provision for income taxes (10,074,394) (20,541,191) (126,758,946)
--------------------------------------------------------------------
PROVISION FOR INCOME TAXES 0 0 0
--------------------------------------------------------------------
Net Loss ($10,074,394) ($20,541,191) ($126,758,946)
====================================================================
.
Basic and diluted net loss per common share ($0.35) ($0.82)
===========================================
Basic and diluted weighted average common shares
outstanding 28,482,450 25,071,795
===========================================
See selected notes to financial statements.
5
eMAGIN CORPORATION
(a development stage corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Period from
Six Months Six Months inception
ended ended January 23 1996
June 30, 2002 June 30, 2001 June 30, 2002
----------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($10,074,394) ($9,708,435) ($126,768,130)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 862,150 6,016,929 40,805,132
Write-down of goodwill and purchased intangibles - - 32,145,863
Loss on sale of assets - - 97,713
Non-cash charge for stock based compensation 2,142,086 735,978 6,717,757
Non-cash interest related charges 936,132 - 2,158,694
Non-cash charge for services received 307,657 - 423,808
Acquired in-process research and development - - 12,820,000
Changes in operating assets and liabilities, net of acquisition:
Contract receivables 270,384 673,980 13,862
Unbilled costs and estimated profits on contracts in progress 191,953 (796,010) 518,244
Inventory 25,120
Prepaid expenses and other current assets (183,360) (546,863) (381,835)
Other long-term assets (8,907) - (76,872)
Advanced payment on contracts to be completed 43,059 - 371,177
Accounts payable, accrued expenses and accrued payroll 746,619 310,558 3,278,732
----------------------------------------------------------------
Net cash used in operating activities ($4,741,501) ($3,313,863) ($27,875,855)
----------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (20,008) (152,848) (1,447,106)
Net proceeds from acquisition - 1,239,162
----------------------------------------------------------------
Net cash used in investing activities (20,008) (152,848) (207,944)
----------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance costs $3,465,517 (93,878) $24,746,517
Proceeds from exercise of stock options and warrants 887 - 28,496
Proceeds from short term debt 1,200,000 - 6,075,000
Proceeds from long term debt - - -
Payments of long term debt and capital leases (515,979) - (3,377,298)
----------------------------------------------------------------
Net cash provided by financing activities $4,150,425 ($93,878) $27,472,715
----------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (611,084) (3,560,589) (611,084)
CASH AND CASH EQUIVALENTS, beginning of period 738,342 7,367,257 738,342
----------------------------------------------------------------
See selected notes to financial statements.
6
eMAGIN CORPORATION
Selected Notes to Unaudited Consolidated Financial Statements
THESE STATEMENTS WERE NOT REVIEWED BY CERTIFIED PUBLIC ACCOUNTANTS.
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 June 30, 2002 are not necessarily indicative of the results to be
expected for the full year. It has been our practice to have our quarterly
results reviewed by independent public accountants, even when such results are
labeled as Unaudited. As indicated in the legend preceding the financial
statements the Company has not to date retained independent public accountants
to replace Arthur Andersen LLP, its former independent auditors, and, thus, has
not been able to obtain an independent review of these consolidated financial
statements. As a result, the results reported herein have been reviewed by
management and by members of our audit committee, but have not yet been reviewed
by independent auditors.
Note 2 - NATURE OF BUSINESS
Fashion Dynamics Corporation (FDC) was organized January 23, 1996, under the
laws of the State of Nevada. FDC had no active business operations other than to
acquire an interest in a business. On March 16, 2000, FDC acquired FED
Corporation ("FED") (the Merger). The merged company changed its name to eMagin
Corporation (the "Company" or eMagin) (Note 3). eMagin is a developer and
manufacturer of optical systems and microdisplays for use in the electronics
industry. eMagin's wholly-owned subsidiary, Virtual Vision Inc., develops and
markets microdisplay systems and optics technology for commercial, industrial
and military applications. Following the Merger, the business conducted by the
Company is the business conducted by FED prior to the Merger.
The Company continues to be a development stage company, as defined by Statement
of Financial Accounting Standards ("SFAS") No. 7, Accounting and Reporting by
Development Stage Enterprises", as it continues to devote substantially all of
its efforts to establishing a new business, and it has not yet commenced its
planned principal operations. Revenues earned by the Company to date are
primarily related to research and development type contracts and are not related
to the Company's planned principal operations of commercialization of products
using organic light emitting diode (OLED) technology.
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.
7
Note 4 - REVENUE AND COST RECOGNITION
The Company has historically earned revenues from certain of its research and
development activities under both firm fixed-price contracts and cost-type
contracts, including some cost-plus-fee contract. Revenues relating to firm
fixed-price contracts are generally recognized on the percentage-of-completion
method of accounting as costs are incurred (cost-to-cost basis). Revenues on
cost-plus-fee contracts include costs incurred plus a portion of estimated fees
or profits based on the relationship of costs incurred to total estimated costs.
Contract costs include all direct material and labor costs and an allocation of
allowable indirect costs as defined by each contract, as periodically adjusted
to reflect revised agreed upon rates.
Note 5 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. To date, activities of
the Company (and its predecessor) have included the performance of research and
development under cooperative agreements with United States Government agencies.
Funding from such research and development contracts is recognized as a
reduction in operating expenses during the period in which the services are
performed and related direct expenses are incurred.
Note 6 - NET LOSS PER COMMON SHARE
In accordance with SFAS No. 128, net loss per common share amounts ("basic EPS")
were computed by dividing net loss by the weighted average number of common
shares outstanding and excluding any potential dilution. Net loss per common
share assuming dilution ("diluted EPS") was computed by reflecting potential
dilution from the exercise of stock options and warrants. Common equivalent
shares have been excluded from the computation of diluted EPS as their effect is
antidilutive.
Note 7 - DEBT
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 matures on August 30, 2002. The Company also granted warrants, exercisable
for a period of three years, to purchase 300,000 shares of common stock with an
exercise price of $0.4419 per share to the investor.
Note 8 - STOCKHOLDERS' EQUITY
The authorized common stock of the Company consists of 100,000,000 shares with a
par value of $0.001 per share.
Prior to the Merger on March 16, 2000, net proceeds of approximately $23.3
million was raised through the private placement issuance of approximately 3.5
million shares of common stock. Additionally, approximately 9.4 million shares
of common stock held by FDC's principal shareholders were cancelled at the time
of the Merger.
On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the
terms of the agreement, FDC issued approximately 10.5 million shares of its
common stock to FED shareholders, and issued approximately 3.9 million options
and warrants in exchange for existing FED options and warrants. The total
purchase price of the transaction was approximately $98.5 million, including
$73.4 million of value relating to the shares issued (at a fair value of $7 per
share, the value of the simultaneous private placement transaction of similar
securities), $20.9 million of value relating to the options and warrants
exchanged, based on the difference between the fair value and the exercise price
of said equity instruments and $3.8 million of assumed liabilities.
8
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 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. Such
warrants are exercisable through April 2005.
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 June 30, 2002, we had
recognized over $1.2 million from sales of our products, and have a backlog of
more than $10 million in products ordered for delivery through 2003. We have an
additional $10 million in letters of intent for purchases. 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
9
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.
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. We are now transitioning
to manufacturing 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.
10
Results of Operations
THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 2001
The discussion and analysis set forth below are based upon financial statements
that have not been reviewed by independent public accountants as required by
Item 10-01(d) of Regulation S-X promulgated under the Securities Exchange Act of
1934, as amended. The Company intends to retain independent public accountants
to replace Arthur Andersen LLP, its former independent accounting firm, but no
assurances can be given when or if the Company will retain such accountants.
Upon retaining such a firm, the Company intends to have its financial statements
reviewed and the Company intends to make additional or supplemental disclosure,
if any, as is indicated by such review.
Revenues
Revenues for the three months and six months ended June 30, 2002 were $0.3
million and $0.5 million, respectively, as compared to $1.6 million and $3.6
million respectively, for the three months and six months ended June 30, 2001.
Current year revenues consist primarily of product sales and increased by $0.1
million and $0.2 million for the three months and six months ended June 30,
2002, respectively, as compared to the three months and six months ended June
30, 2001. We ended the second quarter with a backlog of over $1 million in short
term sales orders. Government R&D contract revenues decreased by $1.4 million
and $3.4 million for the three months and six months ended June 30, 2002,
respectively, as compared to the three months and six months ended June 30,
2001. Government R&D contract revenues will remain significantly lower in 2002
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
Research and Development. Research and development expenses include salaries,
development materials, equipment lease and depreciation expenses, electronics,
rent, utilities and costs associated with operating the Company's manufacturing
facility. Gross research and development expenses for the three months and six
months ended June 30, 2002 were $1.8 million and $3.7 million, respectively. For
the same period in 2001, the Company's gross research and development expenses
were $4.0 million and $7.7 million, respectively. The $2.2 million and $3.9
million decrease in gross expenses for the three months and six months ended
June 30, 2002, as compared to the three months and six months ended June 30,
2001 reflects reduction in staffing and reduction in expenditures related to the
company's difficult cash position.
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 and six months ended
June 30, 2002 were $1.3 million and $2.9 million, respectively, as compared to
$2.1 million and $3.8 million for the three months and for the six months ended
June 30, 2001. The decrease of $0.8 million and $0.9 million in selling, general
and administrative expenses was primarily due to decreases in personnel costs,
patent filings, and legal fees. 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.
Amortization of Purchased Intangibles. Amortization of purchased intangibles
expense for the three months and six months ending June 30, 2002 was $0.1
million and $0.7 million respectively as compared to $5.9 million and $11.7
million for the three months and six months ended June 30, 2001. The decrease of
$5.8
11
million and $11 million in these non-cash charges, is the result of the
prior year's write-down of the balance in purchased intangibles and goodwill and
its impact on future years' amortization.
Non-cash expense related to stock-based compensation amortization, Non-cash
stock-based compensation expense for the three and six months ending June 30,
2002 were $0.8 million and $2.1 million, respectively, as compared to $0.7
million and $1.5 million for the three months and six months ended June 30,
2001. The non-cash stock-based compensation expense for the three and six months
ending June 30, 2002 increased by $0.1 million and $0.6 million. Non-cash
stock-based compensation costs are the result of the issuance of stock options
at below fair market values.
Other Income (Expense). Other income (expenses) for the three months and six
months ending June 30, 2002 was ($0.1) million and ($1.1) million expense. The
increase of $1.0 million in expense for this non-cash charge was due primarily
to the increase in debt discount from the beneficial conversion of a bridge loan
entered into by the company
Liquidity and Capital Resources
Current Financial Position and Need for Additional Financing
We need immediately to raise additional equity or debt financing in order to
continue as a going concern and need to raise substantial additional equity or
debt financing in the very near future to fund our growth and the
commercialization of our products. In the event that we raise additional funds
through equity financing, substantial equity dilution to investors will result.
We had cash and cash equivalents of $1.7 million as of March 31, 2002, $0.1
million as of June 30, 2002 and $0.1 million as of August 1, 2002. Our monthly
operating expenses normally are approximately $1.0 million. In addition, $3.1
million of outstanding indebtedness plus accrued interest is due on August 30,
2002. We cannot assure you that our lenders will agree to reschedule or
renegotiate the terms of this indebtedness before it becomes due. As of June 30,
2002, another significant portion of our working capital deficit consisted of
$3.3 million in accounts payable. A substantial portion of this amount is past
due and owed to leasing companies and law firms. We are currently engaged in
discussions regarding rescheduling payment terms and renegotiating balances due
with our major creditors.
Subject to available funding, 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 manufacturing
operations, purchase of inventory and expenses of increased sales and marketing
efforts will be the principle uses of additional cash that we raise during the
remainder of 2002. Until we raise sufficient funding to manufacture our products
and until our inventory procurement and our manufacturing processes are
stabilized, which we expect will take approximately three to six months after
any funding, we may experience difficulties in making timely product shipments
to all of our customers. After our urgent cash needs are addressed, 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 the sales. We
expect to continue to devote substantial resources to manufacturing, marketing
and selling our products.
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 $32,000 for the six months ended June 30, 2002,
$5.0 million for the year ended December 31, 2001, and $2.6 million for the year
ended December 31, 2000. These figures do not include our government contracts
in which we provided a cost-share. We expect to activate our current U.S. Air
Force SBIR Phase III contract for $1 million in the third quarter of 2002. We
anticipate that our total revenues from government contracts in 2002 will be
substantially lower than
12
in previous years. The government may terminate our contracts at its discretion.
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 increased orders for our products during the third quarter of
2002, and we believe that customer interest remains high. The company ended the
second quarter with a backlog of over $1 million in short term orders. Provided
that we can obtain adequate financing and successfully negotiate debt
restructuring, management believes that the prospects for growth of product
revenue remain high. We have received more than $10 million in purchase
agreements and are in discussion for additional orders. We are in the early
phases of production, although our progress has been impeded by our current cash
position. Anticipated increased shipments in the second quarter were delayed,
primarily due to certain supply delays, even though base displays were prepared.
These components were received behind schedule in July, and shipments resumed.
However, our cash position has resulted in reductions in manufacturing staff
availability.
Our cash requirements depend on numerous factors, including completion of our
product development activities, ability to commercialize our products, market
acceptance of our products and other factors. We expect to devote substantial
capital resources to continue our development programs directed at
commercializing our products in our target markets, hire and train additional
staff, expand our research and development activities, develop and expand our
manufacturing capacity and begin production activities. Through June 30, 2002 we
have incurred accumulated losses of approximately $126.8 million since our
inception and we anticipate incurring significant losses as we fund our growth.
Since inception we have financed our operations through private placements of
equity securities, research and development contracts and borrowings. As of June
30, 2002, we had $0.1 million in cash and cash equivalents and have a working
capital deficit of $7.7 million. In December 2001 and July 2002, we took certain
actions to reduce our workforce due to our difficult working capital
constraints.
Net cash used in operating activities was $5.3 million for the six months ended
June 30, 2002. Cash used in operating activities resulted primarily from our net
loss partially offset by increases from non-cash charges. Cash used in operating
activities for the six months ended June 30, 2001 was $3.3 million resulting
primarily from operating losses.
Net cash used by investing activities was $0.2 million for the six months ended
June 30, 2002, all of which was used for capital expenditures. Net cash used by
investing activities for the six months ended June. 30, 2001 was $0.2 million,
which was used for capital expenditures.
Net cash provided by financing activities was $4.9 million for the six months
ended June 30, 2002, and consisted primarily of proceeds from sale of equity and
the issuance of debt. Net cash used by financing activities was $.1 million for
the six months ended June 30, 2001 year, and consisted primarily of cash
payments on long-term debt and capital assets
Factors Which May Affect Future Results
In evaluating our business, prospective investors and shareholders should
carefully consider the following risks. Any of the following risks could have a
material adverse impact on our business, operating results and financial
condition and result in a complete loss of your investment.
Risks Related To Our Financial Results
If we cannot operate as a going concern, our stock price will decline and you
may lose your entire investment. Our auditors have included an explanatory
paragraph in their report on our financial statements for the year ended
December 31, 2001 which states that, due to recurring losses from operations
since inception of the Company, there is substantial doubt about our ability to
continue as a going concern. Our financial
13
statements for the six months ended June 30, 2002 do not include any adjustments
that might result from our inability to continue as a going concern. These
adjustments could include additional liabilities and the impairment of certain
assets. If we had adjusted our financial statements for these uncertainties, our
operating results and financial condition would have been materially and
adversely affected.
If we do not obtain additional cash to operate our business, we may not be able
to execute our business plan and may not achieve profitability. In the event
that cash flow from operations is less than anticipated and we are unable to
secure additional funding, in order to preserve cash, we would be required to
further reduce expenditures and effect further reductions in our corporate
infrastructure, either of which could have a material adverse effect on our
ability to continue our current level of operations. Even if we obtain
additional working capital in the near future, to the extent that operating
expenses increase or we need additional funds to make acquisitions, develop new
technologies or acquire strategic assets, the need for additional funding may be
accelerated and there can be no assurances that any such additional funding can
be obtained on terms acceptable to us, if at all. If we are not able to generate
sufficient capital, either from operations or through additional financing, to
fund our current operations, we may not be able to continue as a going concern.
If we are unable to continue as a going concern, we may be forced to
significantly reduce or cease our current operations. This could significantly
reduce the value of our securities, which could result in our de-listing from
the American Stock Exchange and cause investment losses for our shareholders.
We may not maintain The American Stock Exchange (the "Exchange") listing
requirements. To maintain the listing of our common stock on the Exchange, we
are required to meet certain listing requirements, in the case of our common
stock selling for a substantial period of time at a low price per share. 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. In addition, the financial statements
set forth in this Quarterly Report on Form 10-Q have not been reviewed by
independent public accountants as required by Item 10-01(d) of Regulation S-X
promulgated under the Securities Exchange Act of 1934, as amended. As result,
this report is not in compliance with the rules and regulations of the
Securities and Exchange Commission. Delisting of our common stock could
materially adversely affect the market price, the market liquidity of our common
stock and our ability to raise necessary capital. Moreover, it would likely be
more difficult to trade in or to obtain accurate quotations as to the market
price of our common stock.
We have a history of losses since our inception and expect to incur losses for
the foreseeable future. Accumulated losses excluding non-cash transactions as of
June 30, 2002, were $34.8 million and acquisition related non-cash transactions
were $92 million, which resulted in an accumulated net loss of $126.8 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 are presently dependent on U.S. government contracts. The majority of our
revenues to date have been derived from research and development contracts with
the U.S. federal government. We may continue to rely on such contracts for
revenue until volume commercial sales commence. The government at its discretion
may terminate our government contracts. We plan to submit proposals for
additional development contract funding;
14
however, funding is subject to legislative authorization and even if funds are
appropriated such funds may be withdrawn based on changes in government
priorities. No assurances can be given that our existing contracts will
continue, that we will be successful in obtaining new government contracts, or
that programs through which our contracts are funded will continue to be funded
beyond the current fiscal year. Our inability to obtain revenues from government
contracts could have a material adverse effect on our results of operations.
Risks Related To Our Intellectual Property
We rely on our license agreement with Eastman Kodak for the development of our
products, and the termination of this license, Eastman Kodak's licensing of its
OLED technology to others for microdisplay applications, or the sublicensing by
Eastman Kodak of our OLED technology to third parties, could have a material
adverse impact on our business. Our principal products under development utilize
OLED technology that we license from Eastman Kodak. We rely upon Eastman Kodak
to protect and enforce key patents held by Eastman Kodak, relating to OLED
display technology. Eastman Kodak's patents expire over a range of years from
2002 to 2020. Our license with Eastman Kodak could terminate if we fail to
perform any material term or covenant under the license agreement. Since our
license from Eastman Kodak is non-exclusive, Eastman Kodak could also elect to
become a competitor itself or to license OLED technology for microdisplay
applications to others who have the potential to compete with us. The occurrence
of any of these events could have a material adverse impact on our business.
We may not be successful in protecting our intellectual property and proprietary
rights. We rely on a combination of patents, trade secret protection, licensing
agreements and other arrangements to establish and protect our proprietary
technologies. If we fail to successfully enforce our intellectual property
rights, our competitive position could suffer, which could harm our operating
results. Patents may not be issued for our current patent applications, third
parties may challenge, invalidate or circumvent any patent issued to us,
unauthorized parties could obtain and use information that we regard as
proprietary despite our efforts to protect our proprietary rights, rights
granted under patents issued to us may not afford us any competitive advantage,
others may independently develop similar technology or design around our
patents, our technology may be available to licensees of Eastman Kodak, and
protection of our intellectual property rights may be limited in certain foreign
countries. We may be required to expend significant resources to monitor and
police our intellectual property rights. Any future infringement or other claims
or prosecutions related to our intellectual property could have a material
adverse effect on our business. Any such claims, with or without merit, could be
time consuming to defend, result in costly litigation, divert management's
attention and resources, or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. Protection of intellectual
property has historically been a large yearly expense for eMagin. We have not
been in a financial position to properly protect all of our intellectual
property, and may not be in a position to do so for some time even if sufficient
funding is available for the production and a sales ramp
Risks Related To the Microdisplay Industry
The commercial success of the microdisplay industry depends on the widespread
market acceptance of microdisplay systems products. The market for microdisplays
is emerging. Our success will depend on consumer acceptance of microdisplays as
well as the success of the commercialization of the microdisplay market. At
present, it is difficult to assess or predict with any assurance the potential
size, timing and viability of market opportunities for our technology in this
market. The viewfinder microdisplay market sector is well established with
entrenched competitors who we must displace.
The microdisplay systems business is intensely competitive. We do business in
intensely competitive markets that are characterized by rapid technological
change, changes in market requirements and competition from both other suppliers
and our potential OEM customers. Such markets are typically characterized by
price erosion. This intense competition could result in pricing pressures, lower
sales, reduced margins, and lower market share. Our ability to compete
successfully will depend on a number of factors, both within and outside
15
our control. We expect these factors to include the following: our success in
designing, manufacturing and delivering expected new products, including those
implementing new technologies on a timely basis; our ability to address the
needs of our customers and the quality of our customer services; the quality,
performance, reliability, features, ease of use and pricing of our products;
successful expansion of our manufacturing capabilities; our efficiency of
production, and ability to manufacture and ship products on time; the rate at
which original equipment manufacturing customers incorporate our product
solutions into their own products; the market acceptance of our customers'
products; and product or technology introductions by our competitors. Our
competitive position could be damaged if one or more potential OEM customers
decide to manufacture their own microdisplays, using OLED or alternate
technologies. In addition, our customers may be reluctant to rely on a
relatively small company such as eMagin for a critical component. We cannot
assure you that we will be able to compete successfully against current and
future competition, and the failure to do so would have a materially adverse
effect upon our business, operating results and financial condition.
The display industry is cyclical. The display industry is characterized by
fabrication facilities that require large capital expenditures and long lead
times go construct leading to frequent mismatches between supply and demand. The
OLED microdisplay sector may experience overcapacity if and when all of the
facilities presently in the planning stage come on line leading to a difficult
market in which to sell our products.
Competing products may get to market sooner than ours. Our competitors are
investing substantial resources in the development and manufacture of
microdisplay systems using alternative technologies such as reflective liquid
crystal displays (LCDs), LCD-on-Silicon ("LCOS") microdisplays, active matrix
electroluminescence and scanning image systems, and transmissive active matrix
LCDs. Color LCOS displays are currently in initial production, and may be in
higher volume production a year or more earlier than our microdisplays, which
could have a significant detrimental effect on our market opportunity.
Our competitors have many advantages over us. As the microdisplay market
develops, we expect to experience intense competition from numerous domestic and
foreign companies including well-established corporations possessing worldwide
manufacturing and production facilities, greater name recognition, larger retail
bases and significantly greater financial, technical, and marketing resources
than us, as well as from emerging companies attempting to obtain a share of the
various markets in which our microdisplay products have the potential to
compete.
Our products are subject to lengthy OEM development periods. We plan to sell
most of our microdisplays to OEMs who will incorporate them into products they
sell. OEMs determine during their product development phase whether they will
incorporate our products. The time elapsed between initial sampling of our
products by OEMs, the custom design of our products to meet specific OEM product
requirements, and the ultimate incorporation of our products into OEM consumer
products is significant. If our products fail to meet our OEM customers' cost,
performance or technical requirements or if unexpected technical challenges
arise in the integration of our products into OEM consumer products, our
operating results could be significantly and 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.
16
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 volumes. We expect to begin commercial production during
2002 to meet anticipated demand for our products. If we are unable to produce
our products in sufficient quantity, we will be unable to attract customers. In
addition, we cannot assure you that once we commence volume production we will
attain yields at high throughput that will result in profitable gross margins or
that we will not experience manufacturing problems which could result in delays
in delivery of orders or product introductions.
We are dependent on a single manufacturing line. We initially expect to
manufacture our products on a single manufacturing line. If we experience any
significant disruption in the operation of our manufacturing facility we may be
unable to supply microdisplays to our customers. For this reason, some OEMs may
also be reluctant to commit a broad line of products to our microdisplays
without a second production facility in place. Interruptions in our
manufacturing could be caused by manufacturing equipment problems, the
introduction of new equipment into the manufacturing process or delays in the
delivery of new manufacturing equipment. Lead-time for delivery of manufacturing
equipment can be extensive. No assurance can be given that we will not lose
potential sales or be unable to meet production orders due to production
interruptions in our manufacturing line. In order to meet the requirements of
certain OEMs for multiple manufacturing sites, we will have to expend capital to
secure additional sites and may not be able to manage multiple sites
successfully.
Risks Related To Our Business
Our success depends in a large part on the continuing service of key personnel.
Changes in management could have an adverse effect on our business. We are
dependent upon the active participation of several key management personnel
including Gary W. Jones, our Chief Executive Officer. We also need to recruit
additional management in order to expand according to our business plan. The
failure to attract and retain additional management or personnel could have a
material adverse effect on our operating results and financial performance.
Our success depends on attracting and retaining highly skilled and qualified
technical and consulting personnel. We must hire highly skilled technical
personnel as employees and as independent contractors in order to develop our
products. The competition for skilled technical employees is intense and we may
not be able to retain or recruit such personnel. We must compete with companies
that possess greater financial and other resources than we do, and that may be
more attractive to potential employees and contractors. To be competitive, we
may have to increase the compensation, bonuses, stock options and other fringe
benefits offered to employees in order to attract and retain such personnel. The
costs of retaining or attracting new 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.
17
Furthermore, we must adopt our products and processes to technological changes
and emerging industry standards and practices on a cost-effective and timely
basis. Our failure to accomplish any of the above could harm our business and
operating results.
Our microdisplay business may not be successful. The market for microdisplays
may develop later than anticipated by us may therefore limit our sales potential
for the foreseeable future.
We generally do not have long-term contracts with our customers. Our business is
operated on the basis of short-term purchase orders and we cannot guarantee that
we will be able to obtain long-term contracts for some time. In the absence of a
backlog of orders that can only be canceled with penalty, we plan production on
the basis of internally generated forecasts of demand, which makes it difficult
to accurately forecast revenues. If we fail to accurately forecast operating
results, out business may suffer and the value of your investment in the Company
may decline.
Our business strategy may fail if we cannot continue to form strategic
relationships with companies that manufacture and use products that could
incorporate our OLED-on-silicon technology. Our prospects will be significantly
affected by our ability to develop strategic alliances with OEMs for
incorporation of our OLED-on-silicon technology into their products. While we
intend to continue to establish strategic relationships with manufacturers of
electronic consumer products, personal computers, chipmakers, lens makers,
equipment makers, material suppliers and/or systems assemblers, there is no
assurance that we will be able to continue to establish and maintain strategic
relationships on commercially acceptable terms, or that the alliances we do
enter in to will realize their objectives. Failure to do so would have a
material adverse effect on our business.
We will need to obtain additional financing, which may not be available on
suitable terms, and as a result our ability to grow or continue existing
operations may be limited. Our future liquidity and capital requirements are
difficult to predict because they depend on numerous factors, including our
success in completing the development of our products, manufacturing and
marketing our products and competing technological and market developments. We
may not be able to generate sufficient cash from our operations to meet
additional working capital requirements, support additional capital expenditures
or take advantage of acquisition opportunities. In addition, substantial
additional capital may be required in the future to fund product development and
product launches. No assurance can be given that additional financing will be
available or that, if available, such financing will be obtainable on terms
favorable to our shareholders or us. To the extent we raise additional capital
by issuing equity or securities convertible into equity, our current
shareholders will suffer dilution in ownership. If needed capital is
unavailable, our ability to continue to operate and grow our business could be
adversely affected. Even if capital is available at acceptable cost, we might
not be able to manage growth effectively.
Our business depends to some extent on international transactions. We purchase
needed materials from companies located abroad and may be adversely affected by
political and currency risk, as well as the additional costs of doing business
with a foreign entity. In addition, many of the OEMs 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
jurisdictions.
Our business may expose us to product liability claims. Our business exposes us
to potential product liability claims. Although no such claim has been brought
against us to date, and to our knowledge no such claim is threatened or likely,
we may face liability to product users for damages resulting from the faulty
design or manufacture of our products. While we maintain product liability
insurance coverage, there can be no assurance that product liability claims will
not exceed coverage limits, fall outside the scope of such coverage, or that
such insurance will continue to be available at commercially reasonable rates,
if at all.
18
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 July 31, 2002, we have outstanding options to purchase
4,979,069 shares; some are currently locked-up due to contractual restrictions.
The restrictions on the sale of the remaining shares will lapse between February
1, 2002 and January 7, 2003. There are also outstanding warrants to purchase
6,924,153 shares of common stock.
We do not intend to pay dividends; you will not receive funds without selling
shares; and you may lose the entire amount of your investment. We have not paid
any dividends on our common stock and we do not plan to pay cash dividends in
the foreseeable future. We intend to retain our earnings, if any, for use in our
business. We further cannot assure you that you will receive a return on your
investment when you sell your shares or that you will not lose the entire amount
of your investment.
Our principal stockholders, officers and directors will own a significant voting
interest in our voting stock. Current directors and officers of eMagin
Corporation or their affiliates beneficially own a large percentage of our
outstanding common stock. If these shareholders were to vote together, they
could significantly influence the outcome of items that are submitted to a vote
of the shareholders including the election of our directors.
We have a staggered Board of Directors and other anti-takeover provisions, which
could inhibit potential investors or delay or prevent a change of control that
may favor you. Our Board of Directors is divided into three classes and our
Board 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
or separately, discourage potential acquisition proposals or delay or prevent a
change in control. In particular, our board of directors is authorized to issue
up to 10,000,000 shares of preferred stock (less any outstanding shares of
preferred stock) with rights and privileges that might be senior to our common
stock, without the consent of the holders of the common stock.
We cannot forecast our future performance. We cannot accurately forecast our
revenues because of our limited commercial operating history and because the
OLED microdisplay market is only beginning to emerge. We may experience
significant fluctuations in our quarterly operating results due to many factors,
which are outside our control. These factors include: fluctuation in demand and
orders for our products; timing or cost of future supply or equipment
deliveries; manufacturing capacity and yields; variations in product and process
development costs; expenses or operational disruptions resulting from
acquisitions; activities of our competitors; adequate working capital; and
general economic conditions. Due to these factors, we cannot anticipate with any
degree of certainty what our revenues, if any, will be in future periods. You
have limited historical financial data and operating results with which to
evaluate our business and our prospects. As a result, you should consider our
prospects in light of the expense, difficulties and delays frequently
encountered by early stage companies formed to pursue development of new
technologies.
19
Our share price is likely to be highly volatile which may result in substantial
losses for investors. Share price volatility may subject us to securities class
action litigation. Prices and trading volume for technology related stock has
been highly volatile. Accordingly, our stock prices are likely to also be highly
volatile. Shareholders may experience a decrease in the value of their common
stock regardless of our operating performance or prospects. In addition, the
trading price of our common stock could be subject to wide fluctuations in
response to: our perceived prospects; quarter to quarter variations in our
operating results; changes in earnings estimates or recommendations by
securities analysts and market perceptions of our operating results in relation
to those estimates or recommendations; changes in market valuation of companies
in the microdisplay systems industry; announcements of technological innovations
or new products by us or our competitors; economic, political, and issues
associated with our customers, suppliers, partners, accountants, governmental
agencies in the USA and elsewhere, or other parties; sales of shares by other
shareholders; and general conditions in the personal products industries or
stock market conditions. In the past, securities class action litigation has
often been instituted against companies following periods of volatility in their
share price. Those companies, like us, that are involved in rapidly changing
technology markets are particularly subject to this risk. This type of
litigation, if instituted against us, could result in substantial costs and
divert our management's attention and resources, which could cause serious harm
to our business.
20
ITEM 3: QUALITATIVE AND QUANTITATIVE Disclosures About
Market Risk
This Form 10-Q report contains forward-looking statements within the
meaning of the securities laws that are based on current expectations,
estimates, forecasts and projections about the industries in which eMagin
operates, management's beliefs, and assumptions made by management. In addition,
other written or oral statements, which constitute forward-looking statements,
may be made by or on behalf of eMagin. Words such as "expects", "anticipates",
"intends", "plans", "believes", "could", "seeks", "estimates", variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions, which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements, whether as a
result of new information, future events or otherwise. Factors that could cause
or contribute to such differences in outcomes and results, include, but are not
limited to, those discussed below.
Interest Rate Risk
Substantially all of the Company's cash equivalents and investment securities
are at fixed interest rates, and as such, the fair market value of these
instruments is affected by changes in market interest rates. As of June 30,
2002, all of the Company's cash equivalents and investment securities mature
within one year. Accordingly, we believe that the market risk arising from our
holdings of these financial instruments is immaterial. However, in the future,
we may invest in securities with maturities of more than one year, which may
carry greater interest rate risk.
Foreign Currency Exchange Risk
Presently, all of the Company's research and development contract payments are
made in U. S. dollars and, consequently, we believe we have no direct foreign
currency exchange rate risk. However, in the future, we may enter into contracts
in foreign currencies, which may subject the Company to foreign exchange rate
risk. We do not have any derivative instruments and do not presently engage in
hedging transactions.
21
PART II--OTHER INFORMATION
Item 5. Other Information
On April 3, 2002, the Company announced that it had received 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 US $1,000,000.
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.
99.2 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 Financial Officer.
(b) Reports on Form 8-K
The Company filed seven reports on form 8-K during the quarter ended June 30,
2002. Information regarding the items reported on is as follows:
DATE OF REPORT ITEM REPORTED ON
- -------------- -------------------
May 20, 2002 On Form 8K, under item 5, eMagin disclosed an extension of
The Travelers Company Convertible Promissory Note from May
20, 2002 to May 31, 2002.
May 28, 2002 On Form 8K, under item 5, eMagin disclosed an extension of
The Travelers Company Convertible Promissory Note from May
31, 2002 to June 5, 2002.
June 7, 2002 On Form 8K, under item 5, eMagin disclosed an extension of
The Travelers Company Convertible Promissory Note from June
7, 2002 to June 14, 2002.
June 14, 2002 On Form 8K, under item 5, eMagin disclosed an extension of
The Travelers Company Convertible Promissory Note from June
14, 2002 to June 17, 2002.
June 17, 2002 On Form 8K, under item 5, eMagin disclosed an extension of
The Travelers Company Convertible Promissory Note from June
17, 2002 to June 21, 2002.
June 18, 2002 On Form 8K, under item 5, eMagin disclosed an extension of
The Travelers Company Convertible Promissory Note from June
21, 2002 to August 30, 2002 and the issuance of 1,200,000
warrants having a five year term at an exercise price of
$0.5264 per share.
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June 28, 2002 On Form 8K, under item 5, eMagin disclosed that it had
entered into a Secured Note Purchase Agreement with an
investor whereby the investor agreed to lend eMagin $200,000
in exchange for a $200,000 11.00% per annum Secured
Promissory Note due on August 30, 2002 and Warrants
exercisable for three years to purchase 300,000 shares of
common stock.
July 29, 2002 On Form 8K, under item 5, eMagin disclosed that Arthur
Andersen LLP ("Arthur Andersen") was unable to perform
future audit services for eMagin, effectively terminating
eMagin's relationship with Arthur Andersen.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
eMAGIN CORPORATION
Dated: August 19, 2002 By: /s/Edward V. Flynn
---------------------------------
Edward V. Flynn
Chief Financial Officer, Treasurer
24