eMagin Corporation Form S-1
Registration
No. 333-
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
eMagin
Corporation
(Name
of
small business issuer in its charter)
Delaware
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3679
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56-1764501
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(State
or other Jurisdiction of
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(Primary
Standard Industrial
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(I.R.S.
Employer
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Incorporation
or Organization)
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Classification
Code Number)
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Identification
No.)
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10500
N.E. 8th
Street,
Suite 1400,
Bellevue,
WA 98004
(425)-749-3600
(Address
and telephone number of principal executive offices and principal place of
business)
K.C.
Park, Interim Chief Executive Officer
eMagin
Corporation
10500
N.E. 8th
Street,
Suite 1400,
Bellevue,
WA 98004
(425)-749-3600
(Name,
address and telephone number of agent for service)
Copies
to:
Richard
A. Friedman, Esq.
Sichenzia
Ross Friedman Ference LLP
61
Broadway, 32nd Flr.
New
York, New York 10006
(212)
930-9700
(212)
930-9725 (fax)
APPROXIMATE
DATE OF PROPOSED SALE TO THE PUBLIC:
From
time
to time after this Registration Statement becomes effective.
If
any
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. o
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
CALCULATION
OF REGISTRATION
FEE
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Title
of each class of securities to be
registered
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Proposed
maximum offering
price per share
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Proposed
maximum aggregate offering
price
(1)
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Amount
of registration fee
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Common
Stock, $0.001 par value per share |
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2,450,000 |
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$ |
1.50 |
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$ |
3,675,000 |
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$ |
113.00 |
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(1)
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Estimated
solely for purposes of calculating the registration fee in accordance
with
Rule 457(c) and Rule 457(g) under the Securities Act of 1933, using
the
average of the sale prices as reported on the OTCBB on July 23,
2007, which was $1.50 per
share.
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The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration shall
thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
eMagin
Corporation
2,450,000
SHARES OF
COMMON
STOCK
This
prospectus relates to the resale by the selling stockholders of up to 2,450,000
shares
of
our common stock, consisting of up to 1,000,000 shares
issuable upon the exercise of common stock purchase warrants and 1,450,000
shares
of
common stock issuable upon conversion of notes and accrued interest. The selling
stockholders may sell common stock from time to time in the principal market
on
which the stock is traded at the prevailing market price or in negotiated
transactions. We will pay the expenses of registering these shares.
Our
common stock is listed on the Over-The-Counter Bulletin Board under the symbol
“EMAN”. The last reported sales price per share of our common stock as reported
by the Over-The-Counter Bulletin Board on July 23, 2007, was $1.41.
Investing
in these securities involves significant risks. See “Risk Factors” beginning on
page 8.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this Prospectus
is
truthful or complete. Any representation to the contrary is a criminal offense.
You should read this prospectus carefully before you invest.
The
date
of this prospectus
is ,
2007.
The
information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by eMagin
Corporation with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities
and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
TABLE
OF CONTENTS
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Page
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Prospectus
Summary
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5
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Risk
Factors
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9
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Forward
Looking Statements
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14
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Use
of Proceeds
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14
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Market
For Equity and Related Stockholder Matters
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14
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Selected
Financial Data
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15
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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16
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Business
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24
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Description
of Property
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35
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Legal
Proceedings
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35
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Management
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36
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Executive
Compensation
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40
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Security
Ownership of Certain Beneficial Owners and Management
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46
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Indemnification
for Securities Act Liabilities
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48
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Plan
of Distribution
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48
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Description
of Securities
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50
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Selling
Stockholders
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50
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Transactions
With Related Persons, Promoters and Certain Control
Persons
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51
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Legal
Matters
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53
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Experts
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53
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Available
Information
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53
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Index
to Financial Statements
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54
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The
following summary highlights selected information contained in this prospectus.
This summary does not contain all the information you should consider before
investing in the securities. Before making an investment decision, you should
read the entire prospectus carefully, including the “risk factors” section, the
financial statements and the notes to the financial statements.
We
design, develop, manufacture, and market virtual imaging products which utilize
OLEDs, or organic light emitting diodes, OLED-on-silicon microdisplays and
related information technology solutions. We integrate OLED technology with
silicon chips to produce high-resolution microdisplays smaller than one-inch
diagonally which, when viewed through a magnifier, create virtual images that
appear comparable in size to that of a computer monitor or a large-screen
television. Our products enable our original equipment manufacturer, or OEM,
customers to develop and market improved or new electronic products. We believe
that virtual imaging will become an important way for increasingly mobile people
to have quick access to high resolution data, work, and experience new more
immersive forms of communications and entertainment.
Our
first
commercial product, the SVGA+ (Super Video Graphics Array of 800x600 picture
elements plus 52 added columns of data) OLED microdisplay was initially offered
for sampling in 2001, and our first SVGA-3D (Super Video Graphics Array plus
built-in stereovision capability) OLED microdisplay was shipped in early 2002.
These products are being applied or considered for near-eye and headset
applications in products such as entertainment and gaming headsets, handheld
Internet and telecommunication appliances, viewfinders, and wearable computers
to be manufactured by OEM customers for military, medical, industrial, and
consumer applications. We market our products globally.
In
2006
we introduced our OLED-XL technology, which provides longer luminance half
life
and enhanced efficiency of eMagin's SVGA+ and SVGA-3D product lines. We are
in
the process of completing development of 2 additional OLED microdisplays, namely
the SVGA 3DS (SVGA 3D shrink, a smaller format SVGA display with a new cell
architecture with embedded features) and an SXGA (1280 x 1024 picture
elements).
In
January 2005 we announced the world's first personal display system to combine
OLED technology with head-tracking and 3D stereovision, the Z800 3DVisor(tm),
which was first shipped in mid-2005. This product was recognized as a Digital
Living Class of 2005 Innovators, and received the Consumer Electronics
Association’s coveted Consumer Electronics Show (CES) 2006 Best of Innovation
Awards for the entire display category as well as a Design and Innovations
Award
for the electronic gaming category. In February 2007 the Z800 3DVisor, as
integrated in Chatten Associates’ head-aimed remote viewer, was recognized as
one of Advanced Imaging's Solutions of the Year.
We
believe that our OLED-on-silicon microdisplays offer a number of advantages
over
current liquid crystal microdisplays, including greatly increased system level
power efficiency, less weight and wider viewing angles. Using our active matrix
OLED technology, many computer and video electronic system functions can be
built directly into the OLED-on-silicon microdisplay, resulting in compact
systems with expected lower overall system costs relative to alternative
microdisplay technologies. We have developed our own technology to create high
performance OLED-on-silicon microdisplays and related optical systems and we
have licensed certain fundamental OLED and display technology from Eastman
Kodak.
As
the
first to exploit OLED technology for microdisplays, and with the support of
our
partners and the development of our intellectual property, we believe that
we
enjoy a significant advantage in the commercialization of this display
technology for virtual imaging. We believe we are the only company to sell
full-color active matrix small molecule OLED-on-silicon
microdisplays.
eMagin
Corporation was created through the merger of Fashion Dynamics Corporation
("FDC"), which was organized on January 23, 1996 under the laws of the State
of
Nevada and FED Corporation ("FED"), a developer and manufacturer of optical
systems and microdisplays for use in the electronics industry. FDC had no active
business operations other than to acquire an interest in a business. On March
16, 2000, FDC acquired FED. The merged company changed its name to eMagin
Corporation. Following the merger, the business conducted by eMagin is the
business conducted by FED prior to the merger.
Our
website is located at www.emagin.com
and our
e-commerce site is www.3dvisor.com.
The
contents of our website are not part of this Prospectus.
The
Offering
Common
stock offered by selling stockholders
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Up
to 2,450,000 shares, consisting of the following:
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·
1,450,000 shares of common stock issuable upon conversion of the
$500,000
Stillwater Notes at a conversion price of $0.35 per
share;
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·
up
to 1,000,000 shares of common stock issuable upon the exercise of
common
stock purchase warrants at an exercise price of $0.48 per
share.
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Common
Stock to be outstanding after the offering
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13,714,657
shares*
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Use
of proceeds
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We
will not receive any proceeds from the sale of the common stock,
however,
we will receive proceeds from the exercise of our
warrants.
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Over-The-Counter
Bulletin Board Symbol
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EMAN
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*
The
information above regarding the common stock to be outstanding after the
offering is based on 11,264,657 shares of the Company’s common stock outstanding
as of June 21, 2007.
Recent
Developments
Note
Purchase Agreement - April
2007
On
July
21, 2006, we entered into a Note Purchase Agreement (the “Stillwater Agreement”)
with Stillwater LLC (“Stillwater”) which provides for the purchase and sale of a
note in the principal amount of up to $500,000 (the “Stillwater Note”), together
with a warrant (the “Stillwater Warrant”) to purchase 70% of the number of
shares issuable upon conversion of the Stillwater Note, at the sole discretion
of the Company by delivery of a notice to Stillwater on December 14,
2006.
By
way of
amendment to the Stillwater Agreement, dated March 28, 2007 (the “Amendment”),
the Company and Stillwater agreed to certain amendments to the Stillwater
Agreement. Among other things, pursuant to the Amendment, the parties agreed
to
a new closing date, amended certain closing conditions and determined that
the
conversion price of the Stillwater Notes would be $0.35, subject to adjustment
as provided in the Stillwater Agreement, and that the exercise price of the
Stillwater Warrant would be $0.48 per share. If all of the Warrants are
exercised for cash, the Company would receive $480,000, which would be used
for working capital and other corporate purposes. There cannot be any assurances
that any of the warrants will be exercised. The closing for the sale of the
Stillwater Note and Stillwater Warrant was completed on April 9, 2007 and the
Company issued Stillwater the Stillwater Note in a 6% Senior Secured Convertible
Note in the principal amount of $500,000 and the Stillwater Warrant to purchase
1,000,000 shares of the Company’s common stock at an exercise price of $0.48 in
accordance with the terms of the Stillwater Agreement and Amendment. The
principal of the Stillwater Note would have become due in installments
as follows:
Principal
Amount
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Due
Date*
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$250,000
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July
21, 2007
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$250,000
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January
21, 2008
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*
If the
due date falls on a non-business day, the payment date will be the next business
day.
On
July,
23 2007, Stillwater elected to convert $252,166.50 of the Note representing
$250,000 of the principal amount of the Note due on July 21, 2007 and
$2,166.50 of accrued and unpaid interest. Stillwater will receive 720,476
shares
of the common stock at the conversion price of $0.35.
This
prospectus covers the resale by Stillwater of the above-referenced common stock
underlying the Stillwater Note and the Stillwater Warrant.
Amendment
Agreements - July 2007
On
July
21, 2006, we entered into several Note Purchase Agreements (the “Purchase
Agreements”) to sell to certain qualified institutional buyers and accredited
investors $5,990,000 in principal amount 6% Senior Secured Convertible Notes
due
July 21, 2007 and January 21, 2008 (the “Notes’), together with warrants (the
“Warrants”) to purchase 1,612,700 shares of the Company’s common stock, par
value $0.001 per share (the “Common Stock”) at $3.60 per share. On March 28,
2007, we entered into a purchase agreement to sell to Stillwater $500,000
in
Notes, together with Warrants to purchase 1,000,000 share of the Company’s
Common Stock at $0.48 per share. On July 23, 2007, we entered into Amendment
Agreements (the “Agreements”) with the holders of the Notes (each a “Holder” and
collectively, the “Holders”) and agreed to issue each Holder an amended and
restated Note (the “Amended Notes”) in the principal amount equal to the
principal amount outstanding as of July 23, 2007.
The
changes to the Amended Notes include the following:
· |
The
due date for the outstanding Notes (totaling after conversions an
aggregate of $6,020,000) has been extended to December 21, 2008;
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· |
The
Amended Notes are convertible into (i) 8,407,612 shares of the Company’s
common stock. The conversion price for $5,770,000 of principal was
revised
from $2.60 to $0.75 per share. The conversion price of $0.35 per
share for
$250,000 of principal was unchanged.
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· |
$3,010,000
of the Notes can convert into (ii) 3,010 shares of the Company’s newly
formed Series A Convertible Preferred Stock (the “Preferred”) at a
conversion price of $1,000 per share. The Preferred is convertible
into
common stock at the same price allowable by the Amended Notes,
subject to adjustment as provided for in the Certificate of
Designations;
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· |
The
Amended Notes adjust the exercise price from $3.60 to $1.03 per share
for
1,553,468 Warrants and require the issuance of 3,831,859 Warrants
exercisable at $1.03 per share pursuant to which the holders may
acquire
common stock, until July 21, 2011; and
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· |
As
of July 23, 2007 the interest rate was raised from 6% to
8%.
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The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”. The
statements of operations data for the years ended December 31, 2006, 2005,
and
2004 and the balance sheet data at December 31, 2006 and 2005 are derived from
our audited financial statements which are included in our Form 10-K filed
with
the Securities and Exchange Commission on April 2, 2007. The statements of
operations data for the years ended December 31, 2003 and 2002 and the balance
sheet data at December 31, 2004, 2003 and 2002 are derived from our audited
financial statements which are not included as part of the Form 10-K mentioned
above. The statements of operations data for the three months ended March 31,
2007 and 2006 and the balance sheet data at March 31, 2007 and 2006 are derived
from our condensed unaudited consolidated interim financial statements filed
with the Securities and Exchange Commission on May 15, 2007. The historical
results are not necessarily indicative of results to be expected for future
periods. The following information is presented in thousands, except per share
data.
Consolidated
Statements of Operations Data:
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Year
Ended December 31,
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Three
Months Ended March 31,
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2006
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2005
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2004
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2003
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2002
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2007
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2006
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(In
thousands, except per share data)
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Revenue
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$
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8,169
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|
$
|
3,745
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$
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3,593
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|
$
|
2,578
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|
$
|
2,128
|
|
$
|
3,609
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|
$
|
1,641
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|
Cost
of goods sold
|
|
|
11,359
|
|
|
10,219
|
|
|
5,966
|
|
|
5,141
|
|
|
—
|
|
|
3,115
|
|
|
3,029
|
|
Gross
(loss) profit
|
|
|
(3,190
|
)
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|
(6,474
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)
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|
(2,373
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)
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(2,563
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)
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2,128
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|
|
494
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|
(1,388
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)
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Operating
expenses:
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Research
and development
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4,406
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4,020
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898
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19
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7,255
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|
853
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1,238
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Stock
based compensation (1)
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|
—
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—
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88
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2,183
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1,647
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—
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—
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Selling,
general and administrative
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8,860
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6,316
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4,340
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3,529
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5,832
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|
2,221
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2,588
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Total
operating expenses
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|
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13,266
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|
|
10,336
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5,326
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5,731
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14,734
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|
|
3,074
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3,826
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Loss
from operations
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|
|
(16,456
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)
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|
(16,810
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)
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|
(7,699
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)
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|
(8,294
|
)
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|
(12,606
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)
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|
(2,580
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)
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|
(5,214
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)
|
Other
income (expense), net
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|
1,190
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|
|
282
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(5,012
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)
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3,571
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|
(2,306
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)
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(357
|
)
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|
54
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Net
loss
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|
$
|
(15,266
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)
|
$
|
(16,528
|
)
|
$
|
(12,711
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)
|
$
|
(4,723
|
)
|
$
|
(14,912
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)
|
$
|
(2,937
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)
|
$
|
(5,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
and diluted loss per share
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$
|
(1.52
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)
|
$
|
(1.94
|
)
|
$
|
(1.98
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)
|
$
|
(1.31
|
)
|
$
|
(5.07
|
)
|
$
|
(0.27
|
)
|
$
|
(0.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Shares
used in calculation of loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
10,058
|
|
|
8,541
|
|
|
6,428
|
|
|
3,599
|
|
|
2,941
|
|
|
10,792
|
|
|
10,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents amounts reported under APB 25.
|
Consolidated
Balance Sheet Data:
|
|
December
31,
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Cash
and cash equivalents
|
|
$
|
1,415
|
|
$
|
6,727
|
|
$
|
13,457
|
|
$
|
1,054
|
|
$
|
83
|
|
$
|
192
|
|
$
|
1,662
|
|
Working
(deficit) capital
|
|
|
(305
|
)
|
|
8,868
|
|
|
14,925
|
|
|
106
|
|
|
(13,602
|
)
|
|
(3,997
|
)
|
|
4,742
|
|
Total
assets
|
|
|
7,005
|
|
|
14,142
|
|
|
18,436
|
|
|
3,749
|
|
|
1,834
|
|
|
5,691
|
|
|
9,160
|
|
Long-term
obligations
|
|
|
2,229
|
|
|
56
|
|
|
22
|
|
|
6,161
|
|
|
228
|
|
|
89
|
|
|
47
|
|
Total
shareholders’ (deficit) equity
|
|
$
|
(1,164
|
)
|
$
|
10,401
|
|
$
|
16,447
|
|
$
|
(4,767
|
)
|
$
|
(12,808
|
)
|
$
|
(2,967
|
)
|
$
|
6,083
|
|
You
should carefully consider the following risk factors and the other information
included herein as well as the information included in other reports and filings
made with the SEC before investing in our common stock. If any of the following
risks actually occurs, our business, financial condition or results of
operations could be harmed. The trading price of our common stock could decline
due to any of these risks, and you may lose part or all of your
investment.
RISKS
RELATED TO OUR FINANCIAL RESULTS
We
have a history of losses since our inception and may incur losses for the
foreseeable future.
Our
accumulated losses are approximately $184 million as of March 31, 2007. 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
may not be able to execute our business plan and may not generate cash from
operations.
As
we
have reported, our business is currently experiencing significant revenue growth
during the quarter ended March 31, 2007. We anticipate that our cash
requirements to fund these requirements as well as other operating or investing
cash requirements over the next twelve months will be greater than our current
cash on hand. In the event that cash flow from operations is less than
anticipated and we are unable to secure additional funding to cover our
expenses, in order to preserve cash, we would be required to reduce expenditures
and effect reductions in our corporate infrastructure, either of which could
have a material adverse effect on our ability to continue our current level
of
operations. We
do not
currently have any financing commitments and no assurance can be given that
additional financing will be available, or if available, will be on acceptable
terms. If
we are
unable to obtain sufficient funds during the next twelve months we will further
reduce the size of our organization and may be forced to reduce and/or curtail
our production and operations, all of which could have a material adverse impact
on our business prospects.
Our
independent registered public accounting firm has expressed doubt about our
ability to continue as a going concern, which may hinder our ability to obtain
future financing.
Our
independent registered public accounting firm had issued a report dated March
27, 2007 in connection with the audit of the financial statements for the year
ended December 31, 2006, that included an explanatory paragraph expressing
substantial doubt as to our ability to continue as a going concern without
additional capital becoming available. Our
ability to continue as a going concern ultimately is dependent on our ability
to
generate a profit which is likely dependant upon our ability to obtain
additional equity or debt financing, attain further operating efficiencies
and,
ultimately, to achieve profitable operations. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. Our
condensed unaudited consolidated interim financial statements as of March 31,
2007 have also been prepared under the assumption that we will continue as
a
going concern.
RISKS
RELATED TO MANUFACTURING
The
manufacture of OLED -on-silicon
is new and OLED microdisplays
have not been produced in significant quantities.
If
we are
unable to produce our products in sufficient quantity, we will be unable to
maintain and attract new 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
currently manufacture our products on a single manufacturing line. If we
experience any significant disruption in the operation of our manufacturing
facility or a serious failure of a critical piece of equipment, we may be unable
to supply microdisplays to our customers. For this reason, some OEMs may also
be
reluctant to commit a broad line of products to our microdisplays without a
second production facility in place. However, we try to maintain product
inventory to fill the requirements under such circumstances. Interruptions
in
our manufacturing could be caused by manufacturing equipment problems, the
introduction of new equipment into the manufacturing process or delays in the
delivery of new manufacturing equipment. Lead-time for delivery of manufacturing
equipment can be extensive. No assurance can be given that we will not lose
potential sales or be unable to meet production orders due to production
interruptions in our manufacturing line. In order to meet the requirements
of
certain OEMs for multiple manufacturing sites, we will have to expend capital
to
secure additional sites and may not be able to manage multiple sites
successfully.
We
could experience manufacturing interruptions, delays, or inefficiencies if
we
are unable to timely and reliably procure components from single-sourced
suppliers.
We
maintain several single-source supplier relationships, either because
alternative sources are not available or the relationship is advantageous due
to
performance, quality, support, delivery, capacity, or price considerations.
If
the supply of a critical single-source material or component is delayed or
curtailed, we may not be able to ship the related product in desired quantities
and in a timely manner. Even where alternative sources of supply are available,
qualification of the alternative suppliers and establishment of reliable
supplies could result in delays and a possible loss of sales, which could harm
operating results.
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 the silicon integrated circuits on which we incorporate our OLED
technology. 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.
RISKS
RELATED TO OUR INTELLECTUAL PROPERTY
We
rely on our license agreement with Eastman Kodak for the development of our
products.
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 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 with whom we must compete.
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 for supplies and the subsequent
processing time, 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. Our competitive position could be damaged
if
one or more of our competitors’ products get to the market sooner than our
products. We cannot assure you that our product will get to market ahead of
our
competitors or that we will be able to compete successfully against current
and
future competition. The failure to do so would have a materially adverse effect
upon our business, operating results and financial condition.
Our
competitors have many advantages over us.
As
the
microdisplay market develops, we expect to experience intense competition from
numerous domestic and foreign companies including well-established corporations
possessing worldwide manufacturing and production facilities, greater name
recognition, larger retail bases and significantly greater financial, technical,
and marketing resources than us, as well as from emerging companies attempting
to obtain a share of the various markets in which our microdisplay products
have
the potential to compete. We cannot assure you that we will be able to compete
successfully against current and future competition, and the failure to do
so
would have a materially adverse effect upon our business, operating results
and
financial condition.
Our
products are subject to lengthy OEM development
periods.
We
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 nor is there
any
assurance that our costs can be reduced as quickly as any reduction in unit
prices. We may also attempt to offset the anticipated decrease in our average
selling price by introducing new products, increasing our sales volumes or
adjusting our product mix. If we fail to do so, our results of operations would
be materially and adversely affected.
RISKS
RELATED TO OUR BUSINESS
Our
success depends on attracting and retaining highly skilled and qualified
technical and consulting personnel.
We
must
hire highly skilled technical personnel as employees and as independent
contractors in order to develop our products. The competition for skilled
technical employees is intense and we may not be able to retain or recruit
such
personnel. We must compete with companies that possess greater financial and
other resources than we do, and that may be more attractive to potential
employees and contractors. To be competitive, we may have to increase the
compensation, bonuses, stock options and other fringe benefits offered to
employees in order to attract and retain such personnel. The costs of 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
success depends in a large part on the continuing service of key
personnel.
Changes
in management could have an adverse effect on our business. We are dependent
upon the active participation of several key management personnel and will
also
need to recruit additional management in order to expand according to our
business plan. The failure to attract and retain additional management or
personnel could have a material adverse effect on our operating results and
financial performance.
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 has primarily operated on the basis of short-term purchase orders.
We
are now receiving longer term purchase agreements, such as those which comprise
our approximately $6.4 million backlog, and procurement contracts, but we cannot
guarantee that we will continue to do so. Our current purchase agreements can
be
cancelled or revised without penalty, depending on the circumstances. We plan
production 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, our business may suffer and the value of your investment
in
eMagin may decline.
Our
business strategy may fail if we cannot continue to form strategic relationships
with companies that manufacture and use products that could incorporate our
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.
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 expose us to various risks, including management of a
multi-national organization, the complexities of complying with foreign laws
and
customs, political instability and the complexities of taxation in multiple
jurisdictions.
Our
business may expose us to product liability claims.
Our
business may expose us to potential product liability claims. Although no such
claims have been brought against us to date, and to our knowledge no such claim
is threatened or likely, we may face liability to product users for damages
resulting from the faulty design or manufacture of our products. While we plan
to maintain product liability insurance coverage, there can be no assurance
that
product liability claims will not exceed coverage limits, fall outside the
scope
of such coverage, or that such insurance will continue to be available at
commercially reasonable rates, if at all.
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 eMagin is
successful.
Sales
of
significant amounts of common stock in the public market, or the perception
that
such sales may occur, could materially affect the market price of our common
stock. These sales might also make it more difficult for us to sell equity
or
equity-related securities in the future at a time and price that we deem
appropriate. As of June 22, 2007, we have outstanding (i) options to purchase
789,277 shares and (ii) warrants to purchase 4,508,650 shares of common
stock.
We
have a staggered board of directors and other anti-takeover provisions, which
could inhibit potential investors or delay or prevent a change of control that
may favor you.
Our
Board
of Directors is divided into three classes and our Board members are elected
for
terms that are staggered. This could discourage the efforts by others to obtain
control of eMagin. Some of the provisions of our certificate of incorporation,
our bylaws and Delaware law could, together or separately, discourage potential
acquisition proposals or delay or prevent a change in control. In particular,
our board of directors is authorized to issue up to 10,000,000 shares of
preferred stock (less any outstanding shares of preferred stock) with rights
and
privileges that might be senior to our common stock, without the consent of
the
holders of the common stock.
FORWARD
LOOKING STATEMENTS
We
and
our representatives may from time to time make written or oral statements that
are “forward-looking,” including statements contained in this prospectus and
other filings with the Securities and Exchange Commission, reports to our
stockholders and news releases. All statements that express expectations,
estimates, forecasts or projections are forward-looking statements. In addition,
other written or oral statements which constitute forward-looking statements
may
be made by us or on our behalf. Words such as “expects,” “anticipates,”
“intends,” “plans,” “believes,” “seeks,” “estimates,” “projects,” “forecasts,”
“may,” “should,” variations of such words and similar expressions are intended
to identify forward-looking statements. These statements are not guarantees
of
future performance and involve risks, uncertainties, and assumptions which
are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in or suggested by such
forward-looking statements. Among the important factors on which such statements
are based are assumptions concerning our ability to obtain additional
funding,
our
ability to compete against our competitors, our ability to integrate our
acquisitions and our ability to attract and retain key employees.
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholders. We will not receive any proceeds
from the sale of shares of common stock in this offering. However, we will
receive the sale price of any common stock we sell to the selling stockholders
upon exercise of the warrants owned by the selling stockholders. We expect
to
use the proceeds received from the exercise of the warrants, if any, for general
working capital purposes.
We have
not declared or paid any dividends and do not currently expect to do so in
the
near future.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock is quoted on the OTC Bulletin Board under the symbol “EMAN.OB.” The
following table sets forth the high and low sales prices as reported by the
NASDAQ Bulletin Board Market for the periods indicated.
|
High
|
|
Low
|
Fiscal
2006
|
|
|
|
First
Quarter
|
$
|
7.10
|
|
$
|
4.60
|
Second
Quarter
|
$
|
5.70
|
|
$
|
2.50
|
Third
Quarter
|
$
|
3.80
|
|
$
|
1.80
|
Fourth
Quarter
|
$
|
2.50
|
|
$
|
1.01
|
Fiscal
2007
|
|
|
|
First
Quarter
|
$
|
1.08
|
|
$
|
0.26
|
Second
Quarter*
|
$
|
0.85
|
|
$
|
0.42
|
*Prices
as of June 19, 2007
As
of
June 22, 2007, we had 488 record holders of our common stock. The number of
record holders was determined from the records of our transfer agent and does
not include beneficial owners of common stock whose shares are held in the
names
of various security brokers, dealers, and registered clearing agencies. There
were no cash dividends declared or paid in fiscal years 2007, 2006 or
2005.
Dividends
We
have
never declared or paid cash dividends on our common stock. We currently
anticipate that we will retain all future earnings to fund the operation of
our
business and do not anticipate paying dividends on our common stock in the
foreseeable future.
The
following table summarizes our consolidated financial data for the periods
presented. We prepared this information using our consolidated financial
statements for each of the periods presented. The following selected
consolidated financial data should be read in conjunction with our consolidated
financial statements and related notes and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations”. The historical results are
not necessarily indicative of results to be expected for future periods.
Consolidated
Statements of Operations Data:
|
|
Year
Ended December 31,
|
|
Three
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2007
|
|
2006
|
|
|
|
(In
thousands, except per share data)
|
|
Revenue
|
|
$
|
8,169
|
|
$
|
3,745
|
|
$
|
3,593
|
|
$
|
2,578
|
|
$
|
2,128
|
|
$
|
3,609
|
|
$
|
1,641
|
|
Cost
of goods sold
|
|
|
11,359
|
|
|
10,219
|
|
|
5,966
|
|
|
5,141
|
|
|
—
|
|
|
3,115
|
|
|
3,029
|
|
Gross
(loss) profit
|
|
|
(3,190
|
)
|
|
(6,474
|
)
|
|
(2,373
|
)
|
|
(2,563
|
)
|
|
2,128
|
|
|
494
|
|
|
(1,388
|
)
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
4,406
|
|
|
4,020
|
|
|
898
|
|
|
19
|
|
|
7,255
|
|
|
853
|
|
|
1,238
|
|
Stock
based compensation (1)
|
|
|
—
|
|
|
—
|
|
|
88
|
|
|
2,183
|
|
|
1,647
|
|
|
—
|
|
|
—
|
|
Selling,
general and administrative
|
|
|
8,860
|
|
|
6,316
|
|
|
4,340
|
|
|
3,529
|
|
|
5,832
|
|
|
2,221
|
|
|
2,588
|
|
Total
operating expenses
|
|
|
13,266
|
|
|
10,336
|
|
|
5,326
|
|
|
5,731
|
|
|
14,734
|
|
|
3,074
|
|
|
3,826
|
|
Loss
from operations
|
|
|
(16,456
|
)
|
|
(16,810
|
)
|
|
(7,699
|
)
|
|
(8,294
|
)
|
|
(12,606
|
)
|
|
(2,580
|
)
|
|
(5,214
|
)
|
Other
income (expense), net
|
|
|
1,190
|
|
|
282
|
|
|
(5,012
|
)
|
|
3,571
|
|
|
(2,306
|
)
|
|
(357
|
)
|
|
54
|
|
Net
loss
|
|
$
|
(15,266
|
)
|
$
|
(16,528
|
)
|
$
|
(12,711
|
)
|
$
|
(4,723
|
)
|
$
|
(14,912
|
)
|
$
|
(2,937
|
)
|
$
|
(5,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(1.52
|
)
|
$
|
(1.94
|
)
|
$
|
(1.98
|
)
|
$
|
(1.31
|
)
|
$
|
(5.07
|
)
|
$
|
(0.27
|
)
|
$
|
(0.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in calculation of loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
10,058
|
|
|
8,541
|
|
|
6,428
|
|
|
3,599
|
|
|
2,941
|
|
|
10,792
|
|
|
10,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents amounts reported under APB 25.
|
Consolidated
Balance Sheet Data:
|
|
December
31,
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,415
|
|
$
|
6,727
|
|
$
|
13,457
|
|
$
|
1,054
|
|
$
|
83
|
|
$
|
192
|
|
$
|
1,662
|
|
Working
(deficit) capital
|
|
|
(305
|
)
|
|
8,868
|
|
|
14,925
|
|
|
106
|
|
|
(13,602
|
)
|
|
(3,997
|
)
|
|
4,742
|
|
Total
assets
|
|
|
7,005
|
|
|
14,142
|
|
|
18,436
|
|
|
3,749
|
|
|
1,834
|
|
|
5,691
|
|
|
9,160
|
|
Long-term
obligations
|
|
|
2,229
|
|
|
56
|
|
|
22
|
|
|
6,161
|
|
|
228
|
|
|
89
|
|
|
47
|
|
Total
shareholders’ (deficit) equity
|
|
$
|
(1,164
|
)
|
$
|
10,401
|
|
$
|
16,447
|
|
$
|
(4,767
|
)
|
$
|
(12,808
|
)
|
$
|
(2,967
|
)
|
$
|
6,083
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Introduction
The
following discussion should be read in conjunction with the Financial Statements
and Notes thereto. Our fiscal year ends December 31. This document contains
certain forward-looking statements including, among others, anticipated trends
in our financial condition and results of operations and our business strategy.
(See Part I, Item 1A, "Risk Factors "). These forward-looking statements are
based largely on our current expectations and are subject to a number of risks
and uncertainties. Actual results could differ materially from these
forward-looking statements. Important factors to consider in evaluating such
forward-looking statements include (i) changes in external factors or in our
internal budgeting process which might impact trends in our results of
operations; (ii) unanticipated working capital or other cash requirements;
(iii)
changes in our business strategy or an inability to execute our strategy due
to
unanticipated changes in the industries in which we operate; and (iv) various
competitive market factors that may prevent us from competing successfully
in
the marketplace.
Overview
We
design
and manufacture miniature displays, which we refer to as
OLED-on-silicon-microdisplays, and microdisplay modules for virtual imaging,
primarily for incorporation into the products of other manufacturers.
Microdisplays are typically smaller than many postage stamps, but when viewed
through a magnifier they can contain all of the information appearing on a
high-resolution personal computer screen. Our microdisplays use organic light
emitting diodes, or OLEDs, which emit light themselves when a current is passed
through the device. Our technology permits OLEDs to be coated onto silicon
chips
to produce high resolution OLED-on-silicon microdisplays.
We
believe that our OLED-on-silicon microdisplays offer a number of advantages
in
near to the eye applications over other current microdisplay technologies,
including lower power requirements, less weight, fast video speed without
flicker, and wider viewing angles. In addition, many computer and video
electronic system functions can be built directly into the OLED-on-silicon
microdisplay, resulting in compact systems with lower expected overall system
costs relative to alternate microdisplay technologies.
Since
our
inception in 1996 through 2004, we derived the majority of our revenues from
fees paid to us by the U.S. federal government, primarily under Department
of Commerce or Department of Defense dual use research and development
agreements. 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. From inception to December 31, 2006, we have
recognized an aggregate of approximately $19.5 million from sales of our
products, and as of December 31, 2006, we have a backlog of approximately $6.1
million in products ordered for delivery through December 31, 2007. 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 our Z800 3DVisor personal display systems. In
addition to marketing OLED-on-silicon microdisplays as components, we also
offer
microdisplays as an integrated package, which we call Microviewer that includes
a compact lens for viewing the microdisplay and electronic interfaces to convert
the signal from our customer's product into a viewable image on the
microdisplay. Through our operations in Washington State we are also developing
head-wearable displays that incorporate our Microviewer. All of our products
are
designed as commercial off the shelf (COTS) products which are suitable
for a wide range of markets and applications.
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
believe that we are the only company to demonstrate publicly and market
full-color small molecule COTS OLED-on-silicon microdisplays.
Company
History
Historically,
we had been a developmental stage company. As of January 1, 2003, we were no
longer classified as a development stage company. We have transitioned to
manufacturing our product and intend to significantly increase our marketing,
sales, and research and development efforts, and expand our operating
infrastructure. Currently, most of our operating expenses are fixed. If we
are
unable to generate significant revenues, our net losses in any given period
could be greater than expected.
Critical
Accounting Policies
The
Securities and Exchange Commission ("SEC") defines "critical accounting
policies" as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods. Not all of the accounting policies require management to
make difficult, subjective or complex judgments or estimates. However, the
following policies could be deemed to be critical within the SEC definition.
Revenue
and Cost Recognition
Revenue
on product sales is recognized when persuasive evidence of an arrangement
exists, such as when a purchase order or contract is received from the customer,
the price is fixed, title and risk of loss to the goods has changed and there
is
a reasonable assurance of collection of the sales proceeds. We obtain written
purchase authorizations from our customers for a specified amount of product
at
a specified price and consider delivery to have occurred at the time of
shipment. We record a reserve for estimated sales returns, which is reflected
as
a reduction of revenue at the time of revenue recognition. Products sold
directly to consumers have a fifteen day right of return. Revenue on consumer
products is deferred until the right of return has expired.
Revenues
from research and development activities relating to firm fixed-price contracts
are generally recognized on the percentage-of-completion method of accounting
as
costs are incurred (cost-to-cost basis). Revenues from research and development
activities relating to cost-plus-fee contracts include costs incurred plus
a
portion of estimated fees or profits based on the relationship of costs incurred
to total estimated costs. Contract costs include all direct material and labor
costs and an allocation of allowable indirect costs as defined by each contract,
as periodically adjusted to reflect revised agreed upon rates. These rates
are
subject to audit by the other party.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during
the
reporting period. Actual results could differ from those estimates. These
estimates and assumptions relate to recording net revenue, collectibility of
accounts receivable, useful lives and impairment of tangible and intangible
assets, accruals, income taxes, inventory realization and other factors.
Management has exercised reasonable judgment in deriving these estimates.
Consequently, a change in conditions could affect these estimates.
Fair
value of financial instruments
eMagin’s
cash, cash equivalents, accounts receivable, short-term investments and accounts
payable are stated at cost which appropriates fair value due to the short-term
nature of these instruments.
Stock-based
Compensation
eMagin
maintains several stock equity incentive plans. The 2005 Employee Stock Purchase
Plan (the “ESPP”) provides our employees with the opportunity to purchase common
stock through payroll deductions. Employees purchase stock semi-annually at
a
price that is 85% of the fair market value at certain plan-defined dates. As
of
March 31, 2007, the number of shares of common stock available for issuance
was
150,000. As of March 31, 2007, the plan had not been implemented.
The
2003
Stock Option Plan (the”2003 Plan”) provides for grants of shares of common stock
and options to purchase shares of common stock to employees, officers, directors
and consultants. Under the 2003 plan, an ISO grant is granted at the market
value of our common stock at the date of the grant and a non-ISO is granted
at a
price not to be less than 85% of the market value of the common stock. These
options have a term of up to 10 years and vest over a schedule determined by
the
Board of Directors, generally over a five year period. The amended 2003 Plan
provides for an annual increase of 3% of the diluted shares outstanding on
January 1 of each year for a period of 9 years which commenced January 1, 2005.
On
January 1, 2006, we adopted the provisions of Financial Accounting Standards
Board (“FASB”) Statement No. 123(R), “Share-Based Payment”, (“SFAS No. 123R”),
which requires us to recognize expense related to the fair value of our
share-based compensation issued to employees and directors. Prior to the January
1, 2006, we accounted for share-based compensation under the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25
("APB No. 25"), “Accounting for Stock Issued to Employees”,
and related interpretations, as permitted by FASB Statement No. 123, "Accounting
for Stock-Based Compensation" (“SFAS No. 123”). In accordance with APB No. 25,
no compensation cost was required to be recognized for options granted that
had
an exercise price equal to the market value of the underlying common stock
on
the date of grant.
We
adopted SFAS No. 123R using the modified prospective transition method and
consequently have not retroactively adjusted results for prior periods. Under
this transition method, compensation cost associated with stock options
includes: a) compensation cost for all share-based compensation granted prior
to, but not vested as of January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS No.123 and b) compensation
cost for all share-based compensation granted beginning January 1, 2006, based
on the grant-date fair value estimated in accordance with the original
provisions of SFAS No.123R. We use the straight-line method for recognizing
compensation expense. Compensation expense for awards under SFAS 123R includes
an estimate for forfeitures.
The
following table presents certain financial data as a percentage of total revenue
for the periods indicated. Our historical operating results are not necessarily
indicative of the results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
Three
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
Cost
of goods sold
|
|
139
|
|
273
|
|
166
|
|
86
|
|
185
|
|
Gross
(loss)/income
|
|
(39)
|
|
(173)
|
|
(66)
|
|
14
|
|
(85)
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
54
|
|
107
|
|
25
|
|
24
|
|
75
|
|
Stock
based compensation
|
|
—
|
|
—
|
|
2
|
|
|
|
|
|
Selling,
general and administrative
|
|
109
|
|
169
|
|
121
|
|
61
|
|
158
|
|
Total operating expenses
|
|
163
|
|
276
|
|
148
|
|
85
|
|
233
|
|
Loss
from operations
|
|
(202)
|
|
(449)
|
|
(214)
|
|
(71)
|
|
(318)
|
|
Other
income (expense)
|
|
15
|
|
8
|
|
(140)
|
|
(10)
|
|
3
|
|
Net
loss
|
|
(187)
|
%
|
(441)
|
%
|
(354)
|
%
|
(81)
|
%
|
(315)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents certain financial data for the periods indicated.
Our historical operating results are not necessarily indicative of the results
for any future period.
|
|
Year
ended December 31,
|
|
Three
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands, except per share data)
|
|
Revenue
|
|
$
|
8,169
|
|
$
|
3,745
|
|
$
|
3,593
|
|
$
|
3,609
|
|
$
|
1,641
|
|
Cost
of goods sold
|
|
|
11,359
|
|
|
10,219
|
|
|
5,966
|
|
|
3,115
|
|
|
3,029
|
|
Gross
(loss)/income
|
|
|
(3,190
|
)
|
|
(6,474
|
)
|
|
(2,373
|
)
|
|
494
|
|
|
(1,388
|
)
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
4,406
|
|
|
4,020
|
|
|
898
|
|
|
853
|
|
|
1,238
|
|
Stock
based compensation
|
|
|
—
|
|
|
—
|
|
|
88
|
|
|
—
|
|
|
—
|
|
Selling,
general and administrative
|
|
|
8,860
|
|
|
6,316
|
|
|
4,340
|
|
|
2,221
|
|
|
2,588
|
|
Total operating expenses
|
|
|
13,266
|
|
|
10,336
|
|
|
5,326
|
|
|
3,074
|
|
|
3,826
|
|
Loss
from operations
|
|
|
(16,456
|
)
|
|
(16,810
|
)
|
|
(7,699
|
)
|
|
(2,580
|
)
|
|
(5,214
|
)
|
Other
income (expense)
|
|
|
1,190
|
|
|
282
|
|
|
(5,012
|
)
|
|
(357
|
)
|
|
54
|
|
Net
loss
|
|
$
|
(15,266
|
)
|
$
|
(16,528
|
)
|
$
|
(12,711
|
)
|
$
|
(2,937
|
)
|
$
|
(5,160
|
)
|
Net
loss per share, basic and diluted
|
|
$
|
(1.52
|
)
|
$
|
(1.94
|
)
|
$
|
(1.98
|
)
|
$
|
(0.27
|
)
|
$
|
(0.52
|
)
|
Revenue.
Revenues
for the three months ended March 31, 2007 were approximately $3.6 million
as compared to approximately $1.6 million for the three months ended March
31,
2006, an increase of approximately 120%. Higher revenue for the 2007 three
month
period was primarily due to increased microdisplay demand and increased
availability of finished displays resulting from manufacturing improvements.
Cost
of Goods Sold.
Cost
of
goods sold includes direct and indirect costs associated with
production. Cost of goods sold for the three months ended March 31, 2007
was approximately $3.1 million as compared to approximately $3.0 million
for the three months ended March 31, 2006, an increase of approximately $0.1
million. The gross margin for the three months ended March 31, 2007
was approximately $0.5 million as compared to a gross loss of approximately
($1.4) million for the three months ended March 31, 2006. This translates to
a
gross margin of 14% for the three months ended March 31, 2007 as compared to
a
gross loss of (85%) for the three months ended March 31, 2006. The gross margin
improvement was attributed to fuller utilization of our fixed production
overhead due to higher unit volume.
Research
and Development Expenses. Research
and development expenses included salaries, development materials and other
costs specifically allocated to the development of new microdisplay products,
OLED materials and subsystems. Research and development expenses
for the three months ended March 31, 2007 were approximately $0.9
million as compared to $1.2 million for the three months ended March 31,
2006, a decrease of approximately $0.3 million. The decrease was due to a
reduction of research and development expenditures and personnel costs in the
quarter as compared to the quarter ended March 31, 2006.
Selling,
General and Administrative Expenses. 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, as well as other marketing and
administrative expenses. Selling, general and
administrative expenses for the three months ended March 31, 2007 were
approximately $2.2 million as compared to approximately $2.6 million for
the three months ended March 31, 2006. The decrease of approximately $0.4
million for the quarter ended March 31, 2007 was primarily related to a
reduction of marketing, tradeshow and personnel costs in the March 2007 quarter
as compared to the quarter ended March 31, 2006.
Other
Income (Expense).
Other
income, net consists primarily of interest income earned on investments,
interest expense related to the secured debentures, and gain from the change
in
the derivative liability. For the three months ended March 31, 2007, interest
income was approximately $16 thousand compared to approximately $54 thousand
for
the three months ended March 31, 2006. The decrease in interest income was
primarily a result of lower cash balances available for investment. For the
three months ended March 31, 2007, interest expense was $840 thousand as
compared to $0 for the three months ended March 31, 2006. The increase in
the interest expense was a result of interest associated with our notes payable
of $133 thousand, the amortization of the deferred costs associated with the
notes payable of $133 thousand, and the amortization of the debt discount of
$574 thousand. The gain from the change in the derivative liability was $460
thousand and $0, respectively, for the quarters ended March 31, 2007 and
2006.
Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005
Revenue.
Revenues
increased by approximately $4.5 million to a total of approximately $8.2 million
for the year ended December 31, 2006 from approximately $3.7 million for the
year ended December 31, 2005, representing an increase of 118%. This increase
was due to increased microdisplay demand and the broadening of our product
revenue through the sales of the Z800 3D Visor. Our contract revenue increased
approximately $150 thousand while our product revenue increased approximately
$4.3 million. Average price per unit for microdisplays was $386 in 2006 and
$372
in 2005.
Cost
of Goods Sold.
Cost
of
goods sold includes direct and indirect costs associated with production of
our
products. Cost of goods sold for the years ended December 31, 2006 and 2005
was
approximately $11.4 million and approximately $10.2, respectively, an increase
of $1.2 million. The gross loss was approximately ($3.2) million and
approximately ($6.5) million, respectively, for the years ended December 31,
2006 and 2005, respectively. The gross loss was (39%) for the year ended
December 31, 2006 as compared to (173%) for the year ended December 31, 2005.
The increase in cost of goods sold for the year ended December 31, 2006 was
attributed to higher materials usage to support increased production as well
as
approximately $343 thousand of stock compensation expense reflected in
accordance with SFAS No. 123R in 2006. The decrease in gross loss was
attributed to fuller utilization of our fixed production overhead due to higher
unit volume.
Research
and Development Expenses.
Research
and development expenses for the year ended December 31, 2006 were approximately
$4.4 million as compared to approximately $4.0 million for the year ended
December 31, 2005. The increase was primarily due to the stock-based
compensation expense of approximately $435 thousand in 2006.
Selling,
General and Administrative Expenses. General
and administrative expenses increased by approximately $2.9 million to a total
of approximately $8.9 million for the year ended December 31, 2006 from $6.3
million for the year ended December 31, 2005. The increase in selling, general
and administrative expenses was due primarily to stock-based compensation
expense of approximately $2.9 million and an increase in marketing expenses
related to our Z800 3DVisor.
Other
Income (Expense).
For
the year ended December 31, 2006, interest income was approximately $92 thousand
as compared to approximately $210 thousand for the year ended December 31,
2005.
The decrease in interest income was primarily a result of lower cash balances
available for investment. For the year ended December 31, 2006, interest expense
was approximately $1.3 million as compared to approximately $4 thousand for
the
year ended December 31, 2005. The increase in the interest expense was a result
of interest associated with our notes payable of approximately $124 thousand,
the amortization of the deferred costs associated with the notes payable of
approximately $221 thousand, and the amortization of the debt discount of
approximately $956 thousand. For the year ended December 31, 2006, income from
the change in the derivative liability was approximately $2.4 million as
compared to $0 for the year ended December 31, 2005.
Year
Ended December 31, 2005 Compared to Year Ended December 31,
2004
Revenues.
Revenues
increased by approximately $152 thousand to a total of approximately $3.7
million for the year ended December 31, 2005 from approximately $3.6 million
for
the year ended December 31, 2004, representing an increase of 4%. This increase
was due primarily to the broadening of our product offerings with the Z800
product and incremental revenue generated by these sales. Our contract revenue
decreased approximately $72 thousand while our product revenue increased
approximately $217 thousand. Average price per unit for microdisplays was $372
in 2005 and 2004.
Cost
of Goods Sold. Cost
of
goods sold includes direct and indirect costs associated with production of
our
products. In the year ended December 31, 2005 we recorded approximately $10.2
million in cost of goods sold which resulted in a gross loss of approximately
$6.5 million as compared to approximately $6.0 million in costs of goods sold
resulting in a gross loss of $2.4 million in the year ended December 31, 2004.
The production expenses for 2005 include labor costs related to operating two
full eight hour shifts and a partial third shift as compared to a single shift
in 2004. To accommodate longer operating hours and
expected higher product output in 2005 we initiated modifications to
our production process that resulted in less than 10% of our expected capacity
while underway. Stabilization of these modifications initially was
expected to be completed early in 2005, but took until the first quarter of
2006
to achieve. As a result gross margins in 2005 declined as compared to
2004 due to the higher labor costs.
Research
and Development Expenses. Gross
research and development expenses increased by approximately $3.1 million to
a
total of $4.0 million for the year ended December 31, 2005 from approximately
$0.9 million for the year ended December 31, 2004. The approximately $3.1
million increase in R&D expenses for the year ended December 31, 2005
reflects efforts to develop two new microdisplays and three visor products.
Selling,
General and Administrative Expenses. Selling,
general and administrative expenses increased by approximately $2.0 million
to a
total of approximately $6.3 million for the year ended December 31, 2005 from
approximately $4.3 million for the year ended December 31, 2004. The increase
in
selling, general and administrative expenses was due primarily to an increase
in
staff and personnel costs.
Other
Income (Expense).
Other
income, net, for 2005 was approximately $282 thousand and was comprised of
net
interest income of approximately $207 thousand; a gain on miscellaneous
equipment sales of approximately $38 thousand; and a gain on foreign exchange
of
approximately $37 thousand. Other expense, net, for 2004 was approximately
$5.0
million and was comprised of approximately $3.2 million of charges related
to
the value of the warrants issued to induce the holders of the approximately
$7.8
million in notes to agree to an early conversion of the notes into common stock;
approximately $1.6 million in charges related to the remaining unamortized
debt
discount and beneficial conversion feature associated with aforementioned notes;
and approximately $75 thousand in charges related to the write-off of the
remaining unamortized deferred financing costs
Since
our
inception, we have incurred significant losses and, as of March 31, 2007, we
had
an accumulated deficit of approximately $184 million. We have not yet achieved
profitability. As
we
have reported, our business experienced significant revenue growth during the
period ended March 31, 2007. This trend, if it continues, may result in higher
accounts receivable levels and may require increased production and/or higher
inventory levels both of which require working capital.
As
of
March 31, 2007, we had approximately $0.4 million of cash and investments as
compared to $1.6 million as of December 31, 2006. The decrease of approximately
$1.2 million was due primarily to cash used for operating
activities.
Sources
and Uses of Cash
|
|
Years
ended December 31,
|
|
Three
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2007
|
|
2006
|
|
Cash
flow data:
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
$
|
(10,389
|
)
|
$
|
(15,713
|
)
|
$
|
(8,297
|
)
|
$
|
(1,204
|
)
|
$
|
(5,000
|
)
|
Net
cash used in investing activities
|
|
|
(257
|
)
|
|
(1,072
|
)
|
|
(820
|
)
|
|
(4
|
)
|
|
(56
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
5,334
|
|
|
10,055
|
|
|
21,520
|
|
|
(15
|
)
|
|
(9
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(5,312
|
)
|
|
(6,730
|
)
|
|
(12,403
|
)
|
|
(1,223
|
)
|
|
(5,065
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
6,727
|
|
|
13,457
|
|
|
1,054
|
|
|
1,415
|
|
|
6,727
|
|
Cash
and cash equivalents, end of period
|
|
$
|
1,415
|
|
$
|
6,727
|
|
$
|
13,457
|
|
$
|
192
|
|
$
|
1,662
|
|
Cash
Flows from Operating Activities
Cash
used
in operating activities during the three months ended March 31, 2007 was
approximately $1.2 million as compared to cash used of approximately $5.0
million during the three months ended March 31, 2006. The decrease was
attributable to a reduction in net losses of approximately $2.2 million due
to
an increase in accounts payable of approximately $500,000 rather than a
reduction of $500,000 during the first quarter of 2006 and approximately
$600,000 of stock issued for services.
Cash
used
in operating activities was $10.4 million in 2006, $15.7 million in 2005 and
$8.3 million in 2004. For 2006, net cash used in operating activities was
approximately $10.4 million, primarily attributable to our net loss of
approximately $15.3 million. For 2005, net cash used by operating activities
was
approximately $15.7 million, primarily attributable to our net loss of
approximately $16.5 million. For 2004, net cash used in operating activities
was
$8.3 million, primarily attributable to our net loss of $12.7 million
principally offset by non-cash activities of a $5.1 million non-cash interest
related charge.
Cash
Flows from Investing Activities
Cash
used
in investing activities during the three months ended March 31, 2007 was
approximately $4 thousand as compared to approximately $56 thousand during
the
three months ended March 31, 2006. The reduction of cash used in investing
activities was primarily due to lower purchases of equipment.
Cash
used
in investing activities was $0.3 million in 2006, $1.1 million in 2005, and
$0.8
million in 2004. Investing activities for all years were capital expenditures.
Cash
Flows from Financing Activities
Cash
used
in financing activities during the three months ended March 31, 2007 was
approximately $15 thousand as compared to approximately $9 thousand during
the
three months ended March 31, 2006. The funds were used to make payments on
long-term debt and capital leases.
Cash
provided by financing activities was $5.3 million in 2006, $10.1 million in
2005, and $21.5 million in 2006. Net cash provided by financing activities
in
2006 was comprised primarily of approximately $5.4 million in proceeds from
debt
issuance and offset by payments on long-term debt and capitalized lease
obligations of approximately $55 thousand. Net cash provided by financing
activities during 2005 consisted primarily of approximately $8.4 million in
proceeds from the sale of common stock and approximately $1.6 million from
the
exercise of stock options and warrants. In 2004, the financing activities
included $16.4 million in proceeds from the sale of common stock and $5.1
million from the exercise of stock options and warrants.
Working
Capital and Capital Expenditure Needs
To
address our liquidity issues, we:
· |
finalized
an agreement with our note holders that defers the note payments
until
December 2008;
|
· |
are in
the process of finalizing an agreement that establishes a $2.5
million revolving credit line; and
|
· |
have
entered into an intellectual property agreement with Kodak where
we have
assigned Kodak the rights, title, and interest to a specific patent
and in
consideration, Kodak has waived the royalties for the first six months
of
2007, reduced the royalty payments by 50% for the second half of
2007 and
for the entire calendar year of 2008, and delayed the minimum royalty
payment until December 1st
for the years 2007 and 2008.
|
We
believe that these funds if available would be sufficient to fund our working
capital requirements over the next 12 months, however they would not be
sufficient to fund both working capital requirements and retirement of our
notes
payable. If we are unable to obtain sufficient funds we may be forced to reduce
and/or curtail our production and operations, all of which could have a material
adverse impact on our business prospects.
Contractual
Obligations
The
following chart describes the outstanding contractual obligations of eMagin
as
of December 31, 2006 (in thousands):
|
|
Payments
due by period
|
|
|
|
Total
|
|
1
Year
|
|
2-3
Years
|
|
4-5
Years
|
|
Capital
lease obligations
|
|
$
|
6
|
|
$
|
6
|
|
$
|
—
|
|
$
|
—
|
|
Operating
lease obligations
|
|
|
3,387
|
|
|
1,405
|
|
|
1,982
|
|
|
—
|
|
Purchase
obligations (a)
|
|
|
1,476
|
|
|
1,476
|
|
|
—
|
|
|
—
|
|
Other
long-term liabilities (b)
|
|
|
787
|
|
|
183
|
|
|
354
|
|
|
250
|
|
Total
|
|
$
|
5,656
|
|
$
|
3,070
|
|
$
|
2,336
|
|
$
|
250
|
|
(a)
The
majority of purchase orders outstanding contain no cancellation fees except
for
minor re-stocking fees.
(b)
This
amount represents the obligation for royalty payments, capitalized software
and
the New York Urban Development settlement.
Off-Balance
Sheet Arrangements
We
do not
have any off balance sheet arrangements that are reasonably likely to have
a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
Effect
of Recently Issued Accounting Pronouncements
The
Financial Accounting Standards Board (“FASB”) has issued interpretation No. 48,
“Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement
No. 109” (“FIN 48”), regarding accounting for, and disclosure of, uncertain tax
positions. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company adopted the provisions of FIN 48 on January 1, 2007.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
157”). SFAS 157 provides guidance for using fair value to measure assets and
liabilities. It also responds to investors’ requests for expanded information
about the extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS 157 applies whenever other standards require
(or
permit) assets or liabilities to be measured at fair value, and does not expand
the use of fair value in any new circumstances. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and is required to be adopted by the Company in the first quarter of 2008.
The
Company is evaluating the effect that the adoption of SFAS 157 will have on
its
consolidated results of operations and financial condition.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities: (“SFAS159”). SFAS159
allows
entities
the option to measure eligible financial instruments at fair value as of
specified dates. Such election, which may be applied on an instrument by
instrument basis, is typically irrevocable once elected. SFAS 159 is effective
for fiscal years beginning after November 15, 2007, and early application
is allowed under certain circumstances. The Company is currently evaluating
the
impact SFAS 159 will have on its consolidated financial position and results
of
operations.
Quantitative
and Qualitative Disclosures About Market Risk
Market
Rate Risk. We
are
exposed to market risk related to changes in interest rates and foreign currency
exchanges rates.
Interest
Rate Risk. We
hold
our assets in cash and cash equivalents. We do not hold derivative financial
instruments or equity securities.
Foreign
Currency Exchange Rate Risk. Our
revenue and expenses are denominated in U.S. dollars. We have conducted some
transactions in foreign currencies and expect to continue to do so; we do not
anticipate that foreign exchange gains or losses will be significant. We have
not engaged in foreign currency hedging to date.
Our
international business is subject to risks typical of international activity,
including, but not limited to, differing economic conditions; change in
political climates; differing tax structures; and other regulations and
restrictions. Accordingly, our future results could be impacted by changes
in
these or other factors.
· |
As
of July 23, 2007 the interest rate was raised from 6% to
8%.
|
BUSINESS
Recent
Developments
The
changes to the Amended Notes include the following:
· |
The
due date for the outstanding Notes (totaling after conversions an
aggregate of $6,020,000) has been extended to December 21, 2008;
|
· |
The
Amended Notes are convertible into (i) 8,407,612 shares of the Company’s
common stock. The conversion price for $5,770,000 of principal was
revised
from $2.60 to $.75 per share. The conversion price of $.35 per share
for
$250,000 of principal was unchanged.
|
· |
$3,010,000
of the Notes can convert into (ii) 3,010 shares of the Company’s newly
formed Series A Convertible Preferred Stock (the “Preferred”) at a
conversion price of $1,000 per share. The Preferred is convertible
into
common stock at the same price allowable by the Amended Notes,
subject to adjustment as provided for in the Certificate of
Designations;
|
· |
The
Amended Notes adjust the exercise price from $3.60 to $1.03 per share
for
1,553,468 Warrants and require the issuance of 3,831,859 Warrants
exercisable at $1.03 per share pursuant to which the holders may
acquire
common stock, until July 21, 2011; and
|
General
eMagin
Corporation designs, develops, manufactures, and markets virtual imaging
products which utilize OLEDs, or organic light emitting diodes, OLED-on-silicon
microdisplays and related information technology solutions. We integrate OLED
technology with silicon chips to produce high-resolution microdisplays smaller
than one-inch diagonally which, when viewed through a magnifier, create virtual
images that appear comparable in size to that of a computer monitor or a
large-screen television. Our products enable our original equipment
manufacturer, or OEM, customers to develop and market improved or new electronic
products. We believe that virtual imaging will become an important way for
increasingly mobile people to have quick access to high resolution data, work,
and experience new more immersive forms of communications and
entertainment.
Our
first
commercial product, the SVGA+ (Super Video Graphics Array of 800x600 picture
elements plus 52 added columns of data) OLED microdisplay was initially offered
for sampling in 2001, and our first SVGA-3D (Super Video Graphics Array plus
built-in stereovision capability) OLED microdisplay was shipped in early 2002.
These products are being applied or considered for near-eye and headset
applications in products such as entertainment and gaming headsets, handheld
Internet and telecommunication appliances, viewfinders, and wearable computers
to be manufactured by OEM customers for military, medical, industrial, and
consumer applications. All of our products are sold as commercial off the shelf
products (COTS) with no specialized features customized or developed for any
specific application or market. We market our products globally within the
limits of our products' EAR99 export classification.
In
2006
we introduced our OLED-XL technology, which provides longer luminance half
life
and enhanced efficiency of eMagin's SVGA+ and SVGA-3D product lines. We are
in
the process of completing development of 2 additional OLED microdisplays, namely
the SVGA-3DS (SVGA-3D shrink, a smaller format SVGA-3D display with a new cell
architecture with embedded features) and an SXGA (1280 x 1024 picture elements).
In
January 2005 we announced the world's first personal display system to combine
OLED technology with head-tracking and 3D stereovision, the Z800 3DVisor(tm),
which was first shipped in mid-2005. This product was recognized as a Digital
Living Class of 2005 Innovators, and received the Consumer Electronics
Association’s coveted Consumer Electronics Show (CES) 2006 Best of Innovation
Awards for the entire display category as well as a Design and Innovations
Award
for the electronic gaming category. In February 2007 the Z800 3DVisor, as
integrated in Chatten Associates’ head-aimed remote viewer, was recognized as
one of Advanced Imaging's Solutions of the Year.
We
believe that our OLED-on-silicon microdisplays offer a number of advantages
over
current liquid crystal microdisplays, including greatly increased system level
power efficiency, less weight and wider viewing angles. Using our active matrix
OLED technology, many computer and video electronic system functions can be
built directly into the OLED-on-silicon microdisplay, resulting in compact
systems with expected lower overall system costs relative to alternative
microdisplay technologies. We have developed our own technology to create high
performance OLED-on-silicon microdisplays and related optical systems and we
have licensed certain fundamental OLED and display technology from Eastman
Kodak.
As
the
first to exploit OLED technology for microdisplays, and with the support of
our
partners and the development of our intellectual property, we believe that
we
enjoy a significant advantage in the commercialization of this display
technology for virtual imaging. We believe we are the only company to sell
full-color active matrix small molecule COTS OLED-on-silicon
microdisplays.
eMagin
Corporation was created through the merger of Fashion Dynamics Corporation
("FDC"), which was organized on January 23, 1996 under the laws of the State
of
Nevada and FED Corporation ("FED"), a developer and manufacturer of optical
systems and microdisplays for use in the electronics industry. FDC had no active
business operations other than to acquire an interest in a business. On March
16, 2000, FDC acquired FED. The merged company changed its name to eMagin
Corporation. Following the merger, the business conducted by eMagin is the
business conducted by FED prior to the merger.
Our
website is located at www.emagin.com
and our
e-commerce site is www.3dvisor.com.
We make
available on our website, free of charge, our annual report on Forms 10K, our
proxy statement, our quarterly reports on Forms 10Q, our current reports on
Form
8K, and all amendments to such reports filed under the Securities and Exchange
Act, earnings press releases, and other business-related press releases. We
also
post on our website the charters of our Audit, Compensation, and Governance
and
Nominating committees, our Codes of Ethics and any amendments of or waiver
to
those codes of ethics, and other corporate governance materials recommended
by
the Securities and Exchange Commission as they occur.
Industry
Overview
A
recent
(February 2007) study by NanoMarkets (www.nanomarkets.net) predicts
the overall OLED market will approach $10.9 billion in 2010 and grow to $15.5
billion by 2014. These markets include various sizes devices for a range of
applications from cell phone size to viewfinder displays to televisions to
lighting. Displays in general are sold as independent products (such as TV
monitors) or as components of other systems (such as laptop computers). Our
products target one segment of the display industry, the near-eye, personal
display, which is viewed through a lens rather than directly, in comparison
to
desktop computer screens which are known as direct view displays.
Personal
displays, that is, near-eye systems based on microdisplays and optics, include
video headsets, camcorders, viewfinders and other portable devices.
Microdisplays are typically of such high resolution that they can be practically
viewed only with magnifying optics. Although microdisplays are typically
physically smaller than a postage stamp, they can provide a magnified viewing
area similar to that of a full-size computer screen. For example, when magnified
through a lens, a high-resolution 0.6-inch diagonal display can appear
comparable to a 19- to 21-inch computer screen at about 2 feet from the viewer
or a 60-inch TV screen at about 6 feet. The wearable display market, according
to DisplaySearch, is expected to grow to at least $153 million in 2010.
McLaughlin Consulting, in a report published December 2006, projects that,
with
effective marketing, the Personal Viewer market could reach nearly $1 billion
in
2010.
We
believe that the most significant driver of the longer term near-eye virtual
imaging microdisplay market is growing consumer demand for mobile access to
larger volumes of information and entertainment in smaller packages. This desire
for mobility has resulted in the development of near-eye microdisplay products
in two general categories: (i) an established market for electronic viewers
incorporated in products such as viewfinders for digital cameras and video
cameras which may potentially also be developed as personal viewers for cell
phones and (ii) an emerging market for headset-application platforms which
include accessories for mobile devices such as notebook and sub-notebook
computers, portable DVD systems, electronic games, and other entertainment,
and
wearable computers.
Until
now, near-eye virtual imaging microdisplay technologies have not simultaneously
met all of the requirements for high resolution, full color, low power
consumption, brightness, lifetime, size and cost which are required for
successful commercialization in OEM consumer products. We believe that our
OLED-on-silicon microdisplay product line meets these requirements better than
alternative products and will help to enable virtual imaging to emerge as an
important display industry segment.
Our
Approach: OLED-on-Silicon Microdisplays and Optics
There
are
two basic classes of organic light emitting diode, or OLED, technology, dubbed
single molecule or small molecule (monomer) and polymer. Our microdisplays
are
currently based upon active matrix molecular OLED technology, which we call
OLED-on-silicon because we build the displays directly on silicon chips. Our
OLED-on-silicon technology uniquely permits millions of individual low-voltage
light sources to be built on low-cost, silicon computer chips to produce single
color, white or full-color display arrays. OLED-on-silicon microdisplays offer
a
number of advantages over current liquid crystal microdisplays, including
increased brightness, lower power requirements, less weight and wider viewing
angles. Using our OLED technology, many computer and video electronic system
functions can be built directly into the silicon chip, under the OLED film,
resulting in very compact, integrated systems with lowered overall system costs
relative to alternative technologies.
We
have
developed our own proprietary and patented technology to create high performance
OLED-on-silicon microdisplays and related optical systems, and we license
fundamental OLED technology from Eastman Kodak. (See "Intellectual Property"
and
"Strategic Relationships"). We expect that the integration of our
OLED-on-silicon microdisplays into mobile electronic products will result in
lower overall system costs to our OEM customers.
We
believe that our OLED-on-silicon microdisplays will initiate a new generation
of
virtual imaging products that could have a profound impact on many industries.
Headsets providing virtual screens surrounding the user in a sphere of data
become a practical reality with our displays and a low cost head tracker.
Because our microdisplays generate and emit light, they have a wider viewing
angle than competing liquid crystal microdisplays, and because they have the
same high brightness at all forward viewing angles, our microdisplays permit
a
large field-of-view and superior optical image.
The
wider
viewing angle of our display results in the following superior optical
characteristics in comparison with LCDs and other near-eye display technologies:
·
|
the
user does not need to accurately position the head-wearable display
to the
eye;
|
·
|
the
image will change minimally with eye movement and appear more natural;
and
|
·
|
the
display can be placed further from the eye and not cut off part of
the
image.
|
In
addition, our OLED-on-silicon microdisplays offer faster response times and
use
much less power than competitive liquid crystal microdisplay systems. Our
subsystem-level power consumption is so low that two SVGA, full color, full
speed motion video computer displays can easily be run in stereovision off
the
power from a single USB port on a portable computer. Battery life is extended
and weight is greatly reduced in systems using our products.
Our
SVGA+
OLED microdisplay stores all the color and luminance value information at each
of the more than 1.5 million picture elements, or pixels, between refresh cycles
in the display array, eliminating the flicker or color breakup seen by most
other high-resolution microdisplay technologies. Even power efficient frame
rates as low as 30 Hz can usually be used effectively. Power consumption at
the
system level is expected to be the lowest of any full-color, full-video SVGA
resolution range, large view microdisplay on the market. The OLED's ability
to
emit light at wide angles allows customers to create large field of view
(approx. 40 degrees), wide image capture range images from very compact,
low-cost, one-piece optical systems. The display contains the majority of the
electronics required for connection to the RGB (red, green, blue signal) port
of
a portable computer imbedded in its silicon chip backplane, thereby eliminating
many other components required by other display technologies such as
digital-analog converters, application-specific integrated circuits (ASICs),
light sources, multiple optical elements, and other components. We believe
that
these features will enable our new class of microdisplay to potentially be
the
most compact, highest image quality, and lowest cost solution for high
resolution near-eye applications, once they are in full production.
We
have
also developed advanced lens technology which permits our OLED-on-silicon
microdisplays to provide large field of view images that can be viewed for
extended periods with reduced eye-fatigue. Molded plastic prism lenses have
been
developed to help our OEM customers obtain better quality, large area virtual
images using our displays at relatively low cost in comparison to alternate
approaches.
Our
Products
Our
first
commercial microdisplay products are based on our "SVGA series" OLED
microdisplays. We offer products utilizing both our proprietary “OLED” or
“OLED-XL” technologies, applied to the same integrated circuit base. We offer
our products to OEMs and other large volume buyers as both separate components,
integrated bundles coupled with our own optics, or full systems. We also offer
engineering support to enable customers to quickly integrate our products into
their own product development programs.
(1)
OLED Microdisplay Component Products
SVGA+
OLED Microdisplay (Super Video Graphics Array of 800x600 plus 52 added columns
of data).
Our 0.62
inch diagonal SVGA+ OLED microdisplays have a resolution of 852x600 triad pixels
(1.53 million picture elements). The product was dubbed "SVGA+" because it
has
52 more display columns than a standard SVGA display, permitting users to run
either (1) standard SVGA (800 x 600 pixels) to interface to the analog output
of
many portable computers or (2) 852 x 480, using all the data available from
a
DVD player in a 16:9 wide screen entertainment format. The display also has
an
internal NTSC monochrome video decoder for low power night vision systems.
SVGA-3D
OLED Microdisplay (Super Video Graphics Array plus built-in stereovision
capability).
Our 0.59
inch diagonal SVGA-3D OLED microdisplays have a resolution of 800x600 triad
pixels (1.44 million picture elements). A built-in circuit provides
compatibility with single channel frame sequential stereoscopic vision without
additional external components.
Microdisplays
Under Development.
We are
developing two additional display products, a smaller format (“shrink”) version
of our SVGA display, which will have 800 x 600 triad pixels and be 0.44 inch
diagonal and an SXGA OLED microdisplay with resolution of 1280x 1024 triad
pixels with diagonal size to be determined. The new products will include a
number of embedded features such as luminance and dimming ranges.
Lens
and Design Reference Kits.
We
offer a WF05 prism optic, with mounting brackets or combined with OLED
microdisplays to form an optic-display module. We provide Design Reference
Kits,
which include a microdisplay and associated electronics to help OEMs evaluate
our microdisplay products and to assist their efforts to build and test new
products incorporating our microdisplays.
Integrated
Modules. We
provide near-eye virtual imaging modules that incorporate our OLED-on-silicon
microdisplays with our lenses and electronic interfaces for integration into
OEM
products. We have shipped customized modules to several customers, some of
which
have incorporated our products into their own commercial products.
(2)
Personal Display Systems (Head-Wearable and Headset Systems)
Our
Z800
3DVisors(tm) give users the ability to work with their hands while
simultaneously viewing information or video on the display. The Z800 3DVisor
enables more versatile portable computing, using a 0.59-inch diagonal
microdisplay (SVGA-3D capable of delivering an image that appears comparable
to
that of a 19-inch monitor at 22 to 24 inches from the eye, or a 105 inch movie
screen at 12 foot distance. Our systems are currently being used for personal
entertainment, electronic gaming, and military training and simulation, among
other applications. We believe that personal display systems will fill the
increasing demand for instant data accessibility and privacy in mobile
workplaces. We sell the personal display systems to OEM systems and equipment
customers, through distributors, and through our e-commerce website,
www.3dvisor.com.
Our
Market Opportunity - Personal Display Systems Platforms, including Head-wearable
Displays
The
growth potential of our selected target market segments have been investigated
using information gathered from key industry market research firms, including
DisplaySearch, Frost and Sullivan, Fuji-Chimera, International Data Corporation,
Nikkei, SEMI, Stanford Resources-iSuppli and others. Such data was obtained
using published reports and data obtained at industry symposia. We have also
relied substantially on market projections obtained privately from industry
leaders, industry analysts, and potential customers.
The
virtual-imaging markets we are targeting include industrial, medical, military,
arcade games, 3-D CAD/Virtual Reality, and wearable computers. Within each
of
these market sectors, we believe that our microdisplays, when combined with
compact optic lenses, will become a key component for a number of mobile
electronic products.
Head-wearable
displays incorporate microdisplays mounted in or on eyeglasses, goggles, simple
headbands, helmets, or hardhats, and are often referred to as head-mounted
displays (HMDs) or headsets. Head-wearable displays may block out surroundings
for a fully immersive experience, or be designed as "see-through" or
"see-around" to the user's surroundings. They may contain one (monocular) or
two
(binocular) displays. Some of the increased current interest is due to
accelerating the timetable to adapt such systems to applications such as
night vision and fire and rescue applications. These have military, commercial,
and consumer applications.
Military
Military
demand for head-wearable displays is currently being met with microdisplay
technologies that we believe to be inferior to our OLED-on-silicon products.
The
new generation of soldiers will be highly mobile, and will often need to carry
highly computerized communications and surveillance equipment. To enable
interaction with the digital battlespace, rugged, yet lightweight and energy
efficient technology is required. Our OLED microdisplays demonstrate
performance characteristics important to military, industrial, and
commercial applications including high brightness and resolution, wide
dimming range and wider temperature operating ranges. The image does not suffer
from flicker or color breakup in vibrating environments, and the microdisplay's
wide viewing angle allows ease of viewing for long periods of time. The OLED's
very low power consumption reduces battery weight. Properly implemented, we
believe that head-mounted systems incorporating our microdisplays will increase
effectiveness by allowing hands-free operation and increasing situational
awareness with enough brightness to be used in daylight, yet controllable for
nighttime light security.
Our
OLED
microdisplays are COTS products that have been selected for a range of
defense-security applications, including a situational awareness HMD for the
US
Army Land Warrior programs, a handheld thermal imager for border patrol and
training, and simulation virtual monitors for Quantum 3D. The Land
Warrior, originally a core program in the Army's drive to digitize the
battlefield, is an integrated digital system that incorporates computerized
communication, navigation, targeting and protection systems for use by the
twenty-first century infantry soldier. Rockwell Collins, the principal
contractor for the US Army's Land Warrior HMD system, applied their respective
expertise in HMD and imaging technology to develop rugged, yet lightweight
and
energy efficient products meeting the requirements of tomorrow's
soldier. The future or timing of the U.S. Army Land Warrior program is not
known. Our COTS display is also used in Rockwell Collins’ commercially
available ProView SO35 Monocular HMD. Night Vision Equipment Corporation's
HelmetIR-50(TM), a lightweight, military helmet mounted thermal imager, which
provides hands-free operation and allows viewers to see through total darkness,
battlefield obscurants, and even foliage, is the first OLED-equipped product
to
be listed on the US Government's GSA schedule. Virtually Better Inc. has
incorporated our Z800 3DVisor into its “Virtual Iraq” medical treatment for
post-traumatic stress disorders. In addition, our displays have been
commercialized, or planned to be commercialized, by military systems integrators
including Insight Technologies, Elbit, Thales, Sagem, and Nivisys, among others.
We cannot assure that Government projects will remain on schedule, or be fully
implemented. Similar systems are of interest for other military applications
as
well as for related operations such as fire and rescue.
Commercial,
Industrial, and Medical
We
believe that a wide variety of commercial and industrial markets offer
significant opportunities due to increasing demand for instant data
accessibility in mobile workplaces. Some examples of microdisplay applications
include: immediate access to inventory such as parts, tools and equipment
availability; instant accessibility to maintenance or construction manuals;
routine quality assurance inspection; endoscopic surgery; and real-time viewing
of images and data for a variety of applications. As one potential example,
a
user wearing a HMD while using test equipment, such as oscilloscopes, can view
technical data while simultaneously probing printed circuit boards. Commercial
products in these sectors include Sage Technologies, Ltd.'s Helmet Vue (TM)
Thermal Imaging System and Liteye's 500, which incorporates IBM's wearable
PC
technology. VRmagic GmbH, a leading developer of virtual reality simulators,
is
using our OLED microdisplays in their EYESI(TM) Virtual Reality Surgical
Simulator, which provides real-time simulation of ophthalmic surgery, high
performance biomechanical tissue simulation, precision tracking, and realistic
stereo imaging. Sensics has incorporated our OLED displays in their immersive
SkyVizor (TM) virtual reality headset to serve as the "eyes" of the Robonaut,
a
humanoid robot being developed by NASA and Department of Defense agencies.
The
Robonaut system can work side by side with humans, or alone in high-risk
situations. Telepresence uses virtual reality display technology to visually
immerse the operator into the robot's workspace, facilitating operation and
interaction with the Robonaut, and potentially reducing the number of dangerous
space walks required of real astronauts.
Consumer
We
believe that our head-wearable display products will enhance the following
consumer products:
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Entertainment
and gaming video headset systems, which permit individuals to view
television, including HDTV, video CDs, DVDs and video games on virtual
large screens or stereovision in private without disturbing others.
We
believe that these new headset game systems can provide a game or
telepresence experience not otherwise practical using conventional
direct
view display technology. The advent of video iPods and the rapidly
increasing amount of downloadable content have accelerated the movement
toward portable video technology. At the same time, the desire for
larger
screen sizes while retaining the iPod portability has been referenced
in
many publications. Virtual imaging uniquely provides a large, high
resolution view in a small portable package, and we believe that
our OLED
on silicon technology is a best fit to help open this market.
|
·
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Notebook
computers, which can use head-wearable devices to reduce power
requirements as well as expand the apparent screen size and increase
privacy. Current notebook computers do not use microdisplays. Our
products
can apply not only to new models of notebook computers, but also
as
aftermarket attachments to older notebooks still in use. The display
can
be easily used as a second monitor on notebook computers for ease
of
editing multiple documents to provide multiple screens or for data
privacy
while traveling. It can also be used to provide larger screen capability
for viewing spreadsheets or complex computer aided design (CAD) files.
We
expect to market our head-wearable displays to be used as plug-in
peripherals to be compatible with most notebook computers. We believe
that
the SVGA-3D microdisplay is well suited for most portable PC headsets.
Our
microdisplays can be operated using the USB power source of most
portable
computers. This eliminates added power supplies, batteries, and rechargers
and reduces system complexity and cost.
|
·
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Handheld
personal computers, whose small, direct view screens are often
limitations, but which are now capable of running software applications
that would benefit from a larger display. Microdisplays can be built
into
handheld computers to display more information content on virtual
screens
without forfeiting portability or adding the cost a larger direct
view
screen. Microdisplays are not currently used in this market. We believe
that GPS viewers and other novel products are likely to develop as
our
displays become more available.
|
The
combination of power efficiency, high resolution, low systems cost, brightness
and compact size offered by our OLED-on-silicon microdisplays has not been
made
available to makers and integrators of existing entertainment and gaming video
headset systems, notebook computers and handheld computers. We believe that
our
microdisplays will propel the growth of new products and applications such
as
lightweight wearable computer systems.
Our
Strategy
Our
strategy is to establish and maintain a leadership position as a worldwide
supplier of microdisplays and virtual imaging technology solutions for
applications in high growth segments of the electronics industry by capitalizing
on our leadership in both OLED-on-silicon technology and microdisplay lens
technology. We aim to provide microdisplay and complimentary accessories to
enable OEM customers to develop and manufacture new and enhanced electronic
products. Some key elements of our strategy to achieve these objectives include
the following:
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|
Leverage
our superior technology to establish a leading market position. As
the
first to exploit OLED-on-silicon microdisplays, we believe that we
enjoy a
significant advantage in bringing this technology to market.
|
·
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Optimize
manufacturing efficiencies by outsourcing while protecting proprietary
processes. We outsource certain portions of microdisplay production,
such
as chip fabrication, to minimize both our costs and time to market.
We
intend to retain the OLED application and OLED sealing processes
in-house.
We believe that these areas are where we have a core competency and
manufacturing expertise. We also believe that by keeping these processes
under tight control we can better protect our proprietary technology
and
process know-how. This strategy will also enhance our ability to
continue
to optimize and customize processes and devices to meet customer
needs. By
performing the processes in-house we can continue to directly make
improvements in the processes, which will improve device performance.
We
also retain the ability to customize certain aspects such as color
balance, which is known as chromaticity, as well as specialized boards
or
interfaces, and to adjust other parameters at the customer's request.
In
the area of lenses and head-wearable displays, we intend to focus
on
design and development, while working with third parties for the
manufacture and distribution of finished products. We intend to prototype
new optical systems, provide customization of optical systems, and
manufacture limited volumes, but we intend to outsource high volume
manufacturing operations. There are numerous companies that provide
these
outsource services.
|
·
|
Build
and maintain strong internal design capabilities. As more circuitry
is
added to OLED-on-silicon devices, the cost of the end product using
the
display can be decreased; therefore integrated circuit design capability
will become increasingly important to us. To meet these requirements,
we
utilize in-house design capabilities supplemented by outsourced design
services. Building and maintaining this capacity will allow us to
reduce
engineering costs, accelerate the design process and enhance design
accuracy to respond to our customers' needs as new markets develop.
In
addition, we intend to maintain a product design staff capable of
rapidly
developing prototype products for our customers and strategic partners.
Contracting third party design support to meet demand and for specialized
design skills will also remain a part of our overall long term strategy.
|
Our
Strategic Relationships
Strategic
relationships have been an important part of our research and development
efforts to date and are an integral part of our plans for commercial product
launch. We have forged strategic relationships with major OEMs and strategic
suppliers. We believe that strategic relationships allow us to better determine
the demands of the marketplace and, as a result, allow us to focus our future
research and development activities to better meet our customer's requirements.
Moreover, we expect to provide microdisplays and Microviewers (TM) to some
of
these partners, thereby taking advantage of established distribution channels
for our products.
Eastman
Kodak (“Kodak”) is a technology partner in OLED development, OLED materials, and
a potential future customer for both specialty market display systems and
consumer market microdisplays. We license Kodak's OLED and optics technology
portfolio. We have a nonexclusive; perpetual, worldwide license to use Kodak
patented OLED technology and associated intellectual property in the
development, use, manufacture, import and sale of microdisplays. The license
covers emissive active matrix microdisplays with a diagonal size of less than
2
inches for all OLED display technology previously developed by Kodak. An annual
minimum royalty is paid at the beginning of each calendar year and is fully
creditable against the royalties we are obligated to pay based on net sales
throughout the year. Effective
May 30, 2007, Kodak and eMagin entered into an intellectual property agreement
where eMagin has assigned Kodak the rights, title, and interest to a specific
patent and in consideration, Kodak has waived the royalties for the first six
months of 2007, and reduced the royalty payments by 50% for the second half
of
2007 and for the entire calendar year of 2008. In addition, the minimum royalty
payment is delayed until December 1st
for the
years 2007 and 2008. Kodak and eMagin have engaged in numerous discussions
regarding potential product applications for eMagin's microdisplays by Eastman
Kodak.
We
are
working cooperatively with the US Army, US Navy, and with several military
system integrators to further characterize operation of our displays
in military and the other demanding environments.
We
are a
member of the United States Display Consortium, a cooperative agency of display
and related technology manufacturers whose charter is to support continued
progress of the display industry. We are currently partnering with the
University of Michigan to develop advanced display process via a
government-sponsored research program. We intend to continue to establish
additional strategic relationships in the future.
Our
Technology Platforms
OLED-on-Silicon
Technology
Scientists
working at Eastman Kodak invented OLEDs in the early 1980s. OLEDs are thin
films
of stable organic materials that emit light of various colors when a voltage
is
impressed across them. OLEDs are emissive devices, which mean they create their
own light, as opposed to liquid crystal displays, which require a separate
light
source. As a result, OLED devices use less power and can be capable of higher
brightness and fuller color than liquid crystal microdisplays. Because the
light
they emit is Lambertian, which means that it appears equally bright from most
forward directions, a moderate movement in the eye does not change the image
brightness or color as it does in existing technologies. OLED films may be
coated on computer chips, permitting millions of individual low-voltage light
sources to be built on silicon integrated circuits to produce single color,
white or full-color display arrays. Many computer and video electronic system
functions can be built directly into a silicon integrated circuit as part of
the
OLED display, resulting in an ultra-compact system. We believe these features,
together with the well-established silicon integrated circuit fabrication
technology of the semiconductor industry, make our OLED-on-silicon microdisplays
attractive for numerous applications.
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. Eastman Kodak provides OLED technology
and we provide additional technology advancements that have enabled us to coat
the silicon integrated circuits with OLEDs.
We
have
developed numerous and significant enhancements to OLED technology as well
as
key silicon circuit designs to effectively incorporate the OLED film on a
silicon integrated circuit. For example, we have developed a unique,
top-emitting structure for our OLED-on-silicon devices that enables OLED
displays to be built on opaque silicon integrated circuits rather than only
on
glass. Our OLED devices can emit full visible spectrum light that can be
isolated with color filters to create full color images. Our microdisplay
prototypes have a brightness that can be greater than that of a typical notebook
computer and can have a potential useful life of over 50,000 operating hours,
in
certain applications. New materials and device improvements in development
offer
future potential for even better performance for brightness, efficiency, and
lifespan. Additionally, we have invested considerable work over several years
to
develop unique electronics control and drive designs for OLED-on-silicon
microdisplays.
In
addition to our OLED-on-silicon technology, we have developed compact optic
and
lens enhancements which, when coupled with the microdisplay, provide the high
quality large screen appearance that we believe a large proportion of the
marketplace demands.
Advantages
of OLED Technology
We
believe that our OLED-on-silicon technology provides significant advantages
over
existing solutions in our targeted microdisplay markets. We believe these key
advantages will include:
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Low
manufacturing cost;
|
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Low
cost system solutions;
|
·
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Wide
angle light emission resulting in large apparent screen size;
|
·
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Low
power consumption for improved battery life and longer system life;
|
·
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High
brightness for improved viewing;
|
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High-speed
performance resulting in clear video images; and
|
·
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Wide
operating temperature range;
|
Low
manufacturing cost. Many
OLED-on-silicon microdisplays can be built on an 8-inch silicon wafer using
existing automated OLED and color filter processing tools. The level of
automation used lowers labor costs. Only a minute amount of OLED material is
used in each OLED-on-silicon microdisplay so that material costs, other than
the
integrated circuit itself, are small. The number of displays per silicon wafer
may be higher on OLEDs than on liquid crystal displays, or LCDs, because OLEDs
do not require a space-wasting perimeter seal band. Expensive transparent wafers
with CMOS silicon laminated onto quartz are not required for OLED microdisplays,
as standard CMOS chips may be used as backplanes.
Low
cost systems solutions. In
general, an OEM using OLED-on-silicon microdisplays will not need to purchase
and incorporate lighting assemblies, color converter related Applications
Specific Integrated Circuits, or ASICs, or beam splitter lenses as is the case
in liquid crystal microdisplays, which also require illumination. Many important
display-related system functions can be incorporated into an OLED-on-silicon
microdisplay, reducing the size and cost of the system. Non-polarized light
from
OLEDs permit lenses for many OLED-on-silicon applications that are made of
a
single piece of molded plastic, which reduces size, weight and assembly cost
when compared to the multipiece lens systems used for liquid crystal
microdisplays. System cost relative to liquid crystal and liquid crystal on
silicon, or LCOS, competitive products is thus reduced. Because our displays
are
power efficient, they typically require less power at the system level than
other display technologies at a given display size and brightness.
Wide-angle
light emission simplifies optics for large apparent screen size.
OLEDs
emit light at most forward directions from each pixel. This permits the display
to be placed close to the lens in compact optical systems. It also provides
the
added benefit of less angular dependence on the image quality relative to pupil
and eye position when showing a large field of view, unlike reflective LCOS
microdisplays. This results in less eye fatigue and makes it relatively easy
to
low power consumption for improved battery life and longer system life. OLEDs
emit light rather than transmitting it, so no power-consuming backlight or
front
light, as required for liquid crystal displays, is required. OLEDs can be energy
efficient because of their high efficiency light generation. Furthermore, OLEDs
conserve power by powering only those pixels that are on while liquid crystal
on
silicon requires light at all pixels all the time. Most optical systems used
for
our OLEDs are highly efficient, permitting over 80% of the light to reach the
eye, whereas reflective technologies such as liquid crystal on silicon require
multiple beam splitters to get light to the display, and then into the optical
system. This results in typically less than 25% light throughput efficiency
in
reflective microdisplay systems. Most important, we do not need a power-hungry
video frame buffer, as required in liquid crystal frame-sequential color
systems. Battery life can therefore be extended.
High
brightness for improved viewing. The
OLED
can be operated over a large luminance range without loss of gray level control,
permitting the displays to be used in a range of dark environments to very
bright ambient applications for a variety of applications including military
and
industrial simulation and situation awareness.
High-speed
performance resulting in clear video image. OLEDs
switch much more rapidly than liquid crystals or most cathode ray tubes, or
CRTs. This results in smear-free video rate imagery and provides improved image
quality for DVD playback applications. This eliminates visible image smear
and
makes practicable three-dimensional stereo imaging using a split frame rate.
This advantage of our OLED-on-silicon is very important for 3-D stereovision
gaming applications.
Flicker-free
and no color breakup. Because
the OLED-on-silicon stores brightness and color information at each pixel,
the
display can be run with no noticeable flicker and no color sequential breakup,
even at low refresh rates. A lower refresh rate not only helps reduce power,
but
it also facilitates system integration. Color sequential breakup occurs in
systems such as liquid crystal on silicon and some liquid crystal display
microdisplays when red, green and blue frames are sequentially imaged in time
for the eye to combine. Since the different color screens occur at different
times, movement of the eye due to vibration or just fast pupil movement can
create color bands at each dark-light edge, making the image unpleasant to
view
and making text difficult to read. For example, the liquid crystal on silicon
display needs to run at least three times the "normal" frame rate or speed
to
produce color sequential images, which wastes power and makes for a difficult
technological challenge as display resolutions increase.
Wide
operating temperature range.
Our
OLEDs offer much less temperature sensitivity at both high and low temperatures
than LCDs. LCDs are sluggish or non-operative much below freezing unless heaters
are added and lose contrast above 50 degrees Celsius, while our OLEDs turn
on
instantly and can operate between -40 degrees Celsius and 65 degrees
Celsius. This is an important characteristic for many portable products that
may
be used outdoors in many varying environmental conditions.
Complementary
lens and system technologies.
We have
developed a wide range of technologies which complement our core OLED and lens
technologies and which will enhance our competitive position in the microdisplay
and head-wearable display markets. These include:
Lens
technology.
High
quality, large view lenses with a wide range for eye positioning are essential
for using our displays in near-eye systems. We have developed advanced lens
technology for microdisplays and personal head-wearable display systems and
hold
key patents in these areas. Our lens technology permits our OLED-on-silicon
microdisplays to provide large field of view images that can be viewed for
extended periods with reduced eye-fatigue. We have engaged a firm to manufacture
our lenses in order to provide them in larger quantities to our customers and
are using them in our own personal display systems.
We
believe that the key advantages of our lens technology include:
·
|
Can
be very low cost, with minimal assembly. A one piece, molded plastic
optic
attached to the microdisplay has been introduced and may potentially
serve
consumer end-product markets. Since our process is plastic molding,
our
per unit production costs are low;
|
·
|
Allows
a compact and lightweight lens system that can greatly magnify a
microdisplay to produce a large field of view. For example, our WF05
prism
lens, in combination with our SVGA OLED microdisplay, provides a
virtual
view equivalent to that of a 105-inch diagonal display viewed at
12 feet;
|
·
|
Can
use single-piece molded microdisplay lenses to permit high light
throughput making the display image brighter or permitting the use
of less
power for an acceptable brightness;
|
·
|
Can
be designed to provide focusing to enable users with various eyesight
qualities to view images clearly; and
|
·
|
Can
optionally provide focal plane adjustment for simultaneous focusing
of
computer images and real world objects. For example, this characteristic
is beneficial for word processing or spreadsheet applications where
a
person is typing data in from reference material. This feature can
make it
easier for people with moderately poor accommodation to use a
head-wearable display as a portable computer-viewing accessory.
|
Personal
display system technology.
We have
developed ergonomic technologies that make head-wearable displays easier to
use
in a wide variety of applications. For example, the use of our patented
rotatable Eyeblocker(TM) provides a sharp image without requiring most users
to
squint. The Eyeblocker can also be moved to create an effective see-through
appearance. To our knowledge, we have made the lightest weight, high-resolution
head-wearable display with an over 35 degree diagonal field of view ever
publicly demonstrated. We have also incorporated low cost, small size, high
speed headtrackers to further enhance game and telepresence applications.
Sales
and Marketing
We
primarily provide display components for OEMs to incorporate into their branded
products and sell through their own well-established distribution channels.
In
addition, we market head-wearable displays directly to various vertical market
channels, such as medical, industrial, and government customers. A typical
buyer
is a manufacturer of a product requiring a specific resolution of visual display
or viewfinder for insertion into a product such as a portable DVD headset,
a
PC-gaming headset, or an instrument. Our products are all commercial off the
shelf (COTS) which are not specifically developed or customized for a
specific application, and which are suitable for a wide range of
markets.
We
market
our products in North America, Asia, and Europe primarily through direct
technical sales from our headquarters. Regular purchase orders are processed
by
our customer service coordinators and technical questions related to product
purchases or product applications are processed by our technical support team.
As a market-driven company, we assess customer needs both quantitatively and
qualitatively, through market research and direct communications. Because our
microdisplays are the main functional component that defines many of our
customers' end products, we work closely with potential customers to define
our
products to optimize the final design, typically on a senior
engineer-to-engineer basis. Our personal display systems are sold through select
resellers and on-line through our e-commerce site, www.3dvisor.com,
and via
www.amazon.com, and www.pcmall.com.
We
identify companies with end products and applications for which we believe
that
our products will provide a system level solution and for which our products
can
be a key differentiator. We target both market leaders and select early adopter
companies; their acceptance validates our technology and approach in the market.
We believe successful marketing will require relationships with recognized
consumer brand companies.
Near
term
sales efforts for OLED microdisplays have been focused on our military,
industrial, medical and consumer customers. We have received production
orders and design wins for both the SVGA+ and SVGA 3D displays. To date, we
have
shipped products and evaluation kits to more than 200 OEM customers. An OEM
design cycle typically requires between 6 and 36 months, depending on the
uniqueness of the market and the complexity of the end product. New product
development may require several design iterations prior to commercialization.
Some of our initial customers have completed their initial evaluation cycle
and
we are now receiving follow-on orders and notification of product purchase
decisions. (See "Our Market Opportunity: Military; Commercial, Industrial,
and Medical; and Consumer")
Customers
Customers
for our products include both large multinational and smaller OEMs. We maintain
relationships with OEMs in a diverse range of industries encompassing the
military, industrial, medical, and consumer market sectors. During 2006, 59%
of
our net revenue was to firms based in the United States and 41% was to
international firms, compared to 49% domestic revenue and 51% international
revenue during 2005. In 2006, we had 5 customers that accounted for more than
68% of our total revenue. In 2006, we had one customer that accounted for 13%
of
its total revenues as compared to 2005, where we had no customers that accounted
for more than 10% of our total revenue.
Backlog
As
of
June 19, 2007, we had a backlog of approximately $ 6.4 million for purchases
through December 31, 2007. This backlog consists of purchase orders and purchase
agreements but does not include expected revenue from our 2 military government
R&D contracts of approximately $2 million, expected NRE (non-recurring
engineering) programs under development, or regular run rate orders from new
or
existing OEM customer orders.
The
majority of our backlog consists of purchase agreements for delivery over the
next 12 months. Most purchase orders are subject to rescheduling or cancellation
by the customer with no or limited penalties. Because of the possibility of
customer changes in delivery schedules or cancellations and potential delays
in
product shipments, our backlog as of a particular date may not be indicative
of
net sales for any succeeding period. Some customers have experienced delays
in
their expected product launch schedules due to their own product development
delays not directly related to our microdisplays, such as development of custom
optics or other aspects of their end product, or by delays in government
programs contracted to them.
Research
and Development
Near-to-the-eye
virtual imaging and OLED technology are relatively new technologies that have
considerable room for substantial improvements in luminance, life, power
efficiency, voltage swing, design compactness, field of view, optical range
of
visibility, headtracking options, wireless control and many other parameters.
We
also anticipate that achieving reductions in manufacturing costs will require
new technology developments. We anticipate that improving the performance,
capability and cost of our products will provide an important competitive
advantage in our fast moving, high technology marketplace. Past and current
research activities include development of improved OLED and display device
structures, developing and/or evaluating new materials (including the synthesis
of new organic molecules), manufacturing equipment and process development,
electronics design methodologies and new circuits and the development of new
lenses and related systems. In 2006, we spent approximately $4.4 million on
research and development. In 2006 we continued to research more efficient
materials and processes. We also completed the primary development of our new
smaller display the SVGA 3D shrink and our new visor products the X800 3DVisor
and the Eyebud 800, for which continued development efforts have been
discontinued until additional financial resources for these programs are
available.
External
relationships play an important role in our research and development efforts.
Suppliers, equipment vendors, government organizations, contract research
groups, external design companies, customer and corporate partners, consortia,
and university relationships all enhance the overall research and development
effort and bring us new ideas (See "Strategic Relationships").
The
FY
2007 Department of Defense Appropriations Bill provided funding for two
development programs managed by the US Army. The first aims to evaluate
potential process improvements and determine performance parameters of OLED
microdisplays for both military and commercial applications, in cooperation
with
US Army NVESD (Night Vision and Electronic Sensors Directorate). The second
will
result in a very high-resolution, HD-compatible display for U.S. Army medical
and other dual use applications, in cooperation with US Army TATRC
(Telemedicine and Advanced Technologies Research Center). The awards totaled
approximately $2.75 million to support the two projects for fiscal year 2007,
and provide resources for development of higher performance OLED technology
and
higher resolution devices.
Manufacturing
Facilities
We
are
located at IBM's Microelectronics Division facility, known as the Hudson Valley
Research Park, located about 70 miles north of New York City in Hopewell
Junction, New York. We lease approximately 40,000 square feet of space housing
our own equipment for OLED microdisplay fabrication and for research and
development plus additional space for assembly and administrative offices.
We
also lease from IBM a 16,300 square foot class 10 clean room space, along with
additional, lower level clean room space.
Facilities
services provided by IBM include our clean room, pure gases, high purity
de-ionized water, compressed air, chilled water systems, and waste disposal
support. This infrastructure provided by our lease with IBM provides us with
many of the resources of a larger corporation without the added overhead costs.
It further allows us to focus our resources more efficiently on our product
development and manufacturing goals.
We
lease
additional non-clean room facilities for chemical mixing, cleaning, chemical
systems, and glass/silicon cutting. OLED chemicals can be purified in our
facility with our own equipment, permitting the company to evaluate new
chemicals in pilot production that are not yet available in suitable purity
for
OLED applications on the market.
Our
display fabrication process starts with the silicon wafer, which is manufactured
by a semiconductor foundry using conventional CMOS process. After a device
is
designed by a combination of internal and external designers with customer
participation, we outsource wafer fabrication.
Our
manufacturing process for OLED-on-silicon microdisplays has three main
components: organic film deposition, organic film encapsulation (also known
as
sealing), and color filter processing. All steps are performed in
semi-automated, hands-free environment suitable for high volume throughput.
An
automated cluster tool provides all OLED deposition steps in a highly controlled
environment that is the centerpiece of our OLED fabrication. After wafer
processing, each part is inspected using an automated inspection system, prior
to shipment. We have electrical and optical instrumentation required to
characterize the performance of our displays including photometric and color
coordinate analysis. We are also equipped for integrated circuit and electronics
design and display testing.
We
also
lease a facility in Bellevue, Washington where we operate our system development
effort and business development activities. The lease for this facility expires
in August of 2009. The facilities are well suited for designing and building
limited volume prototypes and small quantity industrial or government products.
Cables and electronic interfaces have recently been produced to permit our
OEM
customers to more rapidly create products and shorten their time-to-market.
We
plan to outsource medium to high volume subsystem production to low cost
plastics, lenses, and assembly manufacturers. We are currently using domestic
and international outside manufacturers and we are investigating new outsource
opportunities.
We
believe that manufacturing efficiency is an important factor for success in
the
consumer markets. We believe that high yield and maximum utilization of our
equipment set will be key for profitability. The equipment required for initial
profitable production is in place. Some equipment will be added when our
production volume increases or as needed.
Intellectual
Property
We
have
developed a significant intellectual property portfolio of patents, trade
secrets and know-how, supported by our license from Eastman Kodak and our
current patent portfolio.
Our
license from Eastman Kodak gives us the right to use in miniature displays
a
portfolio of organic light emitting diode and optics technology, some of which
are fundamental. Our agreement with Eastman Kodak provides for perpetual access
to the OLED technology for our OLED-on-silicon applications, provided we remain
active in the field and meet our contractual requirements to Eastman Kodak.
We
also generate intellectual property as a result of our internal research and
development activities.
Our
patents and patent applications cover a wide range of materials, device
structures, processes, and fabrication techniques, such as methods of
fabricating full color OLEDs. We believe that our patent applications relating
to up-emitting structures on opaque substrates such as silicon wafers, which
are
critical for OLED microdisplays, and applications relating to the hermetic
sealing of such structures are particularly important.
Our
patents are concentrated in the following areas:
·
|
OLED
Materials, Structures, and Processes;
|
·
|
Display
Color Processing and Sealing;
|
·
|
Active
Matrix Circuit Methodologies and Designs;
|
·
|
Field
Emission and General Display Technologies;
|
·
|
Lenses
and Tracking (Eye and Head);
|
·
|
Ergonomics
and Industrial Design; and
|
·
|
Wearable
Computer Interface Methodology
|
We
also
rely on proprietary technology, trade secrets, and know-how, which are not
patented. To protect our rights in these areas, we require all employees, and
where appropriate, contractors, consultants, advisors and collaborators to
enter
into confidentiality and non-competition agreements. There can be no assurance,
however, that these agreements will provide meaningful protection for our trade
secrets, know-how or other proprietary information in the event of any
unauthorized use, misappropriation or disclosure of such trade secrets, know-how
or other proprietary information.
We
believe that our intellectual property portfolio, coupled with our strategic
relationships and accumulated experience in the OLED field, gives us an
advantage over potential competitors.
Competition
We
may
face competition in the OLED and microdisplay industry from a variety of
companies and technologies. We believe that our key competition will come from
liquid crystal on silicon microdisplays, or LCOS, also known as reflective
liquid crystal displays. While we believe that OLED-on-silicon provides
comparatively lower optics cost, larger apparent image size, reduced electronics
cost and complexity, enhanced color, and improved power efficiency advantages
over liquid crystal on silicon microdisplays, there is no assurance that these
benefits will be realized or that liquid crystal on silicon manufacturers will
not suitably improve these parameters. Companies pursuing liquid crystal on
silicon technology include Microdisplay Corporation and Syntax/Brillian
Corporation, among others, although most of the companies are primarily focusing
on projection microdisplays, which do not compete directly with us. In certain
markets, we may also face competition from developers of transmissive liquid
crystal displays, such as those developed by Kopin, or laser scanning systems,
such as those developed by Microvision Corporation.
To
our
knowledge, the only other company that has publicly stated plans to develop
OLED
microdisplays for near-eye applications is MicroEmissive Displays in Britain.
We
may also compete with potential licensees of Universal Display Corporation
and
Cambridge Display Corporation, each of which license OLED technology portfolios.
Even though we could potentially license technology from these developers,
potential competitors could also obtain such licenses and may do so at more
favorable royalty rates. However, should they decide to embark on developing
microdisplays on silicon, we believe that our progress to date in this area
gives us a substantial head start.
Employees
As
of
June 19, 2007, we had a total of 67 full time and part time staff. None of
our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.
Our
corporate offices are located in Bellevue, Washington. Our Washington location
includes administrative, finance, operations, research and development and
sales
and marketing functions and consists of leased space of approximately 19,000
square feet. The lease expires in 2009. Our manufacturing facility is located
in
Hopewell Junction, New York, where we lease approximately 40,000 square feet
from IBM. The NY facility houses our equipment for OLED microdisplay
fabrication, assembly operations, research and development, and administrative
functions. The lease expires in 2009. We believe our facilities are adequate
for
our current and near-term needs. See Note 12 to our Consolidated Financial
Statement for more information about our lease commitments.
From
time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe will have, individually
or in the aggregate, a material adverse affect on our business, financial
condition or operating results.
On
December 6, 2005, New York State Urban Development Corporation commenced action
against eMagin in the Supreme Court of the State of New York, County of New
York
against eMagin, asserting breach of contract and seeking to recover a $150,000
grant which was made to eMagin based on goals set forth in the agreement for
recruitment of employees. On July 13, 2006, eMagin agreed to a settlement with
the New York State Urban Development Corporation to repay $112,200 of the
$150,000 grant. The settlement requires that repayments be made on a monthly
basis in the amount of $3,116.67 per month commencing August 1, 2006 and ending
on July 1, 2009.
The
following table sets forth the names of our directors and executive officers
as
of June 19, 2007:
Name
|
Age
|
Position
|
K.C.
Park
|
70
|
Interim
Chief Executive Officer, President
|
John
Atherly
|
48
|
Chief
Financial Officer
|
Susan
Jones
|
55
|
Chief
Marketing and Strategy Officer, Secretary
|
Adm.
Thomas Paulsen (Ret.)(2)(3*)
|
70
|
Chairman
of the Board, Director
|
Claude
Charles(1)
|
70
|
Director
|
Paul
Cronson
|
50
|
Director
|
Irwin
Engelman (1*)
|
72
|
Director
|
Dr.
Jacob Goldman(2*)(3)
|
83
|
Director
|
Brig.
Gen. Stephen Seay (Ret.) (1)
|
60
|
Director
|
Dr.
K.C.
Park was appointed Interim CEO and President in January 2007. He served as
executive vice president of International Operations since 1998 and as president
of eMagin's subsidiary, Virtual Vision, Inc., from 2002 to 2004. Earlier, with
LG Electronics as an executive vice president and member of the Board, he built
up LG's business in LCDs and PDPs, solidifying their world leadership position
in flat-panel display products. At IBM, he managed flat panel display and
semiconductor programs at the Watson Research Center; then served as director
of
Display Technology with worldwide responsibility at the IBM Corporate
Headquarters, setting up technical operations in Korea as senior managing
director. Dr. Park holds his Ph.D. in Solid-State Chemistry from the University
of Minnesota and an MBA from New York University.
John
Atherly has served as Chief Financial Officer since June of 2004. Before joining
eMagin Corporation, Mr. Atherly worked for Click2learn, Inc., a NASDAQ listed
enterprise Software Company from 1990 to 2004. He held the positions of Vice
President of Finance and CFO for approximately 8 years and prior to that held
the positions of Director of Finance and Controller. During his 14 years with
Click2learn Mr. Atherly managed the firm's finance and administration, human
resources, IT and manufacturing organizations. From 1987 to 1990, Mr. Atherly
was a Finance and Operations Manager at MicroDisk Services, a manufacturing
firm
serving the software industry. Mr. Atherly holds a BA in Business Administration
from the University of Washington.
Susan
K.
Jones has served as Executive Vice President and Secretary since 1992, and
assumed responsibility of Chief Marketing and Strategy Officer in 2001. Ms.
Jones has 25 years of industrial experience, including senior research,
management, and marketing assignments at Texas Instruments and Merck, Sharp,
& Dohme Pharmaceuticals. Ms. Jones serves on the boards or chairs committees
for industry organizations including IEEE, SPIE, and SID. Ms. Jones served
as a
director of eMagin Corporation from 1993 to 2000 and was a director of Virtual
Vision, Inc. Ms. Jones graduated from Lamar University with a B.S. in chemistry
and biology, holds more than a dozen patents, and has authored more than 100
papers and talks.
Claude
Charles has served as a director since April of 2000. Mr. Charles has served
as
President of Great Tangley Corporation since 1999. From 1996 to 1998 Mr. Charles
was Chairman of Equinox Group Holdings. Prior to 1996, Mr. Charles has also
served as a director and in senior executive positions at SG Warburg and Co.
Ltd., Peregrine Investment Holdings, Trident International Finance Ltd., and
Dow
Banking Corporation. Mr. Charles holds a B.S. in economics from the Wharton
School at the University of Pennsylvania and a M.S. in international finance
from Columbia University.
Paul
Cronson has served as a director since July of 2003. Mr. Cronson is Managing
Director of Larkspur Capital Corporation, which he founded in 1992. Larkspur
is
a broker dealer that is a member of the National Association of Securities
Dealers and advises companies seeking private equity or debt. Mr. Cronson's
career in finance began in 1979 at Laidlaw, Adams Peck where he worked in asset
management and corporate finance. From 1983 to 1985, Mr. Cronson worked with
Samuel Montagu Co., Inc. in London, where he marketed eurobond issuers and
structured transactions. Subsequently from 1985 to 1987, he was employed by
Chase Investment Bank Ltd., where he structured international debt securities
and he developed "synthetic asset" products using derivatives. Returning to
the
U.S., he joined Peter Sharp Co., where he managed a real estate portfolio,
structured financings and assisted with capital market investments until 1992.
Mr. Cronson received his BA from Columbia College in 1979, and his MBA from
Columbia University School of Business Administration in 1982. He is on the
Board of Umbanet, in New York City, a private company specializing in email
based distributed applications and secure messaging.
Irwin
Engelman has served as a director since May of 2005. Irwin Engelman has been
a
director of New Plan Excel Realty Trust, Inc., a publicly-traded company that
is
one of the nation's largest owners and managers of community and neighborhood
shopping centers, since 2003. He is currently a consultant to various industrial
companies. He is currently a director of Sanford Bernstein Mutual Funds, a
publicly-traded company, and a member of its audit committee. From
November 1999 until April 2002, he served as Executive Vice President
and Chief Financial Officer of YouthStream Media Networks, Inc., a media
and retailing company serving high school and college markets. From 1992 until
April 1999, he served as Executive Vice President and Chief Financial
Officer of MacAndrews and Forbes Holdings, Inc., a privately-held
financial holding company. From November 1998 until April 1999, he
also served as Vice Chairman, Chief Administrative Officer and a director of
Revlon, Inc., a publicly-traded consumer products company. From 1978 until
1992, he served as an executive officer of various public companies including
International Specialty Products, Inc. (a subsidiary of GAF Holdings Inc.),
CitiTrust Bancorporation, General Foods Corporation and The Singer Company.
Mr.
Engelman received a BBA in Accounting from Baruch College in 1955 and a Juris
Doctorate from Brooklyn Law School in 1961. He was admitted practice law in
the
State of New York in 1962. In addition, he was licensed as a CPA in the State
of
New York in 1966.
Dr.
Jacob
Goldman joined our board of directors in February of 2003. Dr. Goldman is the
retired senior vice-president for R&D and chief technical officer of the
Xerox Corporation. While at Xerox, he founded and directed the celebrated Xerox
PARC laboratory. Prior to joining Xerox, Dr. Goldman was Director of Ford Motor
Company's Scientific Research Laboratory. He also served as Visiting Edwin
Webster Professor at MIT. Dr. Goldman presently serves on the Boards of
Directors of Umbanet Inc. and Medis Technologies Inc., and he has served on
the
Boards of Xerox, General Instrument Corp., United Brands, Intermagnetics
General, GAF and Bank Leumi USA. He has also been active in government and
professional advisory roles including service on the US Dept. of Commerce
Technical Advisory Board, chairman of Statutory Visiting Committee of The
National Bureau of Standards (National Institute of Standards and Technology),
vice-president of the American Association for the Advancement of Science and
president of the Connecticut Academy of Science and Engineering.
Admiral
Thomas Paulsen has served as a director since July 2003. Admiral Thomas Paulsen
served for over 34 years in the US Navy in Command Control, Communications
and
Intelligence (C3I), Telecommunications, Network Systems Operations, Computers
and Computer Systems Operations until his retirement in 1994 as a Rear Admiral.
He then served as Chief Information Officer for Williams Telecommunications.
Admiral Paulsen has served as a director of Umbanet, Inc. since 2002. Since
2000, Admiral Paulsen has served on the Board of Governors of the Institute
of
Knowledge Management, George Washington University. Since 1994, he has served
as
the Chairman of the Advisory Board and President Emeritus of the Center for
Advanced Technologies (CAT) and a Managing Partner on the National Knowledge
and
Intellectual Property Management Taskforce, a not-for-profit company
headquartered in Dallas, Texas, and is a member of the Board of Governors for
the Japanese American National Museum, Los Angeles, California.
Brigadier
General Stephen Seay was elected to the Board of Directors in January
2006. General
Seay, since leaving active military service, also joined the Board of Directors
for Kid’s House of Seminole County, Florida (child advocacy) and Atlantis
Cyberspace, Inc., Hawaii (simulation/training), incorporated as Seay Business
Solutions, LLC, Florida, in addition to being an Associate in The Spectrum
Group, Alexandria, Virginia. He
held a
wide variety of command and staff positions during his thirty-three year Army
career, culminating as the Program Executive Officer for Simulation, Training
and Instrumentation (PEO STRI) and Commanding General, Joint Contracting
Command-Iraq/Head of Contracting Authority in 2004-2005, Operation Iraqi
Freedom, Iraq. He was Program Manager for a Joint system, headed the Joint
Target Oversight Council and was Commanding General, Simulation, Training and
Instrumentation Command (STRICOM), Army Materiel Command prior to reorganization
into PEO STRI in 2002. As a Field Artillery officer, General Seay commanded
at
all levels, culminating as V Corps Artillery Commander, United States Army,
Europe. He served as Chief of Staff, United States Army, Europe (Forward) and
National Security Element, Taszar Hungary, during Operation Joint Endeavor.
He
held operational, resource management, operations research and acquisition
positions, as well as serving as Military Assistant to the Secretary of the
Army
during three tours on Department of the Army staff. He holds a Bachelor of
Science degree from the University of New Hampshire and a Master of Science
degree from the North Carolina State University.
(2) |
Governance
& nominating Committee
|
(3) |
Compensation
Committee
|
*
Committee Chair
Code
of Ethics
We
have
adopted a Code of Business Conduct and Ethics that applies to all of our
directors, officers and employees, including our principal executive officer,
principal financial officer and principal accounting officer. The Code of
Business Conduct and Ethics is posted on our website at
http://www.emagin.com/investors.
We
intend
to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an
amendment to, or waiver from, a provision of this Code of Business Conduct
and
Ethics by posting such information on our website, at the address and location
specified above and, to the extent required by the listing standards of the
American Stock Exchange, by filing a Current Report on Form 8-K with the SEC,
disclosing such information.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires our directors
and
executive officers and persons who own more than 10% of the issued and
outstanding shares of eMagin common stock to file reports of initial ownership
of common stock and other equity securities and subsequent changes in that
ownership with the SEC and the NYSE. Officers, directors and greater than ten
percent stockholders are required by SEC regulation to furnish us with copies
of
all Section 16(a) forms they file. To our knowledge, based solely on a
review of the copies of such reports furnished to us and written representations
that no other reports were required, during the period ended March 31, 2007
all
Section 16(a) filing requirements applicable to our officers, directors and
greater than 10% beneficial owners were complied with.
General
Information Concerning the Board of Directors
The
Board
of Directors of eMagin is classified into three classes: Class A, Class B and
Class C. As of March 31, 2007, Irwin Engelman is the only Class A Director,
and
will hold office until the 2008 Annual Meeting of our stockholders. Paul
Cronson, Admiral Thomas Paulsen, and General Stephen Seay are Class B directors
who will hold office until the 2009 Annual Meeting. Claude Charles, Dr. Jacob
Goldman, and Dr. KC Park are Class C Directors who will hold office until the
2007 Annual Meeting. In each case, each director will hold office until his
successor is duly elected or appointed and qualified in the manner provided
in
our Amended and Restated Certificate of Incorporation and our Amended and
Restated Bylaws, or as otherwise provided by applicable law.
Our
Board
of Directors held 10 meetings during 2006. Our independent directors met in
executive session on a periodic basis in connection with regular meetings,
as
well as in their capacity as members of our Audit Committee and Compensation
Committee.
Compensation
of Directors
Non-management
directors receive options under the 2003 Stock Option Plan. Under the 2003
Plan,
a grant of options to purchase 6,000 shares of common stock will automatically
be granted on the date a director is first elected or otherwise validly
appointed to the Board with an exercise price per share equal to 100% of the
market value of one share on the date of grant. Such options granted will expire
ten years after the date of grant and will become exercisable in four equal
installments commencing on the date of grant and annually thereafter. In
addition to the options to purchase 6,000 shares of common stock automatically
granted upon joining the Board, each Director thereafter will receive an annual
grant of options to purchase 1,000 shares of common stock at the fair market
value as determined on the date of grant, which options will vest on December
31
in the year granted. Directors receive an additional 500 upon re-election.
Directors are also granted options based on committee assignments consisting
of
options to purchase 500 shares per year for members of the compensation
committee, 1,000 shares for the governance committee in 2006 and 1,500 shares
for the audit committee. Each committee chair will receive 250 additional
shares. The compensation committee is in the process of redefining Board
compensation provisions for fiscal year 2007. In addition, each non-management
director is reimbursed for ordinary expenses incurred in connection with
attendance at such meetings.
Audit
Committee.
The
Audit
Committee is responsible for determining the adequacy of our internal accounting
and financial controls, reviewing the results of our audit performed by the
independent public accountants, and recommending the selection of independent
public accountants. The Audit Committee has adopted an Audit Charter, which
is
posted on our website at http://www.emagin.com/investors.
During
the year, the Board examined the composition of the Audit Committee and
determined that each of the members of the Audit Committee is independent,
unrelated, and an outside member with no other affiliation with us. The Board
has determined that Mr. Engelman is an “audit committee financial expert” as
defined by the SEC. During 2006, the Audit Committee held 4
meetings.
Compensation
Committee.
The
Compensation Committee determines matters pertaining to the compensation and
expense reporting of certain of our executive officers, and administers our
stock option, incentive compensation, and employee stock purchase plans. During
2006, the Compensation Committee held 6 meetings.
Governance
and Nominating Committee.
The
Governance and Nominating Committee is responsible for nominating directors
and
for all other purposes outlined in the Governance and Nominating Committee
Charter, which is posted on our website at http://www.emagin.com/investors.
The
Board has determined that each of the members of the Governance and Nominating
Committee is independent, unrelated, and an outside member with no other
affiliation with us. During 2006, the Governance and Nominating Committee held
3
meetings.
Nomination
of Directors
As
provided in its charter and our company’s corporate governance principles, the
Governance and Nominating Committee is responsible for identifying individuals
qualified to become directors. The Governance and Nominating Committee seeks
to
identify director candidates based on input provided by a number of sources,
including (1) the Governance and Nominating Committee members, (2) our other
directors, (3) our stockholders, (4) our Chief Executive Officer or Chairman,
and (5) third parties such as professional search firms. In evaluating potential
candidates for director, the Nominating and Corporate Governance Committee
considers the entirety of each candidate’s credentials.
Qualifications
for consideration as a director nominee may vary according to the particular
areas of expertise being sought as a complement to the existing composition
of
the Board of Directors. However, at a minimum, candidates for director must
possess:
|
•
|
|
high
personal and professional ethics and integrity;
|
|
•
|
|
the
ability to exercise sound judgment;
|
|
•
|
|
the
ability to make independent analytical inquiries;
|
|
•
|
|
a
willingness and ability to devote adequate time and resources to
diligently perform Board and committee duties; and
|
|
•
|
|
the
appropriate and relevant business experience and acumen.
|
In
addition to these minimum qualifications, the Governance and Nominating
Committee also takes into account when considering whether to nominate a
potential director candidate the following factors:
|
•
|
|
whether
the person possesses specific industry expertise and familiarity
with
general issues affecting our business;
|
|
•
|
|
whether
the person’s nomination and election would enable the Board to have a
member that qualifies as an “audit committee financial expert” as such
term is defined by the Securities and Exchange Commission (the “SEC”) in
Item 401 of Regulation S-K;
|
|
•
|
|
whether
the person would qualify as an “independent” director;
|
|
•
|
|
the
importance of continuity of the existing composition of the Board
of
Directors to provide long term stability and experienced oversight;
and
|
|
•
|
|
the
importance of diversified Board membership, in terms of both the
individuals involved and their various experiences and areas of expertise.
|
This
section describes the compensation program for our executive officers. In
particular, this section focuses on our 2006 compensation program and related
decisions.
Compensation
Discussion and Analysis
The
objectives of our compensation program are as
follows:
|
|
•
|
Reward
performance that drives substantial increases in shareholder value,
as
evidenced through both future operating profits and increased market
price
of our common shares; and
|
|
•
|
Attract,
hire and retain well-qualified
executives.
|
The
compensation level of our Chief Executive Officer (“CEO”) in general is higher
than other Company executives, and reflects the CEO's unique position and
incentive to positively affect our future operating performance and shareholder
value. Part of the compensation of our executives is from equity compensation,
primarily through stock options grants, to provide a relatively strong personal
economic incentive for these executives to increase the market price of our
common shares. Specific salary and bonus levels, as well as the amount and
timing of equity incentive grants, are determined informally and judgmentally,
on an individual-case basis, taking into consideration each executive's unique
talents and experience as they relate to our needs. Specific Company performance
measures as they may relate to the timing and amount of executive compensation
have not yet been developed. Executive compensation is paid or granted pursuant
to each executive's compensation agreement. Compensation adjustments are made
occasionally based on changes in an executive's level of responsibility or
on
changed local and specific executive employment market conditions.
Summary
Compensation Table
The
following table sets forth information with respect to the compensation for
the
year ended December 31, 2006 of our principal executive officers and principal
financial officers during 2006, and each person who served as an executive
officer of our Company as of December 31, 2006.
Name
& Principal Position
|
Year
|
Salary
($) (a)
|
Option
Awards ($)
(b)
|
Non-Equity
Incentive Plan Compensation ($) (c)
|
All
Other Compensation ($) (d)
|
Total ($)
|
|
Gary
Jones
Chief
Executive Officer
|
2006
|
$368,170
|
$788,180
|
—
|
$127,928
|
$1,268,808
|
|
John
Atherly
Chief
Financial Officer
|
2006
|
$242,308
|
$244,890
|
—
|
—
|
$487,198
|
|
Susan
Jones
Chief
Strategy and Marketing Officer
|
2006
|
$289,163
|
$538,817
|
$81,379
|
—
|
$895,188
|
|
Column
notes:
(a)
The
amounts in this column represent the dollar value of base salary earned. Gary
Jones and Susan Jones have deferred 10% of their 2006 base salary, all of which
has been included in column (a). See “Narrative Disclosure to Summary
Compensation Table.” The other officer did not defer any salary in
2006.
(b)
The
amounts in this column represent the dollar amount recognized for financial
statement reporting purposes for the fiscal year ended December 31, 2006 in
accordance with FAS123R disregarding the estimate of forfeitures related to
service-based vesting conditions. The fair value of each grant is estimated
on
the date of the grant using the Black-Scholes option-pricing model. Assumptions
made in the valuation of option awards are incorporated by reference from Note
10 in eMagin's financial statements. Mr. Jones resigned from his positions
of
CEO and President in January of 2007 and agreed to forfeit all options held
as
part of his severance agreement. The detail of outstanding officer options
is
listed in the following section.
(c)
The
amount in this column represents the deferred dollar amount earned in sales
incentive plan by the named executive officer.
(d)
The
amount in this column represents the relocation expenses paid by eMagin for
the
benefit of the named executive officer.
Grants
of Plan-Based Awards
There
were no grants of plan-based awards to named executive officers for the year
ended December 31, 2006.
Outstanding
Equity Awards at Fiscal Year-End
The
following table sets forth information with respect to the outstanding equity
awards of our principal executive officers and principal financial officers
during 2006, and each person who served as an executive officer of eMagin
Corporation as of December 31, 2006:
|
Number
of Securities Underlying Unexercised Options (#)
|
|
|
Name
|
Exercisable
|
Unexercisable
(a)
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
Gary
Jones (b)
|
|
32,500(1)
|
$
2.60
|
1/19/07
|
|
44,435
|
|
$
3.40
|
7/14/07
|
|
|
15,254(1)
|
$ 2.60
|
4/24/13
|
|
|
9,152(1)
|
$
2.60
|
8/30/13
|
|
|
9,152(1)
|
$
2.60
|
12/1/13
|
|
|
78,000(2)
|
$
2.60
|
5/17/09
|
|
|
22,750(3)
|
$
2.60
|
3/17/10
|
|
|
11,700(4)
|
$
2.60
|
11/30/12
|
John
Atherly
|
|
32,500(5)
|
$
2.60
|
6/16/11
|
|
|
25,000(6)
|
$
2.60
|
6/16/11
|
|
|
16,250(7)
|
$
2.60
|
3/17/12
|
|
|
11,700(8)
|
$
2.60
|
11/30/12
|
Susan
Jones
|
|
16,770(1)
|
$
2.60
|
1/11/10
|
|
|
9,685(1)
|
$
2.60
|
1/11/10
|
|
|
6,500(1)
|
$
2.60
|
1/2/07
|
|
|
2,405(1)
|
$
2.60
|
1/14/07
|
|
|
19,500(1)
|
$
2.60
|
5/1/07
|
|
32,458
|
—
|
$
3.40
|
7/14/07
|
|
|
11,932(1)
|
$
2.60
|
4/24/13
|
|
|
7,159(1)
|
$
2.60
|
8/30/13
|
|
|
7,159(1)
|
$
2.60
|
12/1/13
|
|
|
48,750(9)
|
$
2.60
|
5/17/09
|
|
|
16,250(10)
|
$
2.60
|
3/17/10
|
|
|
11,700(11)
|
$
2.60
|
11/30/12
|
Column
note:
On
November 3, 2006, a reverse stock split, ratio of 1-for-10, became effective.
All stock options presented reflect the stock split.
(a) |
The
options in this column were repriced. On July 21, 2006, certain employees
agreed to cancel a portion of their existing stock options in return
for
repricing the remaining stock options at $2.60 per share. The repriced
unvested options continue to vest on the original schedule however
will
not vest prior to January 19, 2007. The previously vested repriced
options
will not vest prior to January 19, 2007, also.
|
(b) |
Mr.
Jones resigned from his positions of CEO and President in January
of 2007
and agreed to forfeit all options held as part of his severance agreement.
|
Footnotes:
(1) |
Options
will be fully vested and exercisable after January 19, 2007.
|
(2) |
69,189
shares subject to the option vest after January 19, 2007 and an additional
2,167 shares shall vest monthly until the option is fully
vested.
|
(3) |
11,375
shares subject to the option vest after January 19, 2007 and an additional
11,375 shares shall vest on March 17,
2007.
|
(4) |
5,850
shares subject to the option vest after January 19, 2007 and an additional
5,850 shares shall vest on November 30,
2007.
|
(5) |
17,875
shares subject to the option vest after January 19, 2007 and an additional
488 shares shall vest at each subsequent quarter until the option
is fully
vested.
|
(6) |
25,000
shares subject to the option vest when the Company successfully completes
four consecutive EBITA positive
quarters.
|
(7) |
8,125
shares subject to the option vest after January 19, 2007 and an additional
8,125 shares shall vest on March 17,
2007.
|
(8) |
5,850
shares subject to the option vest after January 19, 2007 and an additional
5,850 shares shall vest on November 30,
2007.
|
(9) |
43,243
shares subject to the option vest after January 19, 2007 and an additional
1,354 shares shall vest monthly until the option is fully
vested.
|
(10) |
8,125
shares subject to the option vest after January 19, 2007 and an additional
8,125 shares shall vest on March 17,
2007.
|
(11) |
5,850
shares subject to the option vest after January 19, 2007 and an additional
5,850 shares shall vest on November 30,
2007.
|
Option
Exercises and Stock Vested
No
executive officer identified in the Summary Compensation Table above exercised
an option in fiscal year 2006. There were no shares of stock awarded or vested
with respect to any of those executive officers.
Pension
Benefits
eMagin
does not have any plan which provides for payments or other benefits at,
following, or in connection with retirement.
Non-qualified
Deferred Compensation
eMagin
does not have any defined contribution or other plan which provides for the
deferral of compensation on a basis that is not tax-qualified.
Employment
Agreements
Susan
Jones entered into a revised executive employment agreement to conform to the
recently established Sarbanes-Oxley requirements, in connection with her service
as the Company’s Chief Marketing and Strategy Officer. The agreement is
effective for an initial term of three years, effective January 1, 2006. The
agreement provides for an annual salary, benefits made available by the Company
to its employees and eligibility for an incentive bonus pursuant to one or
more
incentive compensation plans established by the Company from time to time.
The
Company may terminate the employment of Mrs. Jones at any time with or without
notice and with or without cause (as such term is defined in the
agreements). If Mrs. Jones’ employment is terminated without cause, or if
Mrs. Jones resigns with good reason (as such term is defined in the agreements),
or Mrs. Jones’ position is terminated or significantly changed as result of
change of control (as such term is defined in the agreements), Mrs. Jones shall
be entitled to receive salary until the end of the agreement’s full term or
twelve months, whichever is greater, payment for accrued vacation, and bonuses
which would have been accrued during the term of the agreement. If Mrs. Jones
voluntarily terminates employment with the Company, other than for good reason
or is terminated with cause (as such term is defined in the agreement), she
shall cease to accrue salary, vacation, benefits, and other compensation on
the
date of the voluntary or with cause termination. The Executive Employment
Agreement includes other conventional terms and also contains invention
assignment, non-competition, non-solicitation and non-disclosure provisions.
On
April 17, 2006, the parties entered into amendments to the employment agreements
pursuant to which the parties clarified that the Company has agreed to pay
for
health benefits equivalent to medical and dental benefits provided during Mrs.
Jones’ full time employment until the end of the agreement’s full term or
twenty-four (24) months, whichever is greater.
On
January 11, 2007, Dr. K.C. Park was appointed Interim Chief Executive Office,
President, and a Director of the Company. On February 12, 2007, the Company
entered in a Compensation Agreement (“the Agreement”) with Dr. Park. Under the
Agreement, the Company has agreed to pay Dr. Park an annual base salary equal
to
$300 thousand plus a quarterly increase in his base salary in the amount of
$12.5 thousand per fiscal quarter through December 31, 2007. The Company agreed
to issue Dr. Park an aggregate of 250 thousand restricted shares of common
stock
within 10 business days of the completion of a change of control of the Company.
In addition, if a change of control transaction is completed and Dr. Park is
not
offered a senior executive position in the new organization, the Company has
agreed to pay Dr. Park three month’s salary.
Potential
Payments Upon Termination or Change-in-Control
The
following table sets forth information regarding potential payments and benefits
Mrs. Jones would receive upon termination of employment under specified
circumstances, assuming that the triggering event in question occurred on
December 29, 2006, the last business day of the fiscal year:
Name
|
|
Voluntary
Resignation w/o Good Reason
|
|
Voluntary
Resignation for Good Reason
|
|
Involuntary
Termination without Cause
|
|
Involuntary
Termination with Cause
|
|
Involuntary
Termination with a Change in Control
|
|
Susan
Jones
|
|
$
|
——
|
|
|
|
|
|
|
|
$
|
——
|
|
|
|
|
Cash
severance
|
|
$
|
——
|
|
$
|
510,172
(1
|
)
|
$
|
510,172
(1
|
)
|
$
|
——
|
|
$
|
510,172
(1
|
)
|
Post-termination
health and welfare
|
|
$
|
——
|
|
$
|
——
|
|
$
|
11,663
(2
|
)
|
$
|
——
|
|
$
|
——
|
|
Vesting
of stock options
|
|
$
|
——
|
|
$
|
——
(3
|
)
|
$
|
——
|
|
$
|
——
|
|
$
|
——
(3
|
)
|
(1)
This amount reflects the lump sum that is payable within thirty days of the
triggering event to the named executive. All calculations were made as of
December 31, 2006 using then current salary figures for each named executive
as
detailed for each executive in the discussion below.
(2)
This amount reflects the COBRA payments for health and dental benefits that
eMagin would make on behalf of the named executive.
(3)
This amount reflects the value of the stock option awards that were unvested
as
of December 31, 2006 which would accelerate and vest under the terms of eMagin’s
option plans following a triggering event. The calculation was based on the
closing market price of eMagin stock as of December 31, 2006 which was $1.04.
All stock options had a grant price higher than the closing market price at
December 31, 2006.
The
following table sets forth information regarding payments and benefits Mr.
Jones
received upon termination of employment on January 11, 2007 and future potential
payments:
Name
and Description
|
Amount
|
Gary
Jones:
|
|
Cash
severance
|
$102,060
(1)
|
Stock
grant
|
$430,000
(2)
|
Advances
for legal and accounting fees
|
$
30,000 (3)
|
Post-termination
health and welfare
|
$
11,663 (4)
|
Other
|
$497,500
(5)
|
(1)
This amount reflects the payments of accrued salary of $10,935, one month’s
salary of $36,450, and accrued vacation of $54,675;
(2)
This amount reflects the value of 500,000 shares of eMagin registered common
stock priced as of January 18, 2007;
(3)
This amount reflects the advances for legal and accounting fees associated
with
2004 stock options;
(4)
This
amount reflects the COBRA payments for health and dental benefits that eMagin
will make on behalf of the named executive; and
(5)
This
amount reflects the following: $460,000 to be paid upon the consummation of
a
strategic transaction; up to $7,500 for moving personal property from the New
York office; and up to $30,000 for personal legal fees.
Director
Compensation Arrangements
The
following table sets forth with respect to the named director, compensation
information inclusive of equity awards and payments made in the year ended
December 31, 2006. The Compensation Committee is in the process of redefining
Board compensation provisions for fiscal year 2006 and 2007.
Name
(a)
|
|
Fees
Earned or
Paid
in Cash
($)
(b)
|
|
Option
Awards
($)
(c)
|
|
Total
($)
|
|
Charles
Claude
|
|
$
|
——
|
|
$
|
2,509
|
|
$
|
2,509
|
|
Paul
Cronson
|
|
$
|
——
|
|
$
|
38
|
|
$
|
38
|
|
Irwin
Engelman
|
|
$
|
——
|
|
$
|
25,592
|
|
$
|
25,592
|
|
Jacob
Goldman
|
|
$
|
——
|
|
$
|
842
|
|
$
|
842
|
|
Thomas
Paulsen
|
|
$
|
20,835
|
|
$
|
——
|
|
$
|
20,835
|
|
Stephen
Seay
|
|
$
|
——
|
|
$
|
5,759
|
|
$
|
5,759
|
|
Column
notes:
(a)
This
column includes only directors that are not employees of eMagin Corporation.
Any
director who is also an executive officer is included in the Summary
Compensation Table.
(b)
This
column includes the dollar amount of all fees earned or paid in cash for
services as a director.
(c)
The
amounts in this column represent the dollar amount recognized for financial
statement reporting purposes for the fiscal year ended December 31, 2006 in
accordance with FAS123R disregarding the estimate of forfeitures related to
service-based vesting conditions. The fair value of each grant is estimated
on
the date of the grant using the Black-Scholes option-pricing model. Assumptions
made in the valuation of option awards are incorporated by reference from Note
10 in eMagin's financial statements. The following table sets forth information
with respect to the outstanding equity awards of our non-employee directors
as
of December 31, 2006:
|
Number
of Securities Underlying Unexercised Options (#)
|
|
Name
|
Exercisable
|
Unexercisable
(a)
|
Option
Exercise Price ($)
|
Charles
Claude
|
|
18,200(1)
|
$2.60
|
|
10,000
|
|
$2.10
|
|
1,000
|
|
$3.50
|
Paul
Cronson
|
|
10,400(1)
|
$2.60
|
Irwin
Engelman
|
|
5,038(2)
|
$2.60
|
Jacob
Goldman
|
|
12,026(1)
|
$2.60
|
Thomas
Paulsen
|
|
11,213(1)
|
$2.60
|
Stephen
Seay
|
|
3,900(3)
|
$2.60
|
Column
note:
On
November 3, 2006, a reverse stock split, ratio of 1-for-10, became effective.
All stock options presented reflect the stock split.
(a)
The options in this column were repriced. On July 21, 2006, certain directors
agreed to cancel a portion of their existing stock options in return for
repricing the remaining stock options at $2.60 per share. The repriced unvested
options continue to vest on the original schedule however will not vest prior
to
January 19, 2007. The previously vested repriced options will not vest prior
to
January 19, 2007, also.
Footnotes:
(1)
Options will be fully vested and exercisable after January 19, 2007.
(2)
1,788
shares subject to the option vest after January 19, 2007 and an additional
1,083
shares shall vest annually until the option is fully vested.
(3)
975
shares subject to the option vest after January 19, 2007 and an additional
975
shares shall vest annually until the option is fully vested.
Compensation
Committee Interlocks and Insider Participation
None
of
the members of our Compensation Committee is or has been an officer or employee
of eMagin. In addition, during the most recent fiscal year, no eMagin
executive officer served on the Compensation Committee (or equivalent), or
the
Board, of another entity whose executive officer(s) served on our Compensation
Committee or Board.
Compensation
Committee Report
The
Committee has reviewed the Compensation Discussion and Analysis and discussed
that analysis with management. Based on its review and discussions with
management, the Committee recommended to the Board that the Compensation
Discussion and Analysis be included in eMagin’s Annual Report on Form 10-K/A for
2006. This report is provided by the following independent directors, who
comprise the Committee:
Jacob
Goldman
Thomas
Paulsen
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The
following table sets forth the number of shares known to be owned by all persons
who own at least 5% of eMagin's outstanding common stock, the Company's
directors, the executive officers, and the directors and executive officers
as a
group as of June 22, 2007, unless otherwise noted. Unless otherwise indicated,
the stockholders listed in the table have sole voting and investment power
with
respect to the shares indicated.
Name
of Beneficial Owner
|
Common
Stock Beneficially Owned
|
Percentage
of Common Stock
|
Stillwater
LLC (1)
|
4,052,041
|
20.0%
|
Alexandra
Global Master Fund Ltd (2)
|
2,012,799
|
9.9%
|
Ginola
Limited (3)
|
1,910,287
|
9.4%
|
Gary
W. Jones (4)
|
1,106,683
|
5.5%
|
Susan
K Jones (4)
|
1,106,683
|
5.5%
|
Rainbow
Gate Corporation (5)
|
804,822
|
4.0%
|
Paul
Cronson (6)
|
181,934
|
*
|
K.
C. Park (7)
|
104,741
|
*
|
John
Atherly (8)
|
68,164
|
*
|
Claude
Charles (9)
|
22,700
|
*
|
Jacob
Goldman (10)
|
12,026
|
*
|
Thomas
Paulsen (11)
|
11,213
|
*
|
Irwin
Engelman (12)
|
3,088
|
*
|
Stephen
Seay (13)
|
1,950
|
*
|
All
executive officers and directors as a group (consisting of 9 individuals)
(14)
|
1,381,730
|
6.8%
|
*Less
than 1% of the outstanding common stock
**
Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options,
warrants, or convertible debt currently exercisable or convertible, or
exercisable or convertible within 60 days of June 22, 2007 are deemed
outstanding for computing the percentage of the person holding such option
or
warrant but are not deemed outstanding for computing the percentage of any
other
person. Percentages are based on a total of 20,254,382 shares of common stock
outstanding on June 22, 2007, and the shares issuable upon the exercise of
options, warrants exercisable, and debt convertible on or within 60 days of
June
22, 2007, as described below.
(1)
This
figure represents: (i) 1,744,000 shares owned by Stillwater LLC, which includes
262,842 shares owned by Rainbow Gate Corporation, in which the sole member
of
Stillwater LLC is the investment manager of Rainbow Gate Corporation; (ii)
warrants held by Stillwater LLC to purchase 1,324,528 shares, which
includes warrants to purchase 272,749 shares held by Rainbow Gate Corporation,
in which the sole member of Stillwater LLC is the investment manager of Rainbow
Gate Corporation; and (iii) 983,516 shares of common stock underlying a 6%
senior convertible note which includes 269,231 shares of common stock underlying
a 6% senior convertible note held by Rainbow Gate Corporation, which the sole
member of Stillwater LLC is the investment manager of Rainbow Gate
Corporation.
(2)
This
figure represents: (1) 363,636 shares owned by Alexandra Global Master Fund;
(ii) warrants held to purchase 775,874 shares; and (iii) 873,289 shares of
common stock underlying a 6% senior convertible note.
(3)
This
figure represents: (i) 739,024 shares owned by Ginola Limited, which include
262,842 shares held indirectly by Rainbow Gate Corporation, 65,080 shares owned
by Ogier Trustee(Jersey) Limited, as trustee, 57,371 shares owned by Chelsea
Trust Company Limited, as trustee, and 39,622 shares owned by Crestflower
Corporation. Ginola Limited disclaims beneficial ownership of the shares owned
by Crestflower Corporation, Ogier Trustee (Jersey) Limited, as trustee, and
Chelsea Trust Company Limited, as trustee; and (ii) warrants held by Ginola
Limited to purchase 594,340 common shares, which includes warrants to purchase
272,749 shares held by Rainbow Gate Corporation, in which the sole shareholder
of Ginola Limited is also the sole shareholder of Rainbow Gate Corporation,
and
warrants to purchase 32,540 shares owned by Ogier Trustee (Jersey) Limited,
as
trustee and 27,273 shares of common stock issuable upon exercise of a common
stock purchase warrant held indirectly by Chelsea Trust Company Limited, as
trustee. Ginola Limited disclaims beneficial ownership of the shares owned
by
Ogier Trustee (Jersey) Limited, as trustee and Chelsea Trust Company Limited,
as
trustee; and (iii) 576,923 shares of common stock underlying a 6% senior
convertible note, which includes 269,231 shares of common stock underlying
a 6%
senior convertible note held by Rainbow Gate Corporation, in which the sole
shareholder of Ginola Limited is also the sole shareholder of Rainbow Gate
Corporation.
(4)
This
figure represents shares owned by Gary Jones and Susan Jones who are married
to
each other, including (i) 841,106 shares owned by Gary Jones and 158,792 shares
owned by Susan Jones; and (ii) 106,785 shares of common stock issuable upon
exercise of stock options held by Susan Jones. This does not include 5,850
shares underlying options owned by Susan Jones which are not exercisable within
60 days of June 22, 2007.
(5)
This
figure represents: (1) 262,842 shares owned by Rainbow Gate Corporation; (ii)
warrants held by to purchase 272,749 shares; and (iii) 269,231 shares of common
stock underlying a 6% senior convertible note.
(6)
This
figure represents 19,198 shares owned by Mr. Cronson, 75,413 shares underlying
warrants, 10,400 shares underlying options, and 76,923 shares of common stock
underlying a 6% senior convertible note held directly and indirectly by Paul
Cronson. This includes (i) 12,097 common stock shares and 4,286 shares
underlying warrants held indirectly by a family member of Paul Cronson; (ii)
4,365 shares underlying warrants held indirectly by Larkspur Corporation of
which he is the Managing Director and (iii) 53,846 shares underlying warrants
and 76,923 shares of common stock underlying a 6% senior convertible note held
indirectly by Navacorp III, LLC.
(7)
This
figure represents: (i) 957 shares owned by Mr. Park; and (ii) 103,784 shares
of
common stock issuable upon exercise of stock options. This does not include
1,625 shares underlying options which are not exercisable within 60 days of
June
22, 2007.
(8)
This
figure represents: (i) 410 shares owned by Mr. Atherly; (ii) warrants held
to
purchase 10,769 shares; (iii) 15,385 shares of common stock underlying a 6%
senior convertible note and (iv) 41,600 shares of common stock issuable upon
exercise of stock options. This does not include 43,850 shares underlying
options which are not exercisable within 60 days of June 22, 2007.
(9)
This
figure represents shares underlying options.
(10)
This
figure represents shares underlying options.
(11)
This
figure represents shares underlying options.
(12)
This
figure represents shares underlying options.
(13)
This
figure represents shares underlying options.
(14)
This
figure represents: (i) warrants held to purchase 32,337 shares; (ii) 313,546
shares of common stock issuable upon exercise of stock options.
Equity
Compensation Plan Information
The
following table sets forth the aggregate information of our equity compensation
plans in effect as of December 31, 2006:
Plan
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in first
column
|
Equity
compensation plans approved by security holders
|
657,288
|
$2.78
|
1,001,546
|
Equity
compensation plans not approved by security holders
|
408,457
|
$3.24
|
|
Our
transfer agent for our common stock is Continental Stock Transfer, 17 Battery
Place, New York, NY 10004.
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our
Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State
of
Delaware, that our directors or officers shall not be personally liable to
us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation,
as
amended, are necessary to attract and retain qualified persons as directors
and
officers.
Our
By
Laws also provide that the Board of Directors may also authorize us to indemnify
our employees or agents, and to advance the reasonable expenses of such persons,
to the same extent, following the same determinations and upon the same
conditions as are required for the indemnification of and advancement of
expenses to our directors and officers. As of the date of this Registration
Statement, the Board of Directors has not extended indemnification rights to
persons other than directors and officers.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
We
are
registering the shares of common stock issuable upon exercise of the warrants
and conversion of the notes to permit the resale of these shares of common
stock
by the holders of the warrants from time to time after the date of this
prospectus. We will receive proceeds of $480,000 from the exercise of
the warrants. We will bear all fees and expenses incident to our
obligation to register the shares of common stock.
The
selling stockholders and any of their pledgees, donees, transferees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be
at fixed prices, at prevailing market prices at the time of sale, at varying
prices determined at the time of sale or negotiated prices. The selling
stockholders may use any one or more of the following methods when selling
shares:
·
ordinary
brokerage transactions and transactions in which the broker-dealer solicits
investors;
·
block
trades in which the broker-dealer will attempt to sell the shares as agent
but
may position and resell a portion of the block as principal to facilitate the
transaction;
·
purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;
·
an
exchange distribution in accordance with the rules of the applicable
exchange;
·
privately negotiated transactions;
·
to cover
short sales made after the date that this registration statement is declared
effective by the Commission;
·
through
the writing or settlement of options or other hedging transactions, whether
through an options exchange or otherwise;
·
broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
·
a
combination of any such methods of sale; and
·
any
other method permitted pursuant to applicable law.
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts
from the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The
selling stockholders may from time to time pledge or grant a security interest
in some or all of the shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of common stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and if such short
sale shall take place after the date that this registration statement is
declared effective by the Commission, the selling stockholders may deliver
these
securities to close out such short sales, or loan or pledge the common stock
to
broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
Upon
us
being notified in writing by a selling stockholder that any material arrangement
has been entered into with a broker-dealer for the sale of common stock through
a block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, a supplement to this prospectus will be
filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing
(i) the name of each such selling stockholder and of the participating
broker-dealer(s), (ii) the number of shares involved, (iii) the price at which
such the shares of common stock were sold, (iv)the commissions paid or discounts
or concessions allowed to such broker-dealer(s), where applicable, (v) that
such
broker-dealer(s) did not conduct any investigation to verify the information
set
out or incorporated by reference in this prospectus, and (vi) other facts
material to the transaction. In addition, upon us being notified in
writing by a selling stockholder that a donee or pledgee intends to sell more
than 500 shares of common stock, a supplement to this prospectus will be filed
if then required in accordance with applicable securities law.
The
selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this
prospectus.
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Discounts, concessions,
commissions and similar selling expenses, if any, that can be attributed to
the
sale of securities will be paid by the selling stockholder and/or the
purchasers.
We
have
advised each selling stockholder that it may not use shares registered on this
registration statement to cover short sales of common stock made prior to the
date on which this registration statement shall have been declared effective
by
the Commission. If a selling stockholder uses this prospectus for any sale
of the common stock, it will be subject to the prospectus delivery requirements
of the Securities Act unless an exemption therefrom is available. The
selling stockholders will be responsible to comply with the applicable
provisions of the Securities Act and Exchange Act, and the rules and regulations
thereunder promulgated, including, without limitation, Regulation M, as
applicable to such selling stockholders in connection with resales of their
respective shares under this registration statement.
Under
the
securities laws of some states, the shares of common stock may be sold in such
states only through registered or licensed brokers or dealers. In
addition, in some states the shares of common stock may not be sold unless
such
shares have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied
with.
There
can
be no assurance that any selling stockholder will sell any or all of the shares
of common stock registered pursuant to the registration statement, of which
this
prospectus forms a part.
Once
sold
under the registration statement, of which this prospectus forms a part, the
shares of common stock will be freely tradable in the hands of persons other
than our affiliates.
We
have
agreed to indemnify the selling stockholders against certain losses, claims,
damages and liabilities, including liabilities under the Securities
Act.
DESCRIPTION
OF SECURITIES
COMMON
STOCK
We
are
authorized to issue up to 200,000,000 shares of common stock, $0.001 par value.
As of June 19, 2007, there were 11,264,657 shares of common stock outstanding.
Holders of the common stock are entitled to one vote per share on all matters
to
be voted upon by the stockholders. Holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor. Upon the liquidation,
dissolution, or winding up of our company, the holders of common stock are
entitled to share ratably in all of our assets which are legally available
for
distribution after payment of all debts and other liabilities and liquidation
preference of any outstanding common stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of common stock are validly issued, fully paid and
non-assessable.
PREFERRED
STOCK
We
are
authorized to issue up to 10,000,000 shares of Preferred Stock, $0.001 par
value. The 10,000,000 shares of Preferred Stock authorized are undesignated
as
to preferences, privileges and restrictions. As the shares are issued, the
Board
of Directors must establish a “series” of the shares to be issued and designate
the preferences, privileges and restrictions applicable to that series.
Pursuant
to the Agreements entered into on July 23, 2007, as outlined above in our
Recent
Developments section, the Company is required to file a Certificate of
Designations of Series A Senior Secured Convertible Preferred Stock (the
“Certificate of Designations”). The Certificate of Designations designates 3,198
shares of the Company’s preferred stock as Series A Senior Secured Convertible
Preferred Stock (the “Preferred Stock”). The Preferred Stock has a stated value
of $1,000. The Preferred Stock is entitled to cumulative dividends which
accrue
at a rate of 8% per annum, payable on December 21, 2008. Each share of Preferred
Stock has voting rights equal to (1) in any case in which the Preferred Stock
votes together with the Company’s Common Stock or any other class or series of
stock of the Company, the number of shares of Common Stock issuable upon
conversion of such shares of Preferred Stock at such time (determined without
regard to the shares of Common Stock so issuable upon such conversion in
respect
of accrued and unpaid dividends on such share of Preferred Stock) and (2)
in any
case not covered by the immediately preceding clause one vote per share of
Preferred Stock.
The
table
below sets forth information concerning the resale of the shares of common
stock
by the selling stockholders. We will not receive any proceeds from the resale
of
the common stock by the selling stockholders. We will receive proceeds from
the
exercise of the warrants. Assuming all the shares registered below are sold
by
the selling stockholders, none of the selling stockholders will continue to
own
any shares of our common stock registered pursuant to the registration statement
of which this prospectus forms a part.
The
following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person based on its ownership of the
shares of common stock and the warrants, as of June 21, 2007, assuming exercise
of the warrants held by the selling stockholders on that date, without regard
to
any limitations on exercise, the number of shares of common stock that may
be
sold in this offering and the number of shares of common stock each person
will
own after the offering, assuming they sell all of the shares
offered.
Except
as
described below the selling stockholders do not have and within the past three
years have not had any position, office or other material relationship with
us
or any of our predecessors or affiliates.
In
accordance with the terms of registration rights agreements with the holders
of
the shares of common stock and the warrants, this prospectus generally covers
the resale of at least the sum of (i) the number of shares of common stock
issued and (ii) the shares of common stock issued and issuable upon exercise
of
the related warrants, determined as if the outstanding warrants were exercised,
as applicable, in full, as of the trading day immediately preceding the date
this registration statement was initially filed with the SEC.
|
Beneficial
Ownership Prior to Offering (1)
|
Shares
Offered
|
|
Shares
(3)
|
Percentage
(2)
|
|
Stillwater
LLC
|
6,767,148
|
60%
|
2,450,000
|
(1) |
Beneficial
ownership is determined in accordance with the rules of the Securities
and
Exchange Commission and generally includes voting or investment power
with
respect to securities. Shares of common stock subject to options
or
warrants currently exercisable or convertible, or exercisable or
convertible within 60 days of June 21, 2007 are deemed outstanding
for
computing the percentage of the person holding such option or warrant
but
are not deemed outstanding for computing the percentage of any other
person.
|
(2) |
Percentage
prior to offering is based on 11,264,657 shares of common stock
outstanding as of June 21, 2007.
|
(3) |
Represents
1,000,000 shares
issuable upon the exercise of common stock purchase warrants and
1,450,000
shares of common stock issuable upon conversion of notes.
|
TRANSACTIONS
WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS
As
stated
above, on July 23, 2007, the Company entered into Agreements with the Holders
and issued Amended Notes to the Holders in the principal amount equal to
the
principal amount outstanding as of July 23, 2007. The due date for the principal
payment has been extended to December 21, 2008 and the interest rate increased
to 8%. The Amended Notes are convertible into 8,407,612 shares of the Company’s
common stock. The conversion price for $5,770,000 of principal was revised
from
$2.60 to $.75 per share and the conversion price of $.35 per share for $250,000
of principal was unchanged. $3,010,000 of the Notes can convert into 3,010
shares of the Company’s newly formed Series A Convertible Preferred Stock (the
“Preferred”) at a conversion price of $1,000 per share. The Preferred is
convertible into common stock at the same price allowable by the Amended
Notes, subject to adjustment as provided for in the Certificate of Designations.
The Amended Notes adjust the exercise price from $3.60 to $1.03 per share
for
1,553,468 Warrants and require the issuance of 3,831,859 Warrants exercisable
at
$1.03 per share pursuant to which the holders may acquire common stock, until
July 21, 2011. Two employees and one board member participated in the
Agreements.
On
July
23, 2007, Stillwater elected to convert $252,166.50 of the Note which is
equal
to the sum of $250,000 of the principal amount of the Note and $2,166.50
of
accrued and unpaid interest. Stillwater will receive 720,476 shares of Common
Stock at the conversion price of $0.35.
On
March
28, 2007, the Company entered into an amendment to the Stillwater Agreement,
originally dated July 21, 2006. On April 9, 2007, the sale of the Stillwater
Note and Warrant was complete and the Company issued a 6% Senior Secured
Convertible Note in the principal amount of $500,000 and warrants to purchase
1,000,000 shares of the Company’s common stock at an exercise price of $0.48. If
the Notes are not converted or amended, 50% of the principal amount will
be due
on July 21, 2007 and the remaining 50% will be due on January 21, 2008. If
the
due date falls on a non-business date, the payment will be due on the next
business day. As stated above, the Notes were amended.
On
January 11, 2007, Gary Jones resigned as the President, Chief Executive Officer,
and as a Director of the Company. Mr. Jones and the Company entered into an
Executive Separation and Consulting Agreement. Under the Agreement, the Company
made a payment to Mr. Jones in an amount equal to: all accrued salary as of
the
date of the Agreement plus an additional 30 days of salary (approximately
$47,000); 360 hours of unused vacation (approximately $55,000); advance for
legal and accounting fees associated with 2004 stock options ($30,000); and
an
advance for future travel expenditures ($5,000). Mr. Jones also received 500,000
shares of registered shares of common stock of the Company valued at $430,000.
In his consulting relationship, Mr. Jones will be paid $460,000 upon the
consummation of a strategic transaction. The Company will provide up to $7,500
for reasonable moving expenses of personal property from the New York office.
In
addition, the Company will pay up to an additional $30,000 to Mr. Jones related
to personal legal fees.
On
July
21, 2006, the Company entered into several Note Purchase Agreements for the
sale
of approximately $5.99 million of senior secured debentures (the “Notes”) and
warrants to purchase approximately 1.8 million shares of common stock, par
value
$.001 per share. The investors purchased $5.99 million principal amount of
Notes
with conversion prices of $2.60 per share that may convert into approximately
2.3 million shares of common stock and 5 year warrants exercisable at $3.60
per
share into approximately 1.6 million shares of common stock. If the Notes are
not converted, 50% of the principal amount will be due on July 21, 2007 and
the
remaining 50% will be due on January 21, 2008. If the due date falls on a
non-business day, the payment date will be due on the next business day.
Commencing September 1, 2006, 6% interest is payable in quarterly installments
on outstanding notes.
In
the
Note Purchase transaction, two employees and one board member participated.
Olivier Prache, Senior VP of Display Operations, purchased a $30 thousand
promissory note which may be converted into 11,539 shares and received 8,077
warrants which are exercisable at $3.60 per share. Mr. Prache converted $20
thousand of his promissory note and received 7,693 shares. John Atherly, CFO,
purchased a $40 thousand promissory note which may be converted into 15,385
shares and received 10,770 warrants exercisable at $3.60 per share. Paul
Cronson, board member, through Navacorp III, LLC purchased a $200 thousand
promissory note which may be converted into 76,923 shares and received 53,847
warrants exercisable at $3.60 per share.
Stillwater
is a beneficial owner of more than 5% of the Company’s common stock. Rainbow
Gate Corporation, a corporation in which its investment manager is the sole
member of Stillwater LLC and its controlling shareholder is the same as Ginola
Limited, purchased a $700 thousand promissory note which may be converted into
269,231 shares and received 188,462 warrants exercisable at $3.60 per share.
Ginola Limited purchased an $800 thousand promissory note which may be converted
into 307,693 shares and received 215,385 warrants exercisable at $3.60 per
share. Stillwater LLC disclaims beneficial ownership of shares owned by Rainbow
Gate Corporation.
A
family
member of an outside director of eMagin is the holder of a Series A warrant
to
purchase an aggregate of 4,286 shares of common stock. As a result of the Note
Purchase transaction, the exercise price of all Series A warrants was reduced
from $5.50 to $2.60 per share. Family members of an outside director of eMagin
are holders of Series F warrants to purchase an aggregate of 10 thousand shares
of common stock. As a result of the Note Purchase transaction, the exercise
price of all Series F warrants was reduced from $10.90 to $8.60 per
share.
eMagin
has entered into a financial advisory agreement with Larkspur Capital
Corporation. Paul Cronson, a director of eMagin, is a founder and shareholder
of
Larkspur Capital Corporation. The Company has agreed to pay a minimum fee of
$500 thousand to Larkspur Capital Corporation in the event certain transactions
occur, i.e. sale of the Company’s assets or change of control.
On
October 20, 2005, the Company entered into a Securities Purchase Agreement
to
sell to certain qualified institutional buyers and accredited investors an
aggregate of 1,661,906 shares of eMagin’s common stock, par value $0.001 per
share (the “Shares”), and warrants to purchase an additional 997,143 shares of
common stock, for an aggregate purchase price of approximately $9.1 million.
The
purchase price of the common stock and corresponding warrant was $5.50 per
share.
The
warrants are exercisable at a price of $10.00 per share and expire on October
20, 2010. Of the 997,143 warrants, 664,762 of the warrants are exercisable
on or
after May 20, 2006. The remaining 332,380 are exercisable after March 31, 2007.
Both Stillwater and Ginola are beneficial owners of more than 5% of the
Company’s common stock.
Rainbow
Gate Corporation, a corporation in which its investment manager is the sole
member of Stillwater LLC and its controlling shareholder is the same as Ginola
Limited, participated in the sale of equity pursuant to the Securities Purchase
Agreement by investing $500 thousand. Stillwater LLC disclaims beneficial
ownership of shares owned by Rainbow Gate Corporation.
Chelsea
Trust Company, as trustee of a trust with the same directors and/or controlling
shareholders as Ginola Limited, participated in the sale of equity pursuant
to
the Securities Purchase Agreement by investing $250 thousand. Ginola Limited
disclaims beneficial ownership of shares owned by Chelsea Trust
Company.
In
connection with the issuance of the Shares and the warrants pursuant to the
Securities Purchase Agreement, the Company was required to lower the exercise
prices of existing Series A and F warrants from $10.50 and $12.10, respectively,
to $5.50 and $10.90 per share, respectively, pursuant to the anti-dilution
provisions of the Series A and F warrants.
A
family
member of an outside director of eMagin is the holder of a Series A warrant
to
purchase an aggregate of 4,286 shares of common stock. Accordingly, the exercise
price of all Series A warrants was reduced from $10.50 to $5.50 per
share.
eMagin
is
also a party to a financial advisory and investment banking agreement with
Larkspur Capital Corporation. Paul Cronson, a director of eMagin, is a founder
and shareholder of Larkspur Capital Corporation. Larkspur Capital Corporation
received as compensation for financial advisory and investment banking services
in connection with the January 2004 private placement a cash fee of 6 3/4%
of
the funds raised and warrants to purchase eMagin shares of common stock equal
to
2.5% of the cash netted to eMagin. Approximately $284 thousand and 4,365 common
stock purchase warrants exercisable at $24.10 per share which expire in January
2009, were paid under the terms of the agreement. Paul Cronson was engaged
as an
advisor in connection with the sale of securities sold in October 2004 and
received a fee of $136 thousand.
A
family
member of an outside director of eMagin participated in the Securities Purchase
Agreement in January 2004's private placement in the amount of $90 thousand.
Stillwater
LLC, a limited liability company and a beneficial owner of more than five
percent of the outstanding shares of eMagin's common stock, held an aggregate
of
$4 million of the notes converted in February 2004. Ginola Limited, a beneficial
owner of more than five percent of the outstanding shares of eMagin's common
stock, held an aggregate of $1.3 million of the notes which were converted.
An
outside director of eMagin held $250 thousand of the notes converted.
A
family
member of an outside director of eMagin participated in the re-pricing of the
Securities Purchase Agreement in August. 209,989 warrants were re-priced and
exercised. The family member re-priced and exercised 2,586 B warrants and 2,368
C warrants.
Director
Independence
Board
of
Directors has determined that Messrs. Thomas Paulsen, Jacob Goldman, Claude
Charles, Irwin Engelman, and Stephen Seay are
each independent directors.
The
Board
of Directors has established a compensation committee which is
currently comprised of Thomas Paulsen and Jacob Goldman each of
whom is independent.
The Board of Directors has established a corporate governance and
nominating committee, which is comprised of Thomas Paulsen and Jacob
Goldman, each of whom is independent.
The
Board of Directors has a separately
designated audit committee established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, which is
currently comprised of Claude Charles, Irwin Engelman, and Steve Seay. The
members of the Audit Committee are independent.
Review,
Approval or Ratification of Transactions with Related
Persons
All
future transactions, if any, between us and any of our officers, directors
and
principal security holders and their affiliates, as well as any transactions
between us and any entity with which our officers, directors or principal
security holders are affiliated, will be approved in accordance with applicable
law governing the approval of the transactions.
Promoter
and Certain Control Persons
Not
applicable.
Sichenzia
Ross Friedman & Ference LLP will issue an opinion with respect to the
validity of the shares of common stock being offered hereby.
We
have
filed a registration statement on Form S-1 under the Securities Act of 1933,
as
amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of eMagin Corp., filed as part of the
registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance
with
the rules and regulations of the Securities and Exchange
Commission.
We
are
subject to the informational requirements of the Securities Exchange Act of
1934
which requires us to file reports, proxy statements and other information with
the Securities and Exchange Commission. Such reports, proxy statements and
other
information may be inspected at public reference facilities of the SEC at 100
F
Street, N.E., Washington D.C. 20549. Copies of such material can be obtained
from the Public Reference Section of the SEC at 100 F Street, N.E., Washington,
D.C. 20549 at prescribed rates. Because we file documents electronically with
the SEC, you may also obtain this information by visiting the SEC’s Internet
website at http://www.sec.gov.
eMAGIN
CORPORATION
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Page
|
10-K
|
|
Report
of Independent Registered Public Accounting Firm
|
56
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
57
|
Consolidated
Statements of Operations for the years ended December 31, 2006, 2005
and
2004
|
58
|
Consolidated
Statements of Changes in Shareholders’ Equity (Deficit) for the years
ended December 31, 2006, 2005 and 2004
|
59
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006, 2005
and
2004
|
60
|
Notes
to the Consolidated Financial Statements
|
61
|
|
|
10-Q
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2007 (unaudited) and
December
31, 2006
|
81
|
Condensed
Consolidated Statements of Operations for the Three Months ended
March 31,
2007 and 2006 (unaudited)
|
82
|
Condensed
Consolidated Statements of Changes in Shareholders’ Capital Deficit for
the Three Months ended March 31, 2007 (unaudited)
|
83
|
Condensed
Consolidated Statements of Cash Flows for the Three Months ended
March 31,
2007 and 2006 (unaudited)
|
84
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
85
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Stockholders
eMagin
Corporation
We
have
audited the accompanying consolidated balance sheets of eMagin Corporation
and
subsidiary (the "Company") as of December 31, 2006 and 2005, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 2006. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of eMagin Corporation
and
subsidiary as of December 31, 2006 and 2005 and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company has had recurring losses from operations
which
it believes will continue, has working capital and capital deficits at December
31, 2006. These factors raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in regard to these matters are
also discussed in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for stock-based compensation effective January
1, 2006.
/s/
Eisner LLP
Eisner
LLP
New
York,
New York
March
27,
2007
eMAGIN
CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands, except
|
|
|
|
share
and per share amounts)
|
|
ASSETS
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,415
|
|
$
|
6,727
|
|
Investments
- held to maturity
|
|
|
171
|
|
|
120
|
|
Accounts
receivable, net
|
|
|
908
|
|
|
822
|
|
Inventory
|
|
|
2,485
|
|
|
3,839
|
|
Prepaid
expenses and other current assets
|
|
|
656
|
|
|
1,045
|
|
Total
current assets
|
|
|
5,635
|
|
|
12,553
|
|
Equipment,
furniture and leasehold improvements, net
|
|
|
666
|
|
|
1,299
|
|
Intangible
assets, net
|
|
|
55
|
|
|
57
|
|
Other
assets
|
|
|
233
|
|
|
233
|
|
Deferred
financing costs, net
|
|
|
416
|
|
|
—
|
|
Total
assets
|
|
$
|
7,005
|
|
$
|
14,142
|
|
|
LIABILITIES
AND SHAREHOLDERS’ (DEFICIT) EQUITY
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,192
|
|
$
|
562
|
|
Accrued
compensation
|
|
|
959
|
|
|
1,010
|
|
Other
accrued expenses
|
|
|
749
|
|
|
1,894
|
|
Advanced
payments
|
|
|
444
|
|
|
60
|
|
Deferred
revenue
|
|
|
126
|
|
|
96
|
|
Current
portion of capitalized lease obligations
|
|
|
6
|
|
|
16
|
|
Current
portion of debt
|
|
|
1,217
|
|
|
—
|
|
Derivative
liability - warrants
|
|
|
1,195
|
|
|
—
|
|
Other
current liabilities
|
|
|
52
|
|
|
47
|
|
Total
current liabilities
|
|
|
5,940
|
|
|
3,685
|
|
|
|
|
|
|
|
|
|
Capitalized
lease obligations
|
|
|
—
|
|
|
6
|
|
Other
long-term liabilities
|
|
|
2,229
|
|
|
50
|
|
Total
liabilities
|
|
|
8,169
|
|
|
3,741
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
(deficit) equity:
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value: authorized 10,000,000 shares; no shares issued
and
outstanding
|
|
|
—
|
|
|
—
|
|
Common
stock, $.001 par value: authorized 200,000,000 shares, issued and
outstanding, 10,341,029 shares in 2006 and 9,997,246 shares in
2005
|
|
|
10
|
|
|
10
|
|
Additional
paid in capital
|
|
|
179,651
|
|
|
175,950
|
|
Accumulated
deficit
|
|
|
(180,825
|
)
|
|
(165,559
|
)
|
Total
shareholders’ (deficit) equity
|
|
|
(
1,164
|
)
|
|
10,401
|
|
Total
liabilities and shareholders’ (deficit) equity
|
|
$
|
7,005
|
|
$
|
14,142
|
|
|
|
|
|
|
|
|
|
See
notes
to Consolidated Financial Statements.
eMAGIN
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For
the Year Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands, except per share data)
|
|
Revenue:
|
|
|
|
|
|
|
|
Product
revenue
|
|
$
|
7,983
|
|
$
|
3,719
|
|
$
|
3,502
|
|
Contract
revenue
|
|
|
186
|
|
|
36
|
|
|
108
|
|
Sales
returns and allowance
|
|
|
—
|
|
|
(10
|
)
|
|
(17
|
)
|
Total
revenue, net
|
|
|
8,169
|
|
|
3,745
|
|
|
3,593
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
11,359
|
|
|
10,219
|
|
|
5,966
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
loss
|
|
|
(3,190
|
)
|
|
(6,474
|
)
|
|
(2,373
|
)
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
4,406
|
|
|
4,020
|
|
|
898
|
|
Selling,
general and administrative
|
|
|
8,860
|
|
|
6,316
|
|
|
4,428
|
|
Total
operating expenses
|
|
|
13,266
|
|
|
10,336
|
|
|
5,326
|
|
Loss
from operations
|
|
|
(16,456
|
)
|
|
(16,810
|
)
|
|
(7,699
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,306
|
)
|
|
(4
|
)
|
|
(5,087
|
)
|
Gain
on warrant derivative liability
|
|
|
2,405
|
|
|
—
|
|
|
—
|
|
Other
income, net
|
|
|
91
|
|
|
286
|
|
|
75
|
|
Total
other income (expense), net
|
|
|
1,190
|
|
|
282
|
|
|
(5,012
|
)
|
Net
loss
|
|
$
|
(15,266
|
)
|
$
|
(16,528
|
)
|
$
|
(12,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share, basic and diluted
|
|
$
|
(1.52
|
)
|
$
|
(1.94
|
)
|
$
|
(1.98
|
)
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
10,058
|
|
|
8,541
|
|
|
6,428
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to Consolidated Financial Statements.
eMAGIN
CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
Additional
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
Deferred
|
|
Paid-In
|
|
Accumulated
|
|
Shareholders’
|
|
|
|
Shares
|
|
Amount
|
|
Compensation
|
|
Capital
|
|
Deficit
|
|
Equity
|
|
|
|
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2003
|
|
|
4,270
|
|
$
|
4
|
|
$
|
(88
|
)
|
$
|
131,638
|
|
$
|
(136,320
|
)
|
$
|
(4,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of common stock, net of issuance costs
|
|
|
1,641
|
|
|
2
|
|
|
—
|
|
|
16,383
|
|
|
—
|
|
|
16,385
|
|
Debt
to equity conversion
|
|
|
1,139
|
|
|
1
|
|
|
—
|
|
|
8,566
|
|
|
—
|
|
|
8,567
|
|
Issuance
of warrants for early conversion of debt to equity
|
|
|
|
|
|
|
|
|
—
|
|
|
3,180
|
|
|
—
|
|
|
3,180
|
|
Exercise
of common stock warrants
|
|
|
353
|
|
|
—
|
|
|
—
|
|
|
3,790
|
|
|
—
|
|
|
3,790
|
|
Stock
options exercised
|
|
|
522
|
|
|
1
|
|
|
—
|
|
|
1,383
|
|
|
—
|
|
|
1,384
|
|
Issuance
of common stock for services
|
|
|
39
|
|
|
—
|
|
|
—
|
|
|
531
|
|
|
—
|
|
|
531
|
|
Amortization
of deferred stock compensation
|
|
|
—
|
|
|
—
|
|
|
88
|
|
|
—
|
|
|
—
|
|
|
88
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,711
|
)
|
|
(12,711
|
)
|
Balance,
December 31, 2004
|
|
|
7,964
|
|
$
|
8
|
|
$
|
—
|
|
$
|
165,471
|
|
$
|
(149,031
|
)
|
$
|
16,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of common stock, net of issuance costs
|
|
|
1,662
|
|
|
2
|
|
|
—
|
|
|
8,398
|
|
|
—
|
|
|
8,400
|
|
Stock
options exercised
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
37
|
|
|
—
|
|
|
37
|
|
Exercise
of common stock warrants
|
|
|
306
|
|
|
—
|
|
|
—
|
|
|
1,584
|
|
|
—
|
|
|
1,584
|
|
Issuance
of common stock for services
|
|
|
54
|
|
|
—
|
|
|
—
|
|
|
461
|
|
|
—
|
|
|
460
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,528
|
)
|
|
(16,528
|
)
|
Balance,
December 31, 2005
|
|
|
9,997
|
|
$
|
10
|
|
$
|
—
|
|
$
|
175,950
|
|
$
|
(165,559
|
)
|
$
|
10,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
to equity conversion
|
|
|
85
|
|
|
—
|
|
|
—
|
|
|
220
|
|
|
—
|
|
|
220
|
|
Issuance
of common stock for services
|
|
|
254
|
|
|
—
|
|
|
—
|
|
|
580
|
|
|
—
|
|
|
580
|
|
Stock-based
compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,891
|
|
|
—
|
|
|
2,891
|
|
Stock
options exercised
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,266
|
)
|
|
(15,266
|
)
|
Balance,
December 31, 2006
|
|
|
10,341
|
|
$
|
10
|
|
$
|
—
|
|
$
|
179,651
|
|
$
|
(180,825
|
)
|
$
|
(
1,164
|
)
|
See
notes
to Consolidated Financial Statements.
eMAGIN
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(15,266
|
)
|
$
|
(16,528
|
)
|
$
|
(12,711
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
841
|
|
|
908
|
|
|
620
|
|
Amortization
of deferred financing fees
|
|
|
221
|
|
|
—
|
|
|
8
|
|
Increase
(reduction) of provision for sales returns and doubtful
accounts
|
|
|
(39
|
)
|
|
(284
|
)
|
|
467
|
|
Stock
based compensation
|
|
|
2,891
|
|
|
—
|
|
|
88
|
|
Non-cash
interest related charges
|
|
|
—
|
|
|
—
|
|
|
5,094
|
|
Issuance
of common stock for services, net
|
|
|
553
|
|
|
470
|
|
|
531
|
|
Amortization
of discount on notes payable
|
|
|
956
|
|
|
—
|
|
|
—
|
|
Gain
on warrant derivative liability
|
|
|
(2,405
|
)
|
|
—
|
|
|
—
|
|
Loss
on other asset
|
|
|
157
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(42
|
)
|
|
(2
|
)
|
|
(235
|
)
|
Unbilled
costs and estimated profits on contracts in progress
|
|
|
—
|
|
|
—
|
|
|
75
|
|
Inventory
|
|
|
1,354
|
|
|
(1,821
|
)
|
|
(1,742
|
)
|
Prepaid
expenses and other current assets
|
|
|
389
|
|
|
(175
|
)
|
|
(400
|
)
|
Advance
payments
|
|
|
384
|
|
|
(4
|
)
|
|
(58
|
)
|
Deferred
revenue
|
|
|
30
|
|
|
96
|
|
|
—
|
|
Accounts
payable, accrued compensation, and accrued expenses
|
|
|
(566
|
)
|
|
1,613
|
|
|
(51
|
)
|
Other
current liabilities
|
|
|
153
|
|
|
14
|
|
|
17
|
|
Net
cash used in operating activities
|
|
|
(10,389
|
)
|
|
(15,713
|
)
|
|
(8,297
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(204
|
)
|
|
(898
|
)
|
|
(721
|
)
|
Purchase
of investments - held to maturity
|
|
|
(51
|
)
|
|
(120
|
)
|
|
|
|
Purchase
of intangibles and other assets
|
|
|
(2
|
)
|
|
(54
|
)
|
|
(99
|
)
|
Net
cash used in investing activities
|
|
|
(257
|
)
|
|
(1,072
|
)
|
|
(820
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock, net of issuance costs
|
|
|
—
|
|
|
8,400
|
|
|
16,385
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
10
|
|
|
1,621
|
|
|
5,173
|
|
Proceeds
from long-term debt
|
|
|
5,970
|
|
|
50
|
|
|
—
|
|
Payments
related to deferred financing costs
|
|
|
(591
|
)
|
|
—
|
|
|
—
|
|
Payments
of long-term debt and capitalized lease obligations
|
|
|
(55
|
)
|
|
(16
|
)
|
|
(38
|
)
|
Net
cash provided by financing activities
|
|
|
5,334
|
|
|
10,055
|
|
|
21,520
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(5,312
|
)
|
|
(6,730
|
)
|
|
12,403
|
|
Cash
and cash equivalents, beginning of year
|
|
|
6,727
|
|
|
13,457
|
|
|
1,054
|
|
Cash
and cash equivalents, end of year
|
|
$
|
1,415
|
|
$
|
6,727
|
|
$
|
13,457
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
128
|
|
$
|
4
|
|
$
|
8
|
|
Cash
paid for taxes
|
|
$
|
40
|
|
$
|
15
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
Conversion
of debt to equity
|
|
$
|
220
|
|
$
|
—
|
|
$
|
8,567
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the year ended December 31, 2006, the Company
|
|
|
|
|
|
|
|
|
|
|
|
· |
entered
into several Note Purchase Agreements with investors and issued
warrants
that are exercisable at $3.60 per share into approximately 1.6
million
shares of common stock valued at $3.4
million;
|
|
· |
issued
10,000 shares of common stock in lieu of cash payment of $26,000
as
compensation for services performed and recorded as deferred costs;
and
|
· |
issued
approximately 85,000 shares for the conversion of Notes totaling
$220,000.
|
See
notes
to Consolidated Financial Statements.
eMAGIN
CORPORATION
NOTES
TO THE CONSOLIDATED FINANCIAL STATMENTS
Note
1 - NATURE OF BUSINESS
eMagin
Corporation and its wholly owned subsidiary (the “Company”) designs, develops,
manufactures, and markets virtual imaging products for consumer, commercial,
industrial and military applications. The Company’s products are sold mainly in
North America, Asia, and Europe,
Note
2 - SIGNIFICANT ACCOUNTING POLICIES
Principles
of consolidation
The
accompanying audited consolidated financial statements include the accounts
of
eMagin Corporation and its wholly owned subsidiary. All intercompany
transactions have been eliminated in consolidation.
Basis
of presentation
The
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has had recurring losses
from operations which it believes will continue through in a foreseeable
future. The Company’s cash requirements over the next twelve months are
greater than the Company’s current cash on hand. At December 31, 2006, the
Company has working capital and shareholders’ deficits. These factors raise
substantial doubt regarding the Company’s ability to continue as a going concern
without continuing to obtain additional funding. The
Company does not have commitments for such financing and no assurance can be
given that additional financing will be available, or if available, will be
on
acceptable terms.
If the
Company is unable to obtain sufficient funds during the next twelve months,
the
Company will further reduce the size of its organization and/or curtail
operations which will have a material adverse impact on the Company’s business
prospects. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
On
November 3, 2006, the Company effected a one-for-ten (1-for-10) reverse stock
split of its issued and outstanding common stock. See Note 9 to the Consolidated
Financial Statements for a further discussion. All common share amounts and
per
share amounts in the accompanying financial statements and this Form 10-K have
been adjusted to reflect the 1-for-10 reverse stock split. The Company has
adjusted its shareholders’ equity accounts by reducing its stated capital and
increasing its additional paid-in capital by approximately $91 thousand as
of
December 31, 2006, 2005 and 2004 to reflect the reduction in outstanding shares
as a result of the reverse stock split.
Use
of estimates
In
accordance with accounting principles generally accepted in the United States
of
America, management utilizes certain estimates and assumptions that affect
the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates
and
judgments. Management bases its estimates and judgments on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results could differ from those estimates.
Revenue
and cost recognition
Revenue
is recognized when products are shipped to customers, net of allowances for
anticipated returns. The Company’s revenue-earning
activities generally involve delivering products and revenues
are considered to be earned when the Company has completed the process
by which it is entitled to such revenues.
Revenue is recognized when persuasive evidence of
an arrangement exists, delivery has occurred, selling price is
fixed or determinable and collection is reasonably assured. The Company defers
revenue recognition on products sold directly to the consumer with a fifteen
day
right of return. Revenue is recognized upon the expiration of the right of
return.
The
Company also earns revenues from certain of eMagin's
R&D activities under
both firm fixed-price contracts and cost-type
contracts, including some cost-plus-fee contracts.
Revenues relating to firm fixed-price contracts are
generally recognized on the percentage-of-completion method
of accounting as costs are incurred (cost-to-cost basis).
Revenues on cost-plus-fee contracts include costs incurred plus a
portion of estimated fees or profits based on the relationship of costs incurred
to total estimated costs. Contract costs include all direct material and
labor costs and an allocation of allowable indirect costs as
defined by each contract, as periodically adjusted to reflect revised
agreed upon rates. These rates are subject to audit by the other party.
Amounts can be billed on a bi-monthly basis.
Research
and development expenses
Research
and development costs are expensed as incurred.
Cash
and cash equivalents
All
highly liquid instruments with an original maturity of three months or less
at
the date of purchase are considered to be cash equivalents.
Investments-held
to maturity
Securities
that the Company has the positive intent and ability to hold to maturity are
classified as held-to-maturity and are carried at amortized cost on the
accompanying balance sheet.
Accounts
receivable
The
majority of the Company’s commercial accounts receivable are due from Original
Equipment Manufacturers ("OEM’s”). Credit is extended based on evaluation of a
customers' financial condition and, generally, collateral is not required.
Accounts receivable are payable in U.S. dollars, are due within 30-90 days
and
are stated at amounts due from customers net of an allowance for doubtful
accounts. Any account outstanding longer than the contractual payment terms
is
considered past due.
Allowance
for doubtful account
The
allowance for doubtful accounts reflects an estimate of probable losses inherent
in the accounts receivable balance. The allowance is determined based on a
variety of factors, including the length of time receivables are past due,
historical experience, the customer's current ability to pay its obligation,
and
the condition of the general economy and the industry as a whole. The Company
will record a specific reserve for individual accounts when the Company becomes
aware of a customer's inability to meet its financial obligations, such as
in
the case of bankruptcy filings or deterioration in the customer's operating
results or financial position. If circumstances related to customers change,
the
Company would further adjust estimates of the recoverability of
receivables.
Inventory
Inventory
is stated at the lower of cost or market. Cost is determined using the first-in
first-out method. Cost includes materials, labor, and manufacturing overhead
related to the purchase and production of inventories. The Company regularly
reviews inventory quantities on hand, future purchase commitments with the
Company’s suppliers, and the estimated utility of the inventory. If the Company
review indicates a reduction in utility below carrying value, the inventory
is
reduced to a new cost basis.
Equipment,
furniture and leasehold improvements
Equipment,
furniture and leasehold improvements are stated at cost. Depreciation on
equipment is calculated using the straight-line method of depreciation over
its
estimated useful life. Amortization of leasehold improvements is calculated
by
using the straight-line method over the shorter of their estimated useful lives
or lease terms. Expenditures for maintenance and repairs are charged to expense
as incurred.
In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company performs impairment tests on its long-lived
assets when circumstances indicate that their carrying amounts may not be
recoverable. If required, recoverability is tested by comparing the estimated
future undiscounted cash flows of the asset or asset group to its carrying
value. Impairment losses, if any, are recognized based on the excess of the
assets' carrying amounts over their estimated fair values.
Intangible
Assets
The
Company’s intangible assets consist of patents that are amortized over their
estimated useful lives of fifteen years using the straight line method. Total
intangible amortization expense was approximately $4 thousand, $4 thousand,
and
$2 thousand for the years ended December 31, 2006, 2005, and 2004,
respectively.
Advertising
Costs
related to advertising and promotion of products is charges to sales and
marketing expense as incurred. Advertising expense for the years ended December
31, 2006, 2005 and 2004 were $296 thousand, $108 thousand, and $0,
respectively.
Income
taxes
The
Company accounts for income taxes in accordance with the provisions of Statement
of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS
No. 109”). SFAS No. 109 requires that the Company recognize deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined on the basis of
the
difference between the tax basis of assets and liabilities and their respective
financial reporting amounts (“temporary differences”) at enacted tax rates in
effect for the years in which the temporary differences are expected to reverse.
The Company records an estimated valuation allowance on its deferred income
tax
assets if it is not more than likely that these deferred income tax assets
will
be realized.
Loss
per common share
In
accordance with SFAS No. 128, "Basic Earnings Per Share", net loss per common
share amounts ("basic EPS") is computed by dividing net loss by the weighted
average number of common shares outstanding and excluding any potential
dilution. Net loss per common share amounts assuming dilution ("diluted EPS")
reflects the potential dilution from the exercise of stock options and warrants.
These common equivalent shares have been excluded from the computation of
diluted EPS for all periods presented as their effect is antidilutive. The
years
ended December 31, 2006, 2005, and 2004 do not include options and warrants
to
purchase 4,613,919, 4,424,988 and 3,517,739 respectively, of common equivalent
shares, as their effect would be antidilutive.
Comprehensive
income (loss)
SFAS
No.
130, "Reporting Comprehensive Income", requires companies to report all changes
in equity during a period, except those resulting from investment by owners
and
distributions to owners, for the period in which they are recognized.
Comprehensive income (loss) is the total of net income (loss) and other
comprehensive income (loss) items, such as unrealized gains or losses on foreign
currency translation adjustments. Comprehensive income (loss) must be reported
on the face of the annual financial statements. The Company's operations did
not
give rise to any material items includable in comprehensive income (loss),
which
were not already in net loss for the years ended December 31, 2006, 2005, and
2004. Accordingly, the Company's comprehensive loss is the same as its net
income (loss) for the periods presented.
Stock-based
compensation
On
January 1, 2006, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payment”, which requires the Company to recognize expense related
to the fair value of the Company’s share-based compensation issued to employees
and directors. Prior to January 1, 2006, the Company accounted for share-based
compensation under the recognition and measurement provisions of
APB No. 25 and related interpretations, as permitted by SFAS No. 123.
We adopted SFAS No. 123R using the modified prospective transition method.
Accordingly, periods prior to adoption have not been restated. Compensation
cost
recognized for the twelve months ended December 31, 2006 includes a)
compensation cost for all share-based compensation granted prior to, but not
vested as of January 1, 2006, based on the grant-date fair value estimated
in
accordance with the original provisions of SFAS No.123 and b) compensation
cost
for all share-based compensation granted beginning January 1, 2006, based on
the
grant-date fair value estimated in accordance with the provisions of SFAS
No.123R. The compensation cost was recognized using the straight-line
attribution method. See Note 10 for a further discussion on stock-based
compensation.
Fair
value of financial instruments
At
December 31, 2006, the Company's cash, cash equivalents, accounts receivable,
short-term investments and accounts payable are shown at cost which approximates
fair value due to the short-term nature of these instruments.
Note
3- RECEIVABLES
Receivables
consisted of the following (in thousands):
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Trade
receivables
|
|
$
|
1,351
|
|
$
|
1,309
|
|
Less
allowance for doubtful accounts
|
|
|
(443
|
)
|
|
(487
|
)
|
Net
receivables
|
|
$
|
908
|
|
$
|
822
|
|
Note
4 - INVENTORY
The
components of inventories were as follows (in thousands):
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Raw
materials
|
|
$
|
1,146
|
|
$
|
2,353
|
|
Work
in process
|
|
|
558
|
|
|
107
|
|
Finished
goods
|
|
|
781
|
|
|
1,379
|
|
Total
Inventory
|
|
$
|
2,485
|
|
$
|
3,839
|
|
Note
5 - EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment,
furniture and leasehold improvements consist of the following (in thousands):
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Computer
hardware and software
|
|
$
|
1,017
|
|
$
|
893
|
|
Lab
and factory equipment
|
|
|
3,312
|
|
|
3,182
|
|
Furniture,
fixtures, and office equipment
|
|
|
306
|
|
|
256
|
|
Assets
under capital leases
|
|
|
66
|
|
|
66
|
|
Leasehold
improvements
|
|
|
473
|
|
|
473
|
|
Construction
in progress
|
|
|
—
|
|
|
100
|
|
Total
equipment, furniture and leasehold improvements
|
|
|
5,174
|
|
|
4,970
|
|
Less:
accumulated depreciation
|
|
|
(4,508
|
)
|
|
(3,671
|
)
|
Equipment,
furniture and leasehold improvements, net
|
|
$
|
666
|
|
$
|
1,299
|
|
Depreciation
expense was $837, $904 and $617 for the years ended December 31, 2006, 2005,
and
2004, respectively. Assets under capital leases are fully
amortized.
Note
6 - DEBT
Debt
is
as follows (in thousands):
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Current
portion of long-term debt:
|
|
|
|
|
|
Capitalized
lease obligations
|
|
$
|
6
|
|
$
|
16
|
|
Other
debt
|
|
|
58
|
|
|
|
|
6%
Senior Secured Convertible Notes
|
|
|
2,880
|
|
|
—
|
|
Less:
Unamortized discount on notes payable
|
|
|
(1,721
|
)
|
|
—
|
|
Current
portion of long-term debt, net
|
|
|
1,223
|
|
|
16
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
Capitalized
lease obligations
|
|
|
—
|
|
|
6
|
|
Other
debt
|
|
|
104
|
|
|
50
|
|
6%
Senior Secured Convertible Notes
|
|
|
2,890
|
|
|
—
|
|
Less:
Unamortized discount on notes payable
|
|
|
(765
|
)
|
|
—
|
|
Long-term
debt, net
|
|
|
2,229
|
|
|
56
|
|
Total
debt, net
|
|
$
|
3,452
|
|
$
|
72
|
|
Maturities
with respect to the capitalized lease obligation, other debt and the 6% Senior
Secured Convertible Notes as of December 31, 2006 are as follows (in
thousands):
Years
Ending December 31,
|
|
|
|
2007
|
|
$
|
2,944
|
|
2008
|
|
$
|
2,934
|
|
2009
|
|
$
|
60
|
|
On
July
21, 2006, the Company entered into several Note Purchase Agreements for the
sale
of approximately $5.99 million of senior secured debentures (the “Notes”)
together with warrants to purchase approximately 1.8 million shares of common
stock, par value $.001 per share. 50% of the aggregate principal amount matures
on July 21, 2007 and the remaining 50% matures on January 21, 2008. The Notes
pay 6% per annum interest quarterly beginning September 1, 2006. Interest of
approximately $124 thousand was paid to investors in the year ended December
31,
2006.
The
Company accounted for the net proceeds from the issuance of the Notes as two
separate components: a detachable warrant component and a debt component.
The Company determined the relative fair value of warrants to be $3.4
million which was recorded as debt discount, a reduction of the carrying value
of the Notes. The following assumptions were used to determine the fair value
of
the warrants:
Dividend
yield
|
|
0%
|
Risk
free interest rates
|
|
4.99%
|
Expected
volatility
|
|
122%
|
Expected
term (in years)
|
|
5.0
years
|
The
discount is being amortized to interest expense using the straight-line method
as it approximates the effective interest method over the term of the Notes.
For
the twelve months ended December 31, 2006, debt discount of $956 thousand was
amortized to interest expense. See
Note
9.
The
Notes
have specific terms that the Company must adhere to, i.e. maintaining minimum
cash and cash equivalent balances and trading its stock on specific Exchanges.
On March 9, 2007, the terms of the Note were amended to allow the Company to
trade its common stock on the Over-The-Counter Bulletin Board and also requiring
the Company to maintain cash and cash equivalent balances of $200,000 from
February 26, 2007 through March 31, 2007. Subsequent to March 31, 2007, the
company must maintain cash and cash equivalent balances of $600,000. On March
12, 2007, the Company was suspended from trading on the AMEX and is currently
trading the Company’s common stock on the Over-The Counter Bulletin Board. The
delisting from the AMEX triggered a compliance condition on the notes payable.
As a result the Company is required to pay the noteholders monthly interest
at
1% on the outstanding principal of the notes payable. The Company received
a
waiver from the noteholders that allows the Company to accrue the interest
and
delay the interest payment until the earliest of the Company (i) completing
$2
million of debt or equity financing or (ii) the occurrence of a Repurchase
Event
per the note. On March 27, 2007, the cash and cash equivalents balances
requirement was amended to maintain cash and cash equivalents balances of
$200,000 from April 1, 2007 through May 15, 2007. Subsequent to May 15, 2007,
the Company must maintain $600,000 in cash and cash equivalent balances.
Note
7 - DEBT SETTLEMENT AND DEBT CONVERSION
In
February 2004, eMagin entered into an agreement whereby the holders of eMagin’s
Secured Convertible Notes (the "Notes"), which were due in November 2005, agreed
to an early conversion of all of the $7.8 million principal amount of the Notes,
together with the $.742 million of accrued interest on the Notes, into 1,139,462
shares of common stock of eMagin. On the date of the conversion the Company
recorded $1.6 million in interest expense related to the unamortized debt
discount and beneficial conversion feature and $75 thousand in interest expense
related to the write-off of deferred financing costs.
In
consideration of the Noteholders agreeing to the early conversion of the Notes,
eMagin issued the Noteholders warrants to purchase an aggregate of 250,000
shares of common stock (the "Warrants"), which Warrants are exercisable at
a
price of $27.60 per share. 150,000 of the Warrants, "D warrants", were
exercisable until December 31, 2005. The remaining 100,000 of the Warrants,
"E
warrants", are exercisable until June 10, 2008. Using the Black-Scholes method
of valuating warrants, an expense totaling $3.18 million was recorded in
interest expense in the first quarter of 2004 to record an estimated value
for
these warrants. The fair value of the warrants was estimated at $23.00 using
the
Black-Scholes option-pricing model with the following assumptions for the two
sets of warrants: (1) average expected volatility of 100%, (2) average risk-free
interest rates of 3.52%, (3) dividends of 0%, and (4) Average Term (in days)
of
670 for the D warrants and 1,460 for the E warrants.
Note
8 - INCOME TAXES
The
difference between the statutory federal income tax rate on the Company's
pre-tax income and the Company's effective income tax rate is summarized as
follows:
|
|
For
the years ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
U.S.
Federal income tax provision (benefit) at federal statutory
rate
|
|
|
(34)
|
%
|
|
(35)
|
%
|
|
(35)
|
%
|
Change
in valuation allowance
|
|
|
32
|
%
|
|
35
|
%
|
|
35
|
%
|
Permanent
difference
|
|
|
2
|
%
|
|
0
|
%
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Significant
components of eMagin's deferred tax assets and liabilities are as follows
(numbers are in thousands):
|
|
For
the years ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
operating losses
|
|
$
|
53,974
|
|
$
|
54,607
|
|
$
|
39,262
|
|
Goodwill
and other intangibles
|
|
|
14,422
|
|
|
17,957
|
|
|
19,894
|
|
Allowance
for doubtful accounts
|
|
|
159
|
|
|
195
|
|
|
274
|
|
Deferred
payroll
|
|
|
13
|
|
|
18
|
|
|
25
|
|
Accrued
vacation payable
|
|
|
132
|
|
|
142
|
|
|
81
|
|
Depreciation
|
|
|
(44
|
)
|
|
(120
|
)
|
|
—
|
|
Stock
compensation
|
|
|
279
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
68,935
|
|
|
72,799
|
|
|
59,536
|
|
Less
valuation allowance
|
|
|
(68,935
|
)
|
|
(72,799
|
)
|
|
(59,536
|
)
|
Net
deferred tax asset
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
As
of
December 31, 2006, eMagin has federal and state net operating loss carryforwards
of approximately $149.9 million that will be available to offset future taxable
income, if any, through December 2026. The utilization of net operating losses
is subject to a substantial limitation due to the change of ownership provisions
under Section 382 of the Internal Revenue Code and similar state provisions.
Such limitation may result in the expiration of the net operating losses before
their utilization. As of December 31, 2006 and 2005, the Company has gross
deferred tax assets of approximately of $68 and $73 million,
respectively,
primarily resulting from the future tax benefit of net operating loss
carryforwards and temporary differences relating to amortization of intangible
assets. Such net deferred tax assets are fully offset by a valuation allowance
due to the uncertainty as to their realizability. A valuation allowance has
been
established to reserve for the deferred tax assets arising from the net
operating losses and other temporary differences due to the uncertainty that
their benefit will be realized in the future. The valuation allowance decreased
approximately $3.9 million for the year ended December 31, 2006 and increased
$13.3 million for the year ended December 31, 2005.
Note
9 - SHAREHOLDERS' EQUITY
Common
Stock
2006
At
the
Company’s 2006 Annual Meeting of Shareholders held on October 20, 2006, the
Company’s shareholders approved an amendment to the Company’s certificate of
incorporation to effect a reverse stock split of the issued and outstanding
common stock on a ratio of 1-for-10. On November 3, 2006, the reverse stock
split became effective. The Company has adjusted its shareholders’ equity
accounts by reducing its stated capital and increasing its additional paid-in
capital by approximately $91 thousand as of December 31, 2006, 2005 and 2004
to
reflect the reduction in outstanding shares as a result of the reverse stock
split.
On
July
21, 2006, the Company entered into several Note Purchase Agreements for the
sale
of approximately $5.99 million of senior secured debentures (the “Notes”) and
warrants to purchase approximately 1.8 million shares of common stock, par
value
$.001 per share. The investors purchased $5.99 million principal amount of
Notes
with conversion prices of $2.60 per share that may convert into approximately
2.3 million shares of common stock and 5 year warrants exercisable at $3.60
per
share into approximately 1.6 million shares of common stock. If the Notes are
not converted, 50% of the principal amount will be due on July 21, 2007 and
the
remaining 50% will be due on January 21, 2008. Commencing September 1, 2006,
6%
interest is payable in quarterly installments on outstanding notes. For the
year
ended December 31, 2006, the Company paid approximately $124,000 of interest
to
investors. The Company received approximately $5.4 million, net of deferred
financing costs of approximately $0.6 million which are amortized over the
life
of the Notes. The Company amortized approximately $221 thousand of deferred
financing costs in 2006. For the year ended December 31, 2006, two note holders
converted their promissory notes valued at approximately $220 thousand and
were
issued an aggregate of approximately 85,000 shares.
An
additional $0.5 million was to be invested through the exercise of a warrant
to
purchase approximately 192,000 shares of common stock at $2.60 per share on
or
prior to December 14, 2006, or at the election of the Company, by the purchase
of additional Notes and warrants. The Company determined the relative fair
value
of the warrants to be approximately $157,000 which was recorded as an other
asset. The following assumptions were used to determine the fair value of the
warrant:
Dividend
yield
|
|
0%
|
Risk
free interest rates
|
|
5.25%
|
Expected
volatility
|
|
122%
|
Expected
term (in years)
|
|
0.4
years
|
|
|
|
The
investor elected not to exercise its warrants prior to December 14, 2006. The
fair value of the warrants which was recorded as an other asset was written
off
as a sales, general and administrative expense.
Under
EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in, a Company’s Own Stock”, the fair value of the warrants,
$3.6 million, have been recorded as a liability since the warrant agreement
requires a potential net-cash settlement in the first year of the warrant
agreement if the registration statement is not effective. As of December 31,
2006, the registration statement is effective. The liability will be adjusted
to
fair value at each reporting period. The change in the fair value of the
warrants will be recorded in the Consolidated Statement of Operations as other
income (expense). For the twelve months ended December 31, 2006, the Company
recorded approximately $2.4 million of gain from the change in the fair value
of
the derivative liability.
In
connection with the Notes, a registration rights agreement was entered into
which requires the Company to file a registration statement for the resale
of
the common stock underlying the Notes and the warrants. The Company must use
its
best efforts to have the registration statement declared effective by the end
of
a specified grace period and also maintain the effectiveness of the registration
statement until all shares of common stock underlying the Notes and the warrants
have been sold or may be sold without volume restrictions pursuant to Rule
144(k) of the Securities Act. If the Company fails to have the registration
statement declared effective within the grace period or fails to maintain the
effectiveness as set forth in the preceding sentence, the Company is required
to
pay each investor cash payments equal to 1.0% of the aggregate purchase price
monthly until the failure is cured. If the Company fails to pay the liquidated
damages, interest at 16.0% will accrue until the liquidated damages are paid
in
full. The registration statement was filed and declared effective by the
Securities and Exchange Commission within the specified grace period. As of
December 31, 2006, the registration statement remains effective.
The
Company accounts for the registration rights agreement as a separate
freestanding instrument and accounts for the liquidated damages provision as
a
derivative liability subject to SFAS 133. The estimated fair value of the
derivative liability is based on an estimate of the probability and costs of
cash penalties being incurred. The Company determined that the fair value of
the
liability was immaterial and it is not recorded in accrued liabilities. The
Company will revalue the potential liability at each balance sheet
date.
As
a
result of the issuance of the Notes, the outstanding 116,576 Series A Common
Stock Purchase Warrants, that were issued to certain accredited and/or
institutional investors pursuant to the Securities Purchase Agreement dated
January 9, 2004, were re-priced from $5.50 to $2.60 and the outstanding 650,001
Series F Common Stock Purchase Warrants, that were issued to certain accredited
and/or institutional investors pursuant to the Securities Purchase Agreement
dated October 25, 2004, were re-priced from $10.90 to $8.60.
For
the
year ended December 31, 2006, the Company received approximately $10,000 for
the
exercise of 5,000 options and there were no warrants exercised. For year ended
December 31, 2006, the Company issued approximately 254,000 shares of common
stock in lieu of cash payments in the amount of approximately $580,000 as
compensation for services rendered and to be rendered in the future.
The fair value of the services was measured at market value of the common stock
at the time of payment. As such, the Company recorded the fair value of the
services rendered in selling, general and administrative expenses in the
accompanying audited consolidated statement of operations for the year ended
December 31, 2006.
The
2004
Non-Employee Compensation Plan (the “2004 Plan”) was established to help the
Company retain consultants, professionals and service providers. The Board
of
Directors will select the recipient of the awards, the nature of the awards
and
the amount. At the 2006 Annual Shareholder meeting, the shareholders approved
an
increase in the number of authorized shares of common stock usable from 200,000
to 950,000. This number is subject to adjustment in the event of a
recapitalization, reorganization or similar event.
2005
On
October 20, 2005, the Company entered into a Securities Purchase Agreement,
pursuant to which the Company sold and issued 1,661,906 shares of common stock,
par value $0.001 per share, at a price of $5.50 per share and warrants to
purchase up to 997,143 shares of common stock for an aggregate purchase price
of
approximately $9.14 million. The net proceeds received after expenses were
approximately $8.4 million.
The
warrants are exercisable at a price of $10.00 per share and expire on April
20,
2011. Of the 997,143 warrants, 664,763 of the warrants are exercisable on or
after May 20, 2006. The remaining 332,381 are exercisable after March 31, 2007,
however these warrants will be cancelled if the Company’s net revenue for fiscal
year 2006 exceeds $20 million or if the investor has sold more than 25% of
the
shares purchased under the securities purchase agreement prior to December
31,
2006.
As
a
result of the above transaction, the outstanding 121,335 Series A Common Stock
Purchase Warrants, that were issued to participants of the Securities Purchase
Agreement dated January 9, 2004, were re-priced from $10.50 to $5.50 and the
outstanding 650,001 Series F Common Stock Purchase Warrants, that were issued
to
participants of the Securities Purchase Agreement dated October 25, 2004, were
re-priced from $12.10 to $10.90.
A
registration rights agreement was entered into in connection with the private
placement which requires the Company to file a registration statement for the
resale of the common stock and the shares underlying the warrants. The Company
must use its best efforts to have the registration statement declared effective
by the end of a specified grace period and also maintain the effectiveness
of
the registration statement until all common stock have been sold or may be
sold
without volume restrictions pursuant to Rule 144(k) of the Securities Act.
If
the Company fails to have the registration statement declared effective within
the grace period or fails to maintain the effectiveness, the agreement requires
the Company to pay each investor cash payments equal to 2.0% of the aggregate
purchase price monthly until the failure is cured. If the Company fails to
pay
the liquidated damages, interest at 15.0% will accrue until the liquidated
damages are paid in full. The registration statement was filed and declared
effective within the specified grace period. As of December 31, 2006, the
registration statement remains effective.
The
Company accounts for the registration rights agreement as a separate
freestanding instrument and accounts for the liquidated damages provision as
a
derivative liability subject to SFAS 133. The estimated fair value of the
liability is based on an estimate of the probability and costs of cash penalties
being incurred. The Company determined that the fair value of the liability
was
immaterial and it is not recorded in accrued liabilities. The Company will
revalue the potential liability at each balance sheet date.
In
2005,
the Company received approximately $1.6 million for the exercise of
approximately 11,100 options and 306,000 warrants. The Company also issued
approximately 54,300 shares of common stock for the payment of $461,000 of
services rendered and to be rendered in the future. The fair value of the
services was measured at market value of the common stock at the time of
payment. As such, the Company recorded the fair value of the services rendered
in selling, general and administrative expenses in the accompanying audited
consolidated statement of operations for the year ended December 31, 2005.
2004
On
January 9, 2004, the Company entered into a Securities Purchase Agreement with
several accredited institutional and private investors whereby such investors
purchased an aggregate of 333,336 shares of common stock and 431,221 warrant
shares for an aggregate purchase price of approximately $4.2 million.
The
shares of common stock were priced at a 20% discount to the average closing
price of the stock from December 30, 2003 to January 6, 2004, which ranged
from
$13.80 to $19.40 per share during the period for an average closing price of
$12.60 per share. In addition, the investors received warrants to purchase
an
aggregate of 200,002 shares of common stock (subject to anti-dilution
adjustments) exercisable at a price of $17.40 per share for a period of five
(5)
years. The warrants were priced at a 10% premium to the average closing price
of
the stock for the pricing period.
In
connection with the Securities Purchase Agreement, eMagin also issued additional
warrants to the investors to acquire an aggregate of 231,219 shares of common
stock. 120,691 of such warrants are exercisable, within 6 months from the
effective date of the registration statement covering these securities, at
a
price of $17.40 per share (a 10% premium to the average closing price of the
stock for the pricing period), and 110,528 of such warrants are exercisable
within 12 months from the effective date of the registration statement covering
these securities, at a price of $19.00 per share (a 20% premium to the average
closing price of the stock for the pricing period).
The
Company also entered into a registration rights agreement with the
aforementioned investors with respect to the common stock issued and common
stock issuable upon the exercise of the warrants. A registration rights
agreement was entered into in connection with the private placement which
requires the Company to file a registration statement for the resale of the
common stock and the shares underlying the warrants. The Company must use its
best efforts to have the registration statement declared effective by the end
of
a specified grace period and also maintain the effectiveness of the registration
statement until all common stock have been sold or may be sold without volume
restrictions pursuant to Rule 144(k) of the Securities Act. If the Company
fails
to have the registration statement declared effective within the grace period
or
fails to maintain the effectiveness, the agreement requires the Company to
pay
each investor cash payments equal to 2.0% of the aggregate purchase price
monthly until the failure is cured. If the Company fails to pay the liquidated
damages, interest at 15.0% will accrue until the liquidated damages are paid
in
full. The registration statement was filed and declared effective within the
specified grace period. As of December 31, 2006, the registration statement
remains effective.
The
Company accounts for the registration rights agreement as a separate
freestanding instrument and accounts for the liquidated damages provision as
a
derivative liability subject o SFAS 133. The estimated fair value of the
liability is based on an estimate of the probability and costs of cash penalties
being incurred. The Company determined that the fair value of the liability
was
immaterial and it is not recorded in accrued liabilities. The Company will
revalue the potential liability at each balance sheet date.
In
February 2004, the Company and all of the holders of the Secured Convertible
Notes (the "Notes"), which were due in November 2005, entered into an agreement
whereby the holders agreed to an early conversion of 100% of the principal
amount of the Notes aggregating $7.825 million, together with all of the accrued
interest of approximately $742,000 on the Notes, into 1,139,462 shares of the
Company's common stock. The listing of the shares issuable pursuant to such
agreement was approved by the American Stock Exchange.
In
consideration of the Noteholders agreeing to the early conversion of the Notes,
eMagin agreed to issue the Noteholders warrants to purchase an aggregate of
250,000 shares of common stock (the "warrants"), which warrants are exercisable
at a price of $27.60 per share. 150,000 of the warrants (series D warrants)
are
exercisable until the later of (i) twelve (12) months from the date upon which
a
registration statement covering the shares issuable upon exercise of the
Warrants is declared effective by the Securities and Exchange Commission, or
(ii) December 31, 2005. The remaining 100,000 of the warrants (series E
warrants) are exercisable until June 10, 2008. Using the Black-Scholes method
of
valuating warrants, an expense totaling $3.18 million was recorded in interest
expense during 2004 to record an estimated fair value of these warrants. The
fair value of the warrants, $3.18 million, was estimated at $23.00 using the
Black-Scholes option-pricing model with the following assumptions for the two
sets of warrants: (1) average expected volatility of 100%, (2) average risk-free
interest rates of 3.52%, (3) dividends of 0%, and (4) Average Term (in days)
of
670 for the series D warrants and 1,460 for the series E warrants.
In
connection with the above conversion, eMagin also entered into a Registration
Rights Agreement with the holders of the Notes providing the holders with
certain registration rights under the Securities Act of 1933, as amended, with
respect to the common stock issuable upon exercise of the warrants.
In
August
2004, the Company and certain of the holders of its outstanding Class A, B
and C
common stock purchase warrants entered into an agreement pursuant to which
the
Company and the holders of the warrants agreed to the $9.00 re-pricing and
exercise of Class A, B and C common stock purchase warrants. As a condition
to
the transaction, the holders of the warrants agreed to limit the right of
participation that they were granted in January 9, 2004. As a result of the
transaction, the holders agreed to re-price and exercise approximately, 209,989
Class A, B and/or C common stock purchase warrants for an aggregate of
$1,889,900.
On
October 21, 2004, the Company entered into a Securities Purchase Agreement,
pursuant to which eMagin sold and issued 1,033,453 shares of common stock,
and
series F common stock warrants to purchase 512,976 of common stock for an
aggregate purchase price of $10,772,500. The common
stock was
priced at $10.50. The common stock and the shares underlying the warrants were
drawn-down off of a shelf registration statement which was filed by the Company
on May 5, 2004, and declared effective by the Securities and Exchange Commission
on June 10, 2004. Net proceeds received after deducting expenses was
approximately $9.75 million.
The
Series F Warrants are exercisable from April 25, 2005 until April 25, 2010
at an
exercise price of $12.10 per share, subject to adjustment upon the occurrence
of
specific events, including stock dividends, stock splits, combinations or
reclassifications of the Company’s common stock or distributions of cash or
other assets. In addition, the Series F Warrants contain provisions protecting
against dilution resulting from the sale of additional shares of the Company’s
common stock for less than the exercise price of the Series F Warrants, or
the
market price of the common stock, on the date of such issuance or sale.
On
October 28, 2004, eMagin entered into a Securities Purchase Agreement, pursuant
to which eMagin sold and issued 274,048 shares of common stock, and series
F
common stock purchase warrants to purchase eMagin’s common stock to purchasers
for an aggregate purchase price of $2,877,500. The common stock was priced
at
$10.50. The common stock and the shares underlying the warrants were drawn-down
off of a shelf registration statement which was filed by us on May 5, 2004,
and
declared effective by the Securities and Exchange Commission on June 10, 2004.
Net proceeds received after deducting expenses was approximately $2.65 million.
The
Series F Warrants are exercisable from April 25, 2005 until April 25, 2010
to
purchase up to 137,024 shares of common stock at an exercise price of $12.10
per
share, subject to adjustment upon the occurrence of specific events, including
stock dividends, stock splits, combinations or reclassifications of eMagin’s
common stock or distributions of cash or other assets. In addition, the Series
F
Warrants contain provisions protecting against dilution resulting from the
sale
of additional shares of eMagin’s common stock for less than the exercise price
of the Series F Warrants, or the market price of the common stock, on the date
of such issuance or sale.
As
a
result of the above transaction, 121.335 outstanding Series A Common Stock
Purchase Warrants, that were issued to participants of the Securities Purchase
Agreement dated January 9, 2004, were re-priced from $17.40 to $10.50.
The
Company paid a Placement Agent $814,000, a fee equal to 6% of the gross proceeds
of these offerings.
In
addition, the Company engaged Larkspur Capital Corporation, a Related Party,
to
act as an adviser in connection with the sale of these securities. For such
services, the Company paid Larkspur Capital Corporation a fee of $136,500,
an
amount equal to 1% of the gross proceeds of these offerings and 9,326 warrants.
In
2004,
the Company received $5,173,945 for the exercise of 552,105 options and 353,335
warrants.
The
Company also issued 38,602 shares of common stock for the payment of $531,031
for services rendered and to be rendered in the future. The fair value of the
services was measured at market value of the common stock at the time of
payment. As such, the Company recorded the fair value of the services rendered
in selling, general and administrative expenses in the accompanying audited
consolidated statement of operations for the year ended December 31, 2004.
Note
10 - STOCK COMPENSATION
Employee
stock purchase plan
In
2005,
the stockholders approved the 2005 Employee Stock Purchase Plan (“ESPP”). The
ESPP provides the Company’s employees with the opportunity to purchase common
stock through payroll deductions. Employees purchase stock semi-annually at
a
price that is 85% of the fair market value at certain plan-defined dates. At
December 31, 2006, the number of shares of common stock available for issuance
was 150,000 and the plan will automatically increase 75,000 shares on January
1
of each year for a period of three years starting January 1, 2006. As of
December 31, 2006, the plan had not been implemented.
Incentive
compensation plans
In
1994,
the Company established the 1994 Stock Plan (the "1994 Plan"). The plan provided
for the granting of options to purchase an aggregate of 1,286,000 shares of
the
common stock to employees and consultants. This Plan expired in 2004.
In
2000,
the Company established the 2000 Stock Option Plan (the "2000 Plan"). The Plan
permits the granting of options and stock purchase rights to employees and
consultants of the Company. The 2000 Plan allows for the grant of incentive
stock options meeting the requirements of Section 422 of the Internal Revenue
Code of 1986 (the "Code") or non-qualified stock options which are not intended
to meet such requirements.
In
2003,
the Company established the 2003 Stock Option Plan (the "2003 Plan"). The 2003
Plan provided for the granting of options to purchase an aggregate of 9,200,000
shares of the common stock to employees and consultants. On July 2, 2003, the
shareholders approved the plan and the 2003 Plan was subsequently amended by
the
Board of Directors on July 2, 2003 to reduce the number of additional shares
that may be provided for issuance under the "evergreen" provisions of the 2003
Plan. The amended 2003 Plan provides for an increase of 2,000,000 shares in
January 2004 and an annual increase on January 1 of each year for a period
of
nine (9) years commencing on January 1, 2005 of 3% of the diluted shares
outstanding. The shareholders approved an amendment to the 2003 Plan to provide
grants of shares of common stock in addition to options to purchase shares
of
common stock. In 2005, approximately 2.4 million shares were added to the plan.
Vesting
terms of the options range from immediate vesting to a ratable vesting period
of
5 years. Option activity for the years ended December 31, 2006, 2005 and 2004
is
summarized as follows:
|
|
Number
of Shares
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life (In Years)
|
|
Aggregate
Intrinsic Value
|
|
Balances
at December 31, 2003
|
|
|
1,216,177
|
|
$
|
5.30
|
|
|
|
|
|
|
|
Options
granted
|
|
|
677,990
|
|
|
16.00
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
(16,146
|
)
|
|
2.70
|
|
|
|
|
|
|
|
Options
cancelled
|
|
|
(522,105
|
)
|
|
11.20
|
|
|
|
|
|
|
|
Balances
at December 31, 2004
|
|
|
1,355,916
|
|
|
11.40
|
|
|
|
|
|
|
|
Options
granted
|
|
|
582,400
|
|
|
9.60
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
(11,059
|
)
|
|
3.40
|
|
|
|
|
|
|
|
Options
cancelled
|
|
|
(121,993
|
)
|
|
13.90
|
|
|
|
|
|
|
|
Balances
at December 31, 2005
|
|
|
1,805,264
|
|
|
10.90
|
|
|
|
|
|
|
|
Options
granted
|
|
|
185,744
|
|
|
4.30
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
(5,000
|
)
|
|
2.10
|
|
|
|
|
|
|
|
Options
forfeited
|
|
|
(453,115
|
)
|
|
7.47
|
|
|
|
|
|
|
|
Options
cancelled
|
|
|
(467,148
|
)
|
|
11.97
|
|
|
|
|
|
|
|
Balances
at December 31, 2006
|
|
|
1,065,745
|
|
$
|
2.94
|
|
|
3.75
|
|
$
|
—
|
|
Vested
or expected to vest at December 31, 2006 (1)
|
|
|
991,143
|
|
$
|
2.94
|
|
|
3.75
|
|
$
|
—
|
|
Exercisable
at December 31, 2006
|
|
|
711,310
|
|
$
|
2.93
|
|
|
3.01
|
|
$
|
—
|
|
At
December 31, 2006, there were 1,069,423 shares available for grant under the
2003 Plan and the 2000 Plan.
The
following table summarizes information about stock options outstanding at
December 31, 2006:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual Life
(In
Years)
|
|
Weighted
Average Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average Exercise Price
|
|
$2.10
- $2.70
|
|
|
925,689
|
|
|
4.04
|
|
$
|
2.57
|
|
|
590,894
|
|
$
|
2.54
|
|
$3.40
- $5.80
|
|
|
105,924
|
|
|
1.09
|
|
|
3.69
|
|
|
100,424
|
|
|
3.58
|
|
$6.60
- $22.50
|
|
|
34,132
|
|
|
4.31
|
|
|
10.59
|
|
|
19,992
|
|
|
11.16
|
|
|
|
|
1,065,745
|
|
|
3.75
|
|
$
|
2.94
|
|
|
711,310
|
|
$
|
2.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The
expected to vest options are the result of applying the pre-vesting forfeiture
rate assumptions to total outstanding options.
The
aggregate intrinsic value in the table above represents the difference between
the exercise price of the underlying options and the quoted price of the
Company’s common stock for the options that were in-the-money. As of December
31, 2006 there were no options that were in-the-money. The Company’s closing
stock price was $1.04 as of December 31, 2006. The Company issues new shares
of
common stock upon exercise of stock options.
On
July
21, 2006, certain employees and Directors of the Company agreed to cancel
approximately 467,000 shares underlying existing stock options in return for
the
re-pricing of approximately 869,000 existing options at $2.60 per share having
a
weighted average original exercise price of $11.97. Option grants that have
not
been re-priced will remain unchanged. The unvested options which were re-priced
will continue to vest on original vesting schedules, but in no event vest prior
to January 19, 2007. Previously vested options which were re-priced will now
vest on January 19, 2007. Re-priced grants will be forfeited if the individual
leaves voluntarily. The Company has accounted for the re-pricing and
cancellation transactions as a modification under SFAS No. 123R. The Company
will recognize the additional compensation charges over the four months ended
January 19, 2007 for previously vested options and over the remaining vesting
period for unvested options. Incremental cost was $171 thousand and the amount
recognized in 2006 was $118 thousand, net of forfeitures.
At
the
Company’s 2006 Annual Meeting of Shareholders held on October 20, 2006, the
Company’s shareholders approved an amendment to the Company’s Certificate of
Incorporation to effect a reverse stock split of the Company’s outstanding
common stock at an exchange ratio of one-for-ten. On November 3, 2006, the
reverse stock split became effective. Each holder of ten shares of the Company’s
common stock became the holder of one share of the Company’s common stock. In
addition, all outstanding options, warrants, and convertible notes were adjusted
in accordance with their terms and pursuant to the ratio of the reverse split.
All fractional shares were rounded up to the next whole number of shares.
Stock
based compensation
On
January 1, 2006, the Company adopted the provisions of SFAS No. 123R, which
requires the Company to recognize expense related to the fair value of the
Company’s share-based compensation issued to employees and directors. Prior to
January 1, 2006, the Company accounted for share-based compensation under the
recognition and measurement provisions of APB No. 25 and related
interpretations, as permitted by SFAS No. 123. The Company adopted SFAS No.
123R
using the modified prospective transition method. Accordingly, periods prior
to
adoption have not been restated. Compensation cost recognized for the twelve
months ended December 31, 2006 includes a) compensation cost for all share-based
compensation granted prior to, but not vested as of January 1, 2006, based
on
the grant-date fair value estimated in accordance with the original provisions
of SFAS No.123 and b) compensation cost for all share-based compensation granted
beginning January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS No.123R. The compensation cost was
recognized using the straight-line attribution method.
The
following table summarizes the allocation of stock-based compensation to expense
categories for the year ended December 31, 2006 (in thousands):
|
|
For
the year ended
December
31, 2006
|
|
|
|
|
|
Cost
of revenue
|
|
$
|
343
|
|
Research
and development
|
|
|
435
|
|
Selling,
general and administrative
|
|
|
2,113
|
|
Total
stock compensation expense
|
|
$
|
2,891
|
|
For
the
year ended December 31, 2006, stock compensation was approximately $2.9 million.
At December 31, 2006, total unrecognized compensation costs related to stock
options was approximately $3.4 million, net of estimated forfeitures. Total
unrecognized compensation cost will be adjusted for future changes in estimated
forfeitures and is expected to be recognized over a weighted average period
of
approximately 5.3 years.
The
Company recognizes compensation expense for options granted to non-employees
in
accordance with the provision of Emerging Issues Task Force (“EITF”) consensus
Issue 96-18, “Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services,”
which requires using a fair value options pricing model and re-measuring such
stock options to the current fair market value at each reporting period as
the
underlying options vest and services are rendered.
In
determining the fair value of stock options granted during the twelve month
periods ended December 31, 2006, 2005, and 2004, the following key assumptions
were used in the Black-Scholes option pricing model:
|
|
For
the years ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Risk
free interest rates
|
|
|
4.59%
- 4.82
|
%
|
|
4.4
|
%
|
|
3.6
|
%
|
Expected
volatility
|
|
|
123%
- 126
|
%
|
|
126
|
%
|
|
139
|
%
|
Expected
term ( in years)
|
|
|
5
years
|
|
|
5
years
|
|
|
5
years
|
|
We
have
not declared or paid any dividends and do not currently expect to do so in
the
near future. The risk-free interest rate used in the Black-Scholes is based
on
the implied yield currently available on U.S. Treasury securities with an
equivalent term. Expected volatility is based on the weighted average historical
volatility of the Company’s common stock for the most recent five year period.
The expected term of options represents the period that eMagin’s stock-based
awards are expected to be outstanding and was determined based on historical
experience and vesting schedules of similar awards.
The
following table shows the proforma effect on eMagin’s net loss and net loss per
share had compensation expense been determined based on the fair value at the
award grant date in accordance with SFAS No. 123 for the twelve months ended
December 31, 2005 and 2004 (in thousands, except per share data):
|
|
For
the years ended
December
31,
|
|
|
|
2005
|
|
2004
|
|
Net
loss applicable to common stockholders, as reported
|
|
$
|
(16,528
|
)
|
$
|
(12,711
|
)
|
Add:
Stock-based employee compensation expense included in reported net
loss
|
|
|
—
|
|
|
88
|
|
Deduct:
Stock-based employee compensation expense determined under fair value
method
|
|
|
(3,035
|
)
|
|
(1,743
|
)
|
Pro
forma net loss
|
|
$
|
(19,563
|
)
|
$
|
(14,366
|
)
|
Net
loss per share:
|
|
|
|
|
|
|
|
Basic
and diluted, as reported
|
|
$
|
(1.94
|
)
|
$
|
(1.98
|
)
|
Basic
and diluted, pro forma
|
|
$
|
(2.29
|
)
|
$
|
(2.23
|
)
|
|
|
|
|
|
|
|
|
Warrants
At
December 31, 2006, 3,548,174 warrants to purchase shares of common stock are
outstanding and exercisable at exercise prices ranging from $2.60 to $27.60
and
expiration dates ranging from June 20, 2007 to February 27, 2012.
|
|
Outstanding
Warrants
|
|
|
|
Shares
|
|
Weighted
Average Exercise Price
|
|
Balances
at December 31, 2003
|
|
|
1,233,629
|
|
$
|
8.00
|
|
Warrants
granted
|
|
|
1,335,587
|
|
|
16.90
|
|
Warrants
exercised
|
|
|
(353,335
|
)
|
|
15.20
|
|
Warrants
cancelled
|
|
|
(54,058
|
)
|
|
11.20
|
|
Balances
at December 31, 2004
|
|
|
2,161,823
|
|
$
|
11.40
|
|
Warrants
granted
|
|
|
997,143
|
|
|
10.00
|
|
Warrants
exercised*
|
|
|
(370,820
|
)
|
|
6.10
|
|
Warrants
cancelled
|
|
|
(168,421
|
)
|
|
26.70
|
|
Balances
at December 31, 2005
|
|
|
2,619,725
|
|
$
|
10.20
|
|
Warrants
granted
|
|
|
1,805,037
|
|
|
3.49
|
|
Warrants
exercised
|
|
|
—
|
|
|
—
|
|
Warrants
expired
|
|
|
(876,588
|
)
|
|
6.90
|
|
Balances
at December 31, 2006
|
|
|
3,548,174
|
|
$
|
7.05
|
|
*Cashless
exercise - 647,619 warrants
|
|
|
|
|
|
|
|
Note
11 - RECENTLY ISSUED ACCOUNTING STANDARDS
The
Financial Accounting Standards Board (“FASB”) has issued interpretation No. 48,
“Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement
No. 109” (“FIN 48”), regarding accounting for, and disclosure of, uncertain tax
positions. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. We do not anticipate that the adoption of this statement will have a
material effect on the Company’s financial position or results of
operation.
In
September 2006, the SEC issued SAB 108. SAB 108 provides guidance on
the consideration of the effects of prior year misstatements in quantifying
current year misstatements for the purpose of a materiality assessment. SAB
108
establishes an approach that requires quantification of financial statement
errors based on the effects of each of the Company’s balance sheet and statement
of operations and the related financial statement disclosures. SAB 108
permits companies to record the cumulative effect of initial adoption by
recording the necessary “correcting” adjustments to the carrying values of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings only if
material. SAB 108 is effective for fiscal years ending on or after
November 15, 2006.
In
November 2004, the FASB issued Statement No. 151 (“SFAS 151”), “Inventory
Costs, an Amendment of ARB No. 43, Chapter 4.” SFAS 151 clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material and requires that these items be recognized as current
period charges. SFAS 151 applies only to inventory costs incurred during
periods beginning after the effective date and also requires that the allocation
of fixed production overhead to conversion costs be based on the normal capacity
of the production facilities. SFAS 151 is effective beginning in fiscal
2007. The Company does not believe that the adoption of SFAS 151 will have
a material impact on its financial position or results of
operations.
In
June
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections”, a replacement of APB No. 20, “Accounting
Changes” (“APB No. 20”) and SFAS No. 3, “Reporting Accounting Changes
in Interim Financial Statements” (“SFAS
No. 3”). SFAS No. 154 changes the requirements for the accounting for
and reporting of, a change in accounting principle. Previously, most voluntary
changes in accounting principles required recognition of a cumulative effect
adjustment within net income of the period of the change. SFAS No. 154
requires retrospective application to prior periods’ financial statements,
unless it is impracticable to determine either the period-specific effects
or
the cumulative effect of the change. SFAS No. 154 is effective for
accounting changes made in fiscal years beginning after December 15, 2005;
however, it does not change the transition provisions of any existing accounting
pronouncements. The Company adopted the statement as of January 1,
2006.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
157”). SFAS 157 provides guidance for using fair value to measure assets and
liabilities. It also responds to investors’ requests for expanded information
about the extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS 157 applies whenever other standards require
(or
permit) assets or liabilities to be measured at fair value, and does not expand
the use of fair value in any new circumstances. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and is required to be adopted by the Company in the first quarter of 2008.
The
Company is evaluating the effect that the adoption of SFAS 157 will have on
its
consolidated results of operations and financial condition and is not yet in
a
position to determine such effects.
Note
12 - COMMITMENTS AND CONTINGENCIES
Royalties
The
Company, in accordance with a royalty agreement, is obligated to make minimum
annual royalty payments to a corporation commencing January 1, 2001. The
original minimum annual royalty due under this agreement was $32 thousand per
year and it increased to $125 thousand in 2005 and beyond. Under this agreement,
the Company must pay a certain percentage of net sales of certain products,
which percentages are defined in the agreement. The percentages are on a sliding
scale depending on the amount of sales generated. Any minimum royalties paid
may
be credited against the amounts due based on the percentage of sales. The
royalty agreement terminates upon the expiration of the last-to-expire issued
patent.
For
the
years ended December 31, 2006, 2005, and 2004, royalty expense of approximately
$515 thousand, $191 thousand and $194 thousand, respectively, is included in
cost of goods sold.
Operating
leases
The
Company leases office facilities and office, lab and factory equipment under
operating leases expiring through 2009. The Company currently has lease
commitments for space in Hopewell Junction, New York and Bellevue, Washington.
The
Company’s manufacturing facilities are leased from IBM in New York. eMagin
leases approximately 40,000 square feet to house its equipment for OLED
microdisplay fabrication and for research and development, an assembly area
and administrative offices. In 2004, eMagin entered into an agreement to
extend the term of the lease until 2009.
In
July
2005, eMagin signed a sub-lease agreement for approximately 19,000 square feet
in Bellevue Washington. The leased space is used as the Company’s corporate
headquarters. This lease will expire in 2009. The Company’s lease at the Redmond
Washington location expired in August 2005 and was not renewed.
The
future minimum lease payments through 2009 are as follows:
2007
|
|
$
|
1,405
|
|
2008
|
|
|
1,444
|
|
2009
|
|
|
538
|
|
|
|
$
|
3,387
|
|
|
|
|
|
|
Rent
expense for the years ended December 31, 2006, 2005, and 2004 was approximately
$1.3 million, $1.0 million, and $0.8 million, respectively. The Redmond lease
was paid in common stock valued at $42 thousand and $48 thousand for the 2005
and 2004 rent periods, respectively.
Employee
benefit plans
eMagin
has a defined contribution plan (the 401(k) Plan) under Section 401(k) of the
Internal Revenue Code, which is available to all employees who meet established
eligibility requirements. Employee contributions are generally limited to 15%
of
the employee's compensation. Under the provisions of the 401(k) Plan, eMagin
may
match a portion of the participating employees' contributions. There was no
matching contribution to the 401(k) Plan for the years ended December 31, 2006,
2005 and 2004.
Legal
proceedings
On
December 6, 2005, New York State Urban Development Corporation commenced action
against eMagin in the Supreme Court of the State of New York, County of New
York
against eMagin, asserting breach of contract and seeking to recover a $150
thousand grant which was made to eMagin based on goals set forth in the
agreement for recruitment of employees. On July 13, 2006, eMagin agreed to
a
settlement with the New York State Urban Development Corporation to repay
approximately $112 thousand of the $150 thousand grant. The settlement requires
that repayments be made on a monthly basis in the amount of approximately $3
thousand per month commencing August 1, 2006 and ending on July 1,
2009.
Note
13 - RELATED PARTY TRANSACTIONS
2006
On
July
21, 2006, the Company entered into several Note Purchase Agreements for the
sale
of approximately $5.99 million of senior secured debentures (the “Notes”) and
warrants to purchase approximately 1.8 million shares of common stock, par
value
$.001 per share. The investors purchased $5.99 million principal amount of
Notes
with conversion prices of $2.60 per share that may convert into approximately
2.3 million shares of common stock and 5 year warrants exercisable at $3.60
per
share into approximately 1.6 million shares of common stock. If the Notes are
not converted, 50% of the principal amount will be due on July 21, 2007 and
the
remaining 50% will be due on January 21, 2008. Commencing September 1, 2006,
6%
interest is payable in quarterly installments on outstanding notes.
In
the
Note Purchase transaction, two employees and two board members participated.
Olivier Prache, Senior VP of Display Operations, purchased a $30 thousand
promissory note which may be converted into 11,539 shares and received 8,077
warrants which are exercisable at $3.60 per share. Mr. Prache converted $20
thousand of his promissory note and received 7,693 shares. John Atherly, CFO,
purchased a $40 thousand promissory note which may be converted into 15,385
shares and received 10,770 warrants exercisable at $3.60 per share. David
Gottfried, board member, purchased a $250 thousand promissory note which may
be
converted into 96,154 shares and received 67,308 warrants exercisable at $3.60
per share. Paul Cronson, board member, through Navacorp III, LLC purchased
a
$200 thousand promissory note which may be converted into 76,923 shares and
received 53,847 warrants exercisable at $3.60 per share.
Stillwater
is a beneficial owner of more than 5% of the Company’s common stock. Rainbow
Gate Corporation, a corporation in which its investment manager is the sole
member of Stillwater LLC and its controlling shareholder is the same as Ginola
Limited, purchased a $700 thousand promissory note which may be converted into
269,231 shares and received 188,462 warrants exercisable at $3.60 per share.
Ginola Limited purchased an $800 thousand promissory note which may be converted
into 307,693 shares and received 215,385 warrants exercisable at $3.60 per
share. Stillwater LLC disclaims beneficial ownership of shares owned by Rainbow
Gate Corporation.
A
family
member of an outside director of eMagin is the holder of a Series A warrant
to
purchase an aggregate of 4,286 shares of common stock. As a result of the Note
Purchase transaction, the exercise price of all Series A warrants was reduced
from $5.50 to $2.60 per share. Family members of an outside director of eMagin
are holders of Series F warrants to purchase an aggregate of 10 thousand shares
of common stock. As a result of the Note Purchase transaction, the exercise
price of all Series F warrants was reduced from $10.90 to $8.60 per
share.
eMagin
has entered into a financial advisory agreement with Larkspur Capital
Corporation. Paul Cronson, a director of eMagin, is a founder and shareholder
of
Larkspur Capital Corporation. The Company has agreed to pay a minimum fee of
$500 thousand to Larkspur Capital Corporation in the event certain transactions
occur, i.e. sale of the Company’s assets or change of control.
2005
On
October 20, 2005, the Company entered into a Securities Purchase Agreement
to
sell to certain qualified institutional buyers and accredited investors an
aggregate of 1,661,906 shares of eMagin’s common stock, par value $0.001 per
share (the “Shares”), and warrants to purchase an additional 997,143 shares of
common stock, for an aggregate purchase price of approximately $9.1 million.
The
purchase price of the common stock and corresponding warrant was $5.50 per
share.
The
warrants are exercisable at a price of $10.00 per share and expire on October
20, 2010. Of the 997,143 warrants, 664,762 of the warrants are exercisable
on or
after May 20, 2006. The remaining 332,380 are exercisable after March 31, 2007.
Both Stillwater and Ginola are beneficial owners of more than 5% of the
Company’s common stock.
Rainbow
Gate Corporation, a corporation in which its investment manager is the sole
member of Stillwater LLC and its controlling shareholder is the same as Ginola
Limited, participated in the sale of equity pursuant to the Securities Purchase
Agreement by investing $500 thousand. Stillwater LLC disclaims beneficial
ownership of shares owned by Rainbow Gate Corporation.
Chelsea
Trust Company, as trustee of a trust with the same directors and/or controlling
shareholders as Ginola Limited, participated in the sale of equity pursuant
to
the Securities Purchase Agreement by investing $250 thousand. Ginola Limited
disclaims beneficial ownership of shares owned by Chelsea Trust
Company.
In
connection with the issuance of the Shares and the warrants pursuant to the
Securities Purchase Agreement, the Company was required to lower the exercise
prices of existing Series A and F warrants from $10.50 and $12.10, respectively,
to $5.50 and $10.90 per share, respectively, pursuant to the anti-dilution
provisions of the Series A and F warrants.
A
family
member of an outside director of eMagin is the holder of a Series A warrant
to
purchase an aggregate of 4,286 shares of common stock. Accordingly, the exercise
price of all Series A warrants was reduced from $10.50 to $5.50 per share.
2004
eMagin
is
party to a financial advisory and investment banking agreement with Larkspur
Capital Corporation. Paul Cronson, a director of eMagin, is a founder and
shareholder of Larkspur Capital Corporation. Larkspur Capital Corporation
received as compensation for financial advisory and investment banking services
in connection with the January 2004 private placement a cash fee of 6 3/4%
of
the funds raised and warrants to purchase eMagin shares of common stock equal
to
2.5% of the cash netted to eMagin. Approximately $284 thousand and 4,365 common
stock purchase warrants exercisable at $24.10 per share which expire in January
2009, were paid under the terms of the agreement. Paul Cronson was engaged
as an
advisor in connection with the sale of securities sold in October 2004 and
received a fee of $136 thousand.
A
family
member of an outside director of eMagin participated in the Securities Purchase
Agreement in January 2004's private placement in the amount of $90 thousand.
Stillwater
LLC, a limited liability company and a beneficial owner of more than five
percent of the outstanding shares of eMagin's common stock, held an aggregate
of
$4 million of the notes converted in February 2004. Ginola Limited, a beneficial
owner of more than five percent of the outstanding shares of eMagin's common
stock, held an aggregate of $1.3 million of the notes which were converted.
An
outside director of eMagin held $250 thousand of the notes converted.
A
family
member of an outside director of eMagin participated in the re-pricing of the
Securities Purchase Agreement in August. 209,989 warrants were re-priced and
exercised. The family member re-priced and exercised 2,586 B warrants and 2,368
C warrants.
Note
14 - EMPLOYMENT AGREEMENTS
On
January 24, 2006, pursuant to actions taken by the Compensation Committee of
the
Board of Directors of eMagin Corporation (the “Company”), Gary Jones entered
into a revised executive employment agreement, to conform to the recently
established Sarbanes-Oxley requirements, in connection with his service as
Chief
Executive Officer and President of the Company. Additionally, Susan Jones
entered into a revised executive employment agreement, to conform to the
recently established Sarbanes-Oxley requirements, in connection with her service
as the Company’s Chief Marketing and Strategy Officer, Executive Vice President
and Corporate Secretary.
Each
agreement is effective for an initial term of three years, effective January
1,
2006. The agreement provides for an annual salary, benefits made available
by
the Company to its employees and eligibility for an incentive bonus pursuant
to
one or more incentive compensation plans established by the Company from time
to
time. The Company may terminate the employment of Executive at any time with
or
without notice and with or without cause (as such term is defined in the
agreement). If the Executive’s employment is terminated without cause, or
if Executive resigns with good reason (as such term is defined in the
agreement), or if Executive’s position is terminated or significantly changed as
result of change of control (as such term is defined in the agreement),
Executive shall be entitled to receive salary until the end of the agreement’s
full term or twelve months, whichever is greater, payment for accrued vacation,
and bonuses which would have been accrued during the term of the agreement.
If
Executive voluntarily terminates employment with the Company, other than for
good reason or is terminated with cause (as such term is defined in the
agreement), Executive shall cease to accrue salary, vacation, benefits, and
other compensation on the date of the voluntary or with cause termination.
The
Executive Employment Agreement includes other conventional terms and also
contains invention assignment, non-competition, non-solicitation and
non-disclosure provisions.
On
April
17, 2006, the parties entered into amendments to the employment agreements
pursuant to which the parties clarified that the
Company has agreed to pay for health benefits equivalent to medical and dental
benefits provided during the executive’s full time employment until the end of
the agreement’s full term or twenty-four (24) months, whichever is
greater.
On
January 11, 2007, Gary Jones resigned as the President, Chief Executive Officer,
and as a Director of the Company. Mr. Jones and the Company entered into an
Executive Separation and Consulting Agreement. See Note 16 - Subsequent Events
for additional information.
In
addition, on January 11, 2007, Dr. K.C. Park was appointed Interim Chief
Executive Office, President, and a Director of the Company. Dr. Park entered
into a Compensation Agreement with the Company on February 12, 2007. See Note
16
- Subsequent Events for additional information.
Note
15 - CONCENTRATIONS
In
2006
eMagin had one customer that accounted for 13% of its total revenues.
In
2005
eMagin had no customers that accounted for more than 10% of its total revenues.
In 2004 eMagin had two customers that individually accounted for 17% and 15%
of
net revenues.
For
the
year ended December 31, 2006, approximately 59% of the Company's net revenues
were made to customers in the United States and approximately 41% of the
Company's net revenues were made to international customers. For the year ended
December 31, 2005, approximately 49% of the Company's net revenues were made
to
customers in the United States and approximately 51% of the Company's net
revenues were made to international customers. For the year ended December
31,
2004, approximately 78% of the Company's net revenues were made to customers
in
the United States and approximately 22% of the Company's net revenues were
made
to international customers.
At
December 31, 2006, there were 5 customers which comprised 69% of the outstanding
accounts receivable. At December 31, 2005, there
were 2 customers which comprised 31% of the outstanding accounts
receivable.
At
December 31, 2004, there were 3 customers which comprised 50% of the outstanding
accounts receivable.
The
Company purchases principally all of its silicon wafers from a single supplier
located in Taiwan.
Note
16 - SUBSEQUENT EVENTS
Executive
Separation and Consulting Agreement
On
January 11, 2007, Gary Jones resigned as the President, Chief Executive Officer,
and as a Director of the Company. Mr. Jones and the Company entered into an
Executive Separation and Consulting Agreement (“the Agreement”). Under the
Agreement, the Company made a payment to Mr. Jones in an amount equal to: all
accrued salary as of the date of the Agreement plus an additional 30 days of
salary (approximately $47 thousand); 360 hours of unused vacation
(approximately $55 thousand); advance for legal and accounting fees associated
with 2004 stock options ($30 thousand); and an advance for future travel
expenditures ($5 thousand). Mr. Jones also received 500 thousand shares of
registered shares of common stock of the Company valued at $430 thousand. In
his
consulting relationship, Mr. Jones will be paid $460 thousand upon the
consummation of a strategic transaction. The Company will provide up to $7.5
thousand for reasonable moving expenses of personal property from the New York
office. In addition, the Company will pay up to an additional $30 thousand
to
Mr. Jones related to personal legal fees.
Compensation
Agreement
On
January 11, 2007, Dr. K.C. Park was appointed Interim Chief Executive Office,
President, and a Director of the Company. On February 12, 2007, the Company
entered in a Compensation Agreement (“the Agreement”) with Dr. Park. Under the
Agreement, the Company has agreed to pay Dr. Park an annual base salary equal
to
$300 thousand plus a quarterly increase in his base salary in the amount of
$12.5 thousand per fiscal quarter through December 31, 2007. The Company agreed
to issue Dr. Park an aggregate of 250 thousand restricted shares of common
stock
within 10 business days of the completion of a change of control of the Company.
In addition, if a change of control transaction is completed and Dr. Park is
not
offered a senior executive position in the new organization, the Company has
agreed to pay Dr. Park three month’s salary.
AMEX
Delisting
On
October 9, 2006, the Company received notice from the American Stock Exchange
(the “AMEX”) Listing Qualifications Department stating that the Company does not
meet certain continued listing standards as set forth in Part 10 of the AMEX
Company Guide (the “Company Guide”). Specifically, pursuant to a review by the
AMEX of the Company’s 10-Q for the three and six months ended June 30, 2006, the
AMEX has determined that the Company is not in compliance with Sections
1003(a)(ii) and 1003(a)(iii) of the Company Guide, respectively, which state,
in
relevant part, that the AMEX will normally consider suspending dealings in,
or
removing from the list, securities of a company that (a) has stockholders'
equity of less than $4.0 million if such company has sustained losses from
continuing operations and/or net losses in three of its four most recent fiscal
years; or (b) has stockholders' equity of less than $6.0 million if such company
has sustained losses from continuing operations and/or net losses in its five
most recent fiscal years, respectively.
On
November 6, 2006, the Company submitted a plan advising the AMEX of actions
that
it will take, which may bring it into compliance with Sections 1003 (a)(ii)
and
1003(a)(iii) of the Company Guide within a maximum of 18 months of receipt
of
the notice letter. On January 5, 2007, the Company received notice from the
staff of the AMEX indicating that it intends to strike the Company’s common
stock from listing on AMEX by filing a delisting application with the Securities
and Exchange Commission as it has determined that the Company has failed to
comply with the continued listing standards. The Company requested a verbal
hearing which was held on February 27, 2007.
On
March
1, 2007, the Company received notice from the AMEX indicating that the AMEX
will
initiate the delisting process with respect to the Company’s common stock. On
March 12, 2007, in accordance with Part 12 of the Company Guide, the Company
was
suspended from trading on the AMEX. The Company is currently trading the
Company’s common stock on the Over-the-Counter Bulletin Board under the symbol,
EMAN.
The
delisting from the AMEX triggered a compliance condition on the notes payable.
As a result the Company is required to pay the noteholders monthly interest
at
1% on the outstanding principal of the notes payable. The Company received
a
waiver from the noteholders that allows the Company to accrue the interest
and
delay the interest payment until the earliest of the Company (i) completing
$2
million of debt or equity financing or (ii) the occurrence of a Repurchase
Event
per the note.
Note
17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized
quarterly financial information for 2006 and 2005 are as follows (in thousands
except per share data):
|
|
Quarters
Ended
|
|
|
|
March
31, 2006
|
|
June
30, 2006
|
|
September
30, 2006
|
|
December
31, 2006
|
|
Revenues
|
|
$
|
1,641
|
|
$
|
1,674
|
|
$
|
2,292
|
|
$
|
2,562
|
|
Gross
margin (loss)
|
|
$
|
(1,388
|
)
|
$
|
(1,291
|
)
|
$
|
(648
|
)
|
$
|
137
|
|
Net
loss
|
|
$
|
(5,160
|
)
|
$
|
(4,838
|
)
|
$
|
(3,769
|
)
|
$
|
(1,499
|
)
|
Net
loss per share - basic and diluted
|
|
$
|
(0.52
|
)
|
$
|
(0.48
|
)
|
$
|
(0.37
|
)
|
$
|
(0.15
|
)
|
Shares
used in per share calculation - basic and diluted
|
|
|
10,004
|
|
|
10,011
|
|
|
10,077
|
|
|
10,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
Ended
|
|
|
|
March
31, 2005
|
|
|
June
30, 2005
|
|
|
September
30, 2005
|
|
|
December
31, 2005
|
|
Revenues
|
|
$
|
690
|
|
$
|
652
|
|
$
|
1,131
|
|
$
|
1,272
|
|
Gross
loss
|
|
$
|
(1,267
|
)
|
$
|
(1,737
|
)
|
$
|
(1,555
|
)
|
$
|
(1,915
|
)
|
Net
loss
|
|
$
|
(3,469
|
)
|
$
|
(4,498
|
)
|
$
|
(3,763
|
)
|
$
|
(4,798
|
)
|
Net
loss per share - basic and diluted
|
|
$
|
(0.43
|
)
|
$
|
(0.55
|
)
|
$
|
(0.47
|
)
|
$
|
(0.52
|
)
|
Shares
used in per share calculation - basic and diluted
|
|
|
8,143
|
|
|
8,245
|
|
|
8,304
|
|
|
9,476
|
|
eMagin
Corporation
Form
10-Q
For
the Quarter ended March 31, 2007
Table
of Contents
|
|
|
|
|
Page
|
PART
I FINANCIAL INFORMATION
|
|
Item
1
|
Condensed
Consolidated Financial Statements
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2007 (unaudited) and
December
31, 2006
|
81
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the Three Months ended
March 31,
2007 and 2006 (unaudited)
|
82
|
|
|
|
|
Condensed
Consolidated Statements of Changes in Shareholders’ Capital Deficit for
the Three Months ended March 31, 2007 (unaudited)
|
83
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Three Months ended
March 31,
2007 and 2006 (unaudited)
|
84
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
85
|
|
|
|
ITEM
1. Condensed Consolidated Financial Statements
eMAGIN
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share data)
|
|
March
31,
|
|
|
|
|
|
2007
(unaudited)
|
|
December
31, 2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
192
|
|
$
|
1,415
|
|
Investments
- held to maturity
|
|
|
175
|
|
|
171
|
|
Accounts
receivable, net
|
|
|
1,466
|
|
|
908
|
|
Inventory
|
|
|
1,975
|
|
|
2,485
|
|
Prepaid
expenses and other current assets
|
|
|
764
|
|
|
656
|
|
Total
current assets
|
|
|
4,572
|
|
|
5,635
|
|
Equipment,
furniture and leasehold improvements, net
|
|
|
549
|
|
|
666
|
|
Intangible
assets, net
|
|
|
54
|
|
|
55
|
|
Other
assets
|
|
|
233
|
|
|
233
|
|
Deferred
financing costs, net
|
|
|
283
|
|
|
416
|
|
Total
assets
|
|
$
|
5,691
|
|
$
|
7,005
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ CAPITAL DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,434
|
|
$
|
1,192
|
|
Accrued
compensation
|
|
|
1,065
|
|
|
959
|
|
Other
accrued expenses
|
|
|
1,052
|
|
|
749
|
|
Advanced
payments
|
|
|
254
|
|
|
444
|
|
Deferred
revenue
|
|
|
64
|
|
|
126
|
|
Current
portion of capitalized lease obligations
|
|
|
4
|
|
|
6
|
|
Current
portion of debt
|
|
|
3,916
|
|
|
1,217
|
|
Derivative
liability - warrants
|
|
|
735
|
|
|
1,195
|
|
Other
current liabilities
|
|
|
45
|
|
|
52
|
|
Total
current liabilities
|
|
|
8,569
|
|
|
5,940
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
89
|
|
|
2,229
|
|
Total
liabilities
|
|
|
8,658
|
|
|
8,169
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
capital deficit:
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value: authorized 10,000,000 shares; no shares issued
and
outstanding
|
|
|
—
|
|
|
—
|
|
Common
stock, $.001 par value: authorized 200,000,000 shares, issued and
outstanding, 11,049,164 shares as of March 31, 2007 and 10,341,029
shares
as of December 31, 2006
|
|
|
11
|
|
|
10
|
|
Additional
paid-in capital
|
|
|
180,784
|
|
|
179,651
|
|
Accumulated
deficit
|
|
|
(183,762
|
)
|
|
(180,825
|
)
|
Total
shareholders’ capital deficit
|
|
|
(
2,967
|
)
|
|
(
1,164
|
)
|
Total
liabilities and shareholders’ capital deficit
|
|
$
|
5,691
|
|
$
|
7,005
|
|
|
|
|
|
|
|
|
|
See
notes
to Condensed Consolidated Financial Statements.
eMAGIN
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except share and per share data )
(unaudited)
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Product
revenue
|
|
$
|
3,523
|
|
$
|
1,571
|
|
Contract
revenue
|
|
|
86
|
|
|
70
|
|
Total
revenue, net
|
|
|
3,609
|
|
|
1,641
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
3,115
|
|
|
3,029
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
|
494
|
|
|
(1,388
|
)
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Research
and development
|
|
|
853
|
|
|
1,238
|
|
Selling,
general and administrative
|
|
|
2,221
|
|
|
2,588
|
|
Total
operating expenses
|
|
|
3,074
|
|
|
3,826
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(2,580
|
)
|
|
(5,214
|
)
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(840
|
)
|
|
—
|
|
Gain
on warrant derivative liability
|
|
|
460
|
|
|
—
|
|
Other
income, net
|
|
|
23
|
|
|
54
|
|
Total
other (expense) income
|
|
|
(357
|
)
|
|
54
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,937
|
)
|
$
|
(5,160
|
)
|
|
|
|
|
|
|
|
|
Loss
per share, basic and diluted
|
|
$
|
(0.27
|
)
|
$
|
(0.52
|
)
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
10,792,074
|
|
|
10,003,839
|
|
|
|
|
|
|
|
|
|
See
notes
to Condensed Consolidated Financial Statements.
eMAGIN
CORPORATION
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ CAPITAL
DEFICIT
(In
thousands)
|
|
|
|
Additional
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
Paid-In
|
|
Accumulated
|
|
Shareholders’
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
10,341
|
|
$
|
10
|
|
$
|
179,651
|
|
$
|
(180,825
|
)
|
$
|
(
1,164
|
)
|
Stock-based
compensation
|
|
|
—
|
|
|
—
|
|
|
514
|
|
|
—
|
|
|
514
|
|
Issuance
of common stock for services
|
|
|
708
|
|
|
1
|
|
|
619
|
|
|
—
|
|
|
620
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,937
|
)
|
|
(2,937
|
)
|
Balance,
March 31, 2007 (unaudited)
|
|
|
11,049
|
|
$
|
11
|
|
$
|
180,784
|
|
$
|
(183,762
|
)
|
$
|
(2,967
|
)
|
See
notes
to Condensed Consolidated Financial Statements.
eMAGIN
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(unaudited)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,937
|
)
|
$
|
(5,160
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
117
|
|
|
257
|
|
Amortization
of deferred financing fees
|
|
|
133
|
|
|
—
|
|
Reduction
of provision for sales returns and doubtful accounts
|
|
|
(8
|
)
|
|
—
|
|
Stock-based
compensation
|
|
|
514
|
|
|
792
|
|
Issuance
of common stock for services
|
|
|
620
|
|
|
50
|
|
Amortization
of discount on notes payable
|
|
|
574
|
|
|
—
|
|
Gain
on warrant derivative liability
|
|
|
(460
|
)
|
|
—
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(558
|
)
|
|
(367
|
)
|
Inventory
|
|
|
510
|
|
|
267
|
|
Prepaid
expenses and other current assets
|
|
|
(108
|
)
|
|
(244
|
)
|
Deferred
revenue
|
|
|
(62
|
)
|
|
(57
|
)
|
Accounts
payable, accrued compensation, other accrued expenses, and advanced
payments
|
|
|
461
|
|
|
(537
|
)
|
Other
current liabilities
|
|
|
—
|
|
|
(1
|
)
|
Net
cash used in operating activities
|
|
|
(1,204
|
)
|
|
(5,000
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
—
|
|
|
(54
|
)
|
Purchase
of investments - held to maturity
|
|
|
(4
|
)
|
|
—
|
|
Purchase
of intangibles and other assets
|
|
|
—
|
|
|
(2
|
)
|
Net
cash used in investing activities
|
|
|
(4
|
)
|
|
(56
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Payments
of long-term debt and capital leases
|
|
|
(15
|
)
|
|
(9
|
)
|
Net
cash used in financing activities
|
|
|
(15
|
)
|
|
(9
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(1,223
|
)
|
|
(5,065
|
)
|
Cash
and cash equivalents beginning of period
|
|
|
1,415
|
|
|
6,727
|
|
Cash
and cash equivalents end of period
|
|
$
|
192
|
|
$
|
1,662
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
87
|
|
$
|
—
|
|
Cash
paid for taxes
|
|
$
|
31
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to Condensed Consolidated Financial Statements.
eMAGIN
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1: Description of the Business and Summary of Significant Account Policies
The
Business
eMagin
Corporation is a developer and manufacturer of optical systems and microdisplays
for use in the electronics industry. eMagin also develops and markets
microdisplay systems and optics technology for commercial, industrial and
military applications.
Basis
of Presentation
In
the
opinion of management, the accompanying unaudited condensed consolidated
financial statements of eMagin Corporation and its subsidiary reflects all
adjustments, including normal recurring accruals, necessary for a fair
presentation. Certain information and footnote disclosure normally included
in
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant
to instruction, rules and regulations prescribed by the Securities and Exchange
Commission. The Company believes that the disclosures provided herein are
adequate to make the information presented not misleading when these unaudited
condensed consolidated financial statements are read in conjunction with the
audited consolidated financial statements contained in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2006. The results of
operations for the period ended March 31, 2007 are not necessarily indicative
of
the results to be expected for the full year.
On
November 3, 2006, the Company effected a one-for-ten (1-for-10) reverse stock
split of its issued and outstanding common stock. All common and per share
amounts in the accompanying financial statements have been adjusted to reflect
the 1-for-10 reverse stock split.
The
condensed consolidated financial statements have been prepared assuming that
the
Company will continue as a going concern. The Company has had recurring
losses from operations which it believes will continue through the foreseeable
future. The Company’s cash requirements over the next twelve months are
greater than the Company’s cash, cash equivalents, and investments at March 31,
2007. The Company has working capital and shareholders’ deficits at March 31,
2007. These factors raise substantial doubt regarding the Company’s ability to
continue as a going concern without continuing to obtain additional
funding. The
Company does not have commitments for such financing and no assurance can be
given that additional financing will be available, or if available, will be
on
acceptable terms.
If the
Company is unable to obtain sufficient funds during the next twelve months,
the
Company will further reduce the size of its organization and/or curtail
operations which will have a material adverse impact on the Company’s business
prospects. The condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during
the
reporting period. Actual results could differ from those estimates. These
estimates and assumptions relate to recording net revenue, collectibility of
accounts receivable, useful lives and impairment of tangible and intangible
assets, accruals, income taxes, inventory realization and other factors.
Management has exercised reasonable judgment in deriving these estimates.
Consequently, a change in conditions could affect these estimates.
Revenue
Recognition
Revenue
is recognized when products are shipped to customers, net of allowances for
anticipated returns. The Company’s revenue-earning
activities generally involve delivering products and revenues
are considered to be earned when the Company has completed the process
by which it is entitled to such revenues.
Revenue is recognized when persuasive evidence of
an arrangement exists, delivery has occurred, selling price is
fixed or determinable and collection is reasonably assured. The Company defers
revenue recognition on products sold directly to the consumer with a fifteen
day
right of return. Revenue is recognized upon the expiration of the right of
return.
The
Company also earns revenues from certain R&D activities under
both firm fixed-price contracts and cost-type
contracts, including some cost-plus-fee contracts.
Revenues relating to firm fixed-price contracts are
generally recognized on the percentage-of-completion method
of accounting as costs are incurred (cost-to-cost basis).
Revenues on cost-plus-fee contracts include costs incurred plus a
portion of estimated fees or profits based on the relationship of costs incurred
to total estimated costs. Contract costs include all direct material and
labor costs and an allocation of allowable indirect costs as
defined by each contract, as periodically adjusted to reflect revised
agreed upon rates. These rates are subject to audit by the other party.
Stock-based
Compensation
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payment” (“SFAS 123R”), which requires the Company to recognize
expense related to the fair value of the Company’s share-based compensation
issued to employees and directors. SFAS
123R
requires companies to estimate the fair value of share-based payment awards
on
the date of grant using an option-pricing model. The value of the portion of
the
award that is ultimately expected to vest is recognized as expense over the
requisite service periods in the Company’s condensed consolidated statement of
operations.
The
Company uses the straight-line method for recognizing compensation expense.
An
estimate for forfeitures is included in compensation expense for awards under
SFAS 123R. See Note 8 for a further discussion on stock-based
compensation.
Note
2: Recently Issued Accounting Pronouncements
The
Financial Accounting Standards Board (“FASB”) has issued interpretation No. 48,
“Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement
No. 109” (“FIN 48”), regarding accounting for, and disclosure of, uncertain tax
positions. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company adopted the provisions of FIN 48 on January 1, 2007. See
Note
10 for further discussion on income taxes.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
157”). SFAS 157 provides guidance for using fair value to measure assets and
liabilities. It also responds to investors’ requests for expanded information
about the extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS 157 applies whenever other standards require
(or
permit) assets or liabilities to be measured at fair value, and does not expand
the use of fair value in any new circumstances. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and is required to be adopted by the Company in the first quarter of 2008.
The
Company is evaluating the effect that the adoption of SFAS 157 will have on
its
consolidated results of operations and financial condition.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities: (“SFAS159”). SFAS159
allows
entities
the option to measure eligible financial instruments at fair value as of
specified dates. Such election, which may be applied on an instrument by
instrument basis, is typically irrevocable once elected. SFAS 159 is effective
for fiscal years beginning after November 15, 2007, and early application
is allowed under certain circumstances. The Company is currently evaluating
the
impact SFAS 159 will have on its consolidated financial position and results
of
operations.
Note
3: Receivables
The
majority of the Company’s commercial accounts receivable are due from Original
Equipment Manufacturers ("OEM’s”). Credit is extended based on evaluation of a
customer’s financial condition and, generally, collateral is not required.
Accounts receivable are payable in U.S. dollars, are due within 30-90 days
and
are stated at amounts due from customers, net of an allowance for doubtful
accounts. Any account outstanding longer than the contractual payment terms
is
considered past due.
The
Company determines the allowance for doubtful accounts
by considering a number of factors, including the length of time the
trade accounts receivable are past due, eMagin's previous loss history, the
customer's current ability to pay its obligation, and the condition of
the general economy and the industry as a whole. The Company will
record a specific reserve for individual accounts when the Company becomes
aware
of a customer's inability to meet its financial obligations, such as in the
case
of bankruptcy filings or deterioration in the customer's operating results
or
financial position. If circumstances related to customers change, the Company
would further adjust estimates of the recoverability of
receivables.
Receivables
consisted of the following (in thousands):
|
|
March
31, 2007
(unaudited)
|
|
December
31, 2006
|
|
Accounts
receivable
|
|
$
|
1,909
|
|
$
|
1,351
|
|
Less
allowance for doubtful accounts
|
|
|
(443
|
)
|
|
(443
|
)
|
Net
receivables
|
|
$
|
1,466
|
|
$
|
908
|
|
Note
4: Research and Development Costs
Research
and development costs are expensed as incurred.
Note
5: Net Loss per Common Share
In
accordance with SFAS No. 128, net loss per common share amounts ("basic EPS")
was 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 stock equivalent
shares are excluded from the computation if their effect is antidilutive. As
of
March 31, 2007 and 2006, there were stock options and warrants outstanding
to
acquire 4,363,909 and 4,462,048 shares of our common stock, respectively. These
shares were excluded from the computation of diluted loss per share because
their effect would be antidilutive.
Note
6: Inventory
Inventory
is stated at the lower of cost or market. Cost is determined using the first-in
first-out method. The Company reviews the value of its inventory and
reduces the inventory value to its net realizable value based upon current
market prices and contracts for future sales. The components of inventory are
as
follows (in thousands):
|
|
March
31, 2007
(unaudited)
|
|
December
31, 2006
|
|
Raw
materials
|
|
$
|
969
|
|
$
|
1,146
|
|
Work
in process
|
|
|
542
|
|
|
558
|
|
Finished
goods
|
|
|
464
|
|
|
781
|
|
Total
Inventory
|
|
$
|
1,975
|
|
$
|
2,485
|
|
Note
7: Debt
Debt
is
as follows (in thousands):
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Current
portion of long-term debt:
|
|
|
|
|
|
Capitalized
lease obligations
|
|
$
|
4
|
|
$
|
6
|
|
Other
debt
|
|
|
58
|
|
|
58
|
|
6%
Senior Secured Convertible Notes
|
|
|
5,770
|
|
|
2,880
|
|
Less:
Unamortized discount on notes payable
|
|
|
(1,912
|
)
|
|
(1,721
|
)
|
Current
portion of long-term debt, net
|
|
|
3,920
|
|
|
1,223
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
Other
debt
|
|
|
89
|
|
|
104
|
|
6%
Senior Secured Convertible Notes
|
|
|
—
|
|
|
2,890
|
|
Less:
Unamortized discount on notes payable
|
|
|
—
|
|
|
(765
|
)
|
Long-term
debt, net
|
|
|
89
|
|
|
2,229
|
|
Total
debt, net
|
|
$
|
4,009
|
|
$
|
3,452
|
|
The
6%
Senior Secured Convertible Notes have 50% of the aggregate principal amount
maturing on July 21, 2007 and the remaining 50% maturing on January 21, 2008.
Interest of approximately $87 thousand was paid to investors on March 1,
2007.
For the
three months ended March 31, 2007, debt discount of approximately $574 thousand
was amortized to interest expense.
The
Notes
have specific terms that the Company must adhere to, i.e. maintaining minimum
cash and cash equivalent balances and trading its stock on specific Exchanges.
On March 9, 2007, the terms of the Note were amended to allow the Company to
trade its common stock on the Over-The-Counter Bulletin Board and also requiring
the Company to maintain cash and cash equivalent balances of $200 thousand
from
February 26, 2007 through March 31, 2007. Subsequent to March 31, 2007, the
company must maintain cash and cash equivalent balances of $600 thousand. On
March 12, 2007, the Company was suspended from trading on the AMEX and is
currently trading the Company’s common stock on the Over-The Counter Bulletin
Board. The delisting from the AMEX triggered a compliance condition on the
notes
payable. As a result the Company is required to pay the noteholders monthly
interest at 1% rather than .5% on the outstanding principal of the notes
payable. The Company received a waiver from the noteholders that allows the
Company to accrue the interest and delay the interest payment until the earliest
of the Company (i) completing $2 million of debt or equity financing or (ii)
the
occurrence of a Repurchase Event per the note. On May 10, 2007, the requirement
to maintain cash and cash equivalents balances of $200 thousand was extended
through July 21, 2007 and any previous claim that may have otherwise been made
regarding the potential breach by the Company of the minimum cash balance
requirement was waived. Subsequent to July 21, 2007, the Company must maintain
$600 thousand in cash and cash equivalent balances. See Note 9: Shareholders’
Equity for additional information on the Notes.
Note
8: Stock-based Compensation
Stock
based compensation is accounted for in accordance with the provisions of SFAS
No. 123R. Under SFAS 123R, the fair value of stock awards is estimated at the
date of grant using the Black-Scholes option valuation model. Stock-based
compensation expense is reduced for estimated forfeitures and is amortized
over
the vesting period using the straight-line method.
The
following table summarizes the allocation of non-cash stock-based compensation
to our expense categories for the three month periods ended March 31, 2007
and
2006 (in thousands):
|
|
Three
Months Ended
March
31, 2007
|
|
Three
Months Ended
March
31, 2006
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
$
|
69
|
|
$
|
135
|
|
Research
and development
|
|
|
103
|
|
|
128
|
|
Selling,
general and administrative
|
|
|
342
|
|
|
529
|
|
Total
stock compensation expense
|
|
$
|
514
|
|
$
|
792
|
|
For
the
three months ended March 31, 2007 and 2006, stock compensation was approximately
$514 thousand and $792 thousand, respectively, net of estimated forfeitures.
At
March 31, 2007, total unrecognized non-cash compensation costs related to stock
options was approximately $2.6 million, net of forfeitures. Total unrecognized
compensation cost will be adjusted for future changes in estimated forfeitures
and is expected to be recognized over a weighted average period of approximately
2.7 years.
The
Company recognizes compensation expense for options granted to non-employees
in
accordance with the provision of Emerging Issues Task Force (“EITF”) consensus
Issue 96-18, “Accounting
for Equity Instruments that are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling Goods or Services,”
which
requires using a fair value options pricing model and re-measuring such stock
options to the current fair market value at each reporting period as the
underlying options vest and services are rendered.
There
were no stock options granted during the three month period ended March 31,
2007. For the three month period ended March 31, 2006, the following key
assumptions were used in the Black-Scholes option pricing model to determine
the
fair value of stock options granted:
|
|
For
the Three Months Ended March 31, 2006
|
|
|
|
|
|
Dividend
yield
|
|
|
0%
|
|
Risk
free interest rates
|
|
|
4.8%
|
|
Expected
volatility
|
|
|
123.2%
|
|
Expected
term (in years)
|
|
|
5
|
|
We
have
not declared or paid any dividends and do not currently expect to do so in
the
near future. The risk-free interest rate used in the Black-Scholes model is
based on the implied yield currently available on U.S. Treasury securities
with
an equivalent term. Expected volatility is based on the weighted average
historical volatility of the Company’s common stock for the most recent five
year period. The expected term of options represents the period that our
stock-based awards are expected to be outstanding and was determined based
on
historical experience and vesting schedules of similar awards.
A
summary
of the Company’s stock option activity for the three months ended March 31, 2007
is presented in the following tables:
|
|
Number
of Shares
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life (In Years)
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at January 1, 2007
|
|
|
1,065,745
|
|
$
|
2.94
|
|
|
|
|
|
|
|
Options
granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Options
forfeited
|
|
|
(193,943
|
)
|
|
2.79
|
|
|
|
|
|
|
|
Options
cancelled
|
|
|
(56,067
|
)
|
|
2.84
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2007
|
|
|
815,735
|
|
$
|
2.98
|
|
|
3.92
|
|
$
|
—
|
|
Vested
or expected to vest at March 31, 2007 (1)
|
|
|
758,634
|
|
$
|
2.98
|
|
|
3.92
|
|
$
|
—
|
|
Exercisable
at March 31, 2007
|
|
|
540,028
|
|
$
|
2.94
|
|
|
3.20
|
|
$
|
—
|
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual Life (In Years)
|
|
Weighted
Average Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average Exercisable Price
|
|
$2.10
- $2.70
|
|
|
726,706
|
|
|
4.11
|
|
$
|
2.56
|
|
|
470,639
|
|
$
|
2.53
|
|
$3.40
- $5.80
|
|
|
55,679
|
|
|
1.40
|
|
|
3.88
|
|
|
50,179
|
|
|
3.67
|
|
$6.60
- $22.50
|
|
|
33,350
|
|
|
4.16
|
|
|
10.66
|
|
|
19,210
|
|
|
11.30
|
|
|
|
|
815,735
|
|
|
3.92
|
|
$
|
2.98
|
|
|
540,028
|
|
$
|
2.94
|
|
(1)
The
expected to vest options are the result of applying the pre-vesting forfeiture
rate assumptions to total outstanding options.
The
aggregate intrinsic value in the table above represents the difference between
the exercise price of the underlying options and the quoted price of the
Company’s common stock. There were no options in-the-money at March 31, 2007.
The Company’s closing stock price was $0.72 as of March 31, 2007. The Company
issues new shares of common stock upon exercise of stock options.
Note
9: Shareholders’ Equity
On
November 3, 2006, the Company effected a one-for-ten (1-for-10) reverse stock
split of its issued and outstanding common stock. The Company has adjusted
its
shareholders’ equity accounts by reducing its stated capital and increasing its
additional paid-in capital by approximately $91 thousand as of December 31,
2006
to reflect the reduction in outstanding shares as a result of the reverse stock
split.
On
July
21, 2006, the Company entered into several Note Purchase Agreements for the
sale
of approximately $5.99 million of senior secured debentures (the “Notes”)
together with warrants to purchase approximately 1.8 million shares of common
stock, par value $.001 per share. 50% of the aggregate principal amount matures
on July 21, 2007 and the remaining 50% matures on January 21, 2008. For the
year
ended December 31, 2006, two note holders converted their promissory notes
valued at approximately $0.22 million and were issued an aggregate of
approximately 85 thousand shares. The Notes pay 6% per annum interest quarterly.
The delisting from the AMEX on March 12, 2007 triggered a compliance condition
on the notes payable and as a result the Company is required to pay the
noteholders monthly interest at 1% rather than .5% on the outstanding principal
of the notes payable. The Company received a waiver from the noteholders that
allows the Company to accrue the interest and delay the interest payment until
the earliest of the Company (i) completing $2 million of debt or equity
financing or (ii) the occurrence of a Repurchase Event per the note. The Company
received approximately $5.4 million, net of deferred costs of approximately
$0.6
million which are amortized over the life of the Notes.
The
Company accounted for the net proceeds from the issuance of the Notes as two
separate components: a detachable warrant component and a debt component.
The Company determined the relative fair value of warrants to be $3.4
million which was recorded as debt discount, a reduction of the carrying value
of the Notes. The following assumptions were used to determine the fair value
of
the warrants:
Dividend
yield
|
|
0%
|
Risk
free interest rates
|
|
4.99%
|
Expected
volatility
|
|
122%
|
Expected
term (in years)
|
|
5.0
years
|
The
discount is being amortized to interest expense using the straight-line method
as it approximates the effective interest method over the term of the
Notes.
Under
EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in, a Company’s Own Stock”, the fair value of the warrants,
$3.6 million, have been recorded as a liability since the warrant agreement
requires a potential net-cash settlement in the first year of the warrant
agreement if the registration statement is not effective. The liability will
be
adjusted to fair value at each reporting period. The change in the fair value
of
the warrants will be recorded in the Consolidated Statement of Operations as
other income (expense). For the three months ended March 31, 2007, the Company
recorded approximately $0.46 million of gain from the change in the fair value
of the derivative liability.
A
registration rights agreement was entered into in connection with the Notes
which requires the Company to file a registration statement for the resale
of
the common stock underlying the Notes and the warrants. The Company must use
its
best efforts to have the registration statement declared effective by the end
of
a specified grace period and also maintain the effectiveness of the registration
statement until all shares of common stock underlying the Notes and the warrants
have been sold or may be sold without volume restrictions pursuant to Rule
144(k) of the Securities Act. If the Company fails to have the registration
statement declared effective within the grace period or fails to maintain the
effectiveness as set forth in the preceding sentence, the Company is required
to
pay each investor cash payments equal to 1.0% of the aggregate purchase price
monthly until the failure is cured. If the Company fails to pay the liquidated
damages, interest at 16.0% will accrue until the liquidated damages are paid
in
full. The registration statement was filed and declared effective by the
Securities and Exchange Commission within the specified grace period. As of
March 31, 2007, the registration statement remains effective.
The
Company accounts for the registration rights agreement as a separate
freestanding instrument and accounts for the liquidated damages provision as
a
derivative liability subject to SFAS 133. The estimated fair value of the
liability is based on an estimate of the probability and costs of cash penalties
being incurred. The Company determined that the fair value of the liability
was
immaterial and it is not recorded in accrued liabilities. The Company will
revalue the potential liability at each balance sheet date.
As
a
result of the issuance of the Notes, the outstanding 116,576 Series A Common
Stock Purchase Warrants, that were issued to certain accredited and/or
institutional investors pursuant to the Securities Purchase Agreement dated
January 9, 2004, were re-priced from $5.50 to $2.60 and the outstanding 650,001
Series F Common Stock Purchase Warrants, that were issued to certain accredited
and/or institutional investors pursuant to the Securities Purchase Agreement
dated October 25, 2004, were re-priced from $10.90 to $8.60.
For
the
three months ended March 31, 2007 and 2006, there were no options or warrants
exercised.
For
the
three months ended March 31, 2007 and 2006, the Company also issued
approximately 708 thousand and 12 thousand shares of common stock, respectively,
for the payment of approximately $620 thousand and $12 thousand, respectively,
for services rendered and to be rendered in the future. As
such, the Company recorded the fair value of the services
rendered in prepaid expenses and selling, general and
administrative expenses in the accompanying unaudited condensed
consolidated statement of operations for the three months ended March 31,
2007 and 2006, respectively.
Note
10: Income Taxes
The
Company adopted the provisions of FIN 48 on January 1, 2007. The Company
continues to fully recognize its tax benefits which are offset by a valuation
allowance due to the uncertainty that the deferred tax assets will be realized.
We will continue to evaluate the realizability of our domestic net deferred
tax
assets and may record additional benefits in future earnings if we determine
the
realization of these assets is more likely than not. As at January 1, 2007
and March 31, 2007, the Company did not have any unrecognized tax benefits.
The
Company files Federal and State corporate tax returns. All tax years since
inception are open to tax examination by the taxing authorities for possible
adjustments to the net operating losses but not for assessment. The Statute
of
Limitations for assessment of tax is generally three years for Federal and
four
years for State tax returns. The years currently open for Federal income tax
assessment include calendar years 2003 through 2006 and calendar years 2002
through 2006 for State tax assessment purposes. The Company is not currently
under examination by any jurisdictions for any of the open years
listed.
The
Company is in the process of preparing its Section 382 study and has not
determined the impact that such study will have on its NOL carryforward.
The
implementation of FIN 48 has not resulted in any adjustment to the Company’s
beginning tax position or tax position for the three month period ended March
31, 2007.
Note
11: Commitments and Contingencies
Royalty
Payments
The Company, in accordance with
a royalty agreement with Eastman Kodak, is obligated to make
minimum annual royalty payments of $125 thousand which commenced on January
1, 2001. Under this agreement, the Company must pay to Eastman Kodak a certain
percentage of net sales with respect to certain products, which
percentages are defined in the agreement. The percentages are on a sliding
scale
depending on the amount of sales generated. Any minimum royalties
paid will be credited against the amounts due based on the percentage of
sales. The royalty agreement terminates upon the expiration of the issued
patent which is the last to expire. Royalty expense was approximately $255
thousand and $85 thousand, respectively, for the three months ended March 31,
2007 and 2006, respectively.
Contractual
Obligations
The Company leases
office facilities and office, lab and factory equipment under operating leases
expiring through 2009. Certain leases provide for payments of monthly
operating expenses. The Company currently has lease commitments for space in
Hopewell Junction, New York and Bellevue, Washington. Rent expense was
approximately $332 thousand and $347 thousand for the three months ended March
31, 2007 and 2006, respectively.
Note
12: Legal Proceedings
None.
Note
13: Separation and Employment Agreements
Executive
Separation and Consulting Agreement
On
January 11, 2007, Gary Jones resigned as the President, Chief Executive Officer,
and as a Director of the Company. Mr. Jones and the Company entered into an
Executive Separation and Consulting Agreement (“the Agreement”). Under the
Agreement, the Company made a payment to Mr. Jones in an amount equal to: all
accrued salary as of the date of the Agreement plus an additional 30 days of
salary (approximately $47 thousand); 360 hours of unused vacation
(approximately $55 thousand); advance for legal and accounting fees associated
with 2004 stock options ($30 thousand); and an advance for future travel
expenditures ($5 thousand). Mr. Jones also received 500 thousand shares of
registered common stock of the Company valued at $430 thousand. In his
consulting relationship, Mr. Jones will be paid $460 thousand upon the
consummation of a strategic transaction. The Company will provide up to $7.5
thousand for reasonable moving expenses of personal property from the New York
office. In addition, the Company will pay up to an additional $30 thousand
to
Mr. Jones related to personal legal fees.
Compensation
Agreement
On
January 11, 2007, Dr. K.C. Park was appointed Interim Chief Executive Office,
President, and a Director of the Company. On February 12, 2007, the Company
entered into a Compensation Agreement (“the Agreement”) with Dr. Park. Under the
Agreement, the Company has agreed to pay Dr. Park an annual base salary equal
to
$300 thousand plus a quarterly increase in his base salary in the amount of
$12.5 thousand per fiscal quarter through December 31, 2007. The Company agreed
to issue Dr. Park an aggregate of 250 thousand restricted shares of common
stock
within 10 business days of the completion of a change of control of the Company.
In addition, if a change of control transaction is completed and Dr. Park is
not
offered a senior executive position in the new organization, the Company has
agreed to pay Dr. Park three month’s salary.
Note
14: AMEX Delisting
On
October 9, 2006, the Company received notice from the American Stock Exchange
(the “AMEX”) Listing Qualifications Department stating that the Company does not
meet certain continued listing standards as set forth in Part 10 of the AMEX
Company Guide (the “Company Guide”). Specifically, pursuant to a review by the
AMEX of the Company’s 10-Q for the three and six months ended June 30, 2006, the
AMEX has determined that the Company is not in compliance with Sections
1003(a)(ii) and 1003(a)(iii) of the Company Guide, respectively, which state,
in
relevant part, that the AMEX will normally consider suspending dealings in,
or
removing from the list, securities of a company that (a) has stockholders'
equity of less than $4.0 million if such company has sustained losses from
continuing operations and/or net losses in three of its four most recent fiscal
years; or (b) has stockholders' equity of less than $6.0 million if such company
has sustained losses from continuing operations and/or net losses in its five
most recent fiscal years, respectively.
On
November 6, 2006, the Company submitted a plan advising the AMEX of actions
that
it would take, which may bring it into compliance with Sections 1003 (a)(ii)
and
1003(a)(iii) of the Company Guide within a maximum of 18 months of receipt
of
the notice letter. On January 5, 2007, the Company received notice from the
staff of the AMEX indicating that it intended to strike the Company’s common
stock from listing on AMEX by filing a delisting application with the Securities
and Exchange Commission as it had determined that the Company has failed to
comply with the continued listing standards. The Company requested a verbal
hearing which was held on February 27, 2007.
On
March
1, 2007, the Company received notice from the AMEX indicating that the AMEX
would initiate the delisting process with respect to the Company’s common stock.
On March 12, 2007, in accordance with Part 12 of the Company Guide, the Company
was suspended from trading on the AMEX. The Company’s common stock is trading on
the Over-the-Counter Bulletin Board under the symbol, EMAN.
The
delisting from the AMEX triggered a compliance condition on the notes payable.
As a result the Company is required to pay the noteholders monthly interest
at
1% rather than .5% on the outstanding principal of the notes payable. The
Company received a waiver from the noteholders that allows the Company to accrue
the interest and delay the interest payment until the earliest of the Company
(i) completing $2 million of debt or equity financing or (ii) the occurrence
of
a Repurchase Event per the note.
Note
15: Subsequent Events
On
March
28, 2007, the Company entered into a Note Purchase Agreement for the sale of
$500 thousand of senior secured debentures (the “Note”) and warrants to purchase
approximately 1.0 million shares of common stock, par value $.001 per share.
The
investor purchased the Note with a conversion price of $0.35 per share that
may
convert into approximately 1.4 million shares of common stock and warrants
exercisable at $0.48 per share into approximately 1.0 million shares of common
stock expiring in 4.2 years. If the Notes are not converted, 50% of the
principal amount will be due on July 21, 2007 and the remaining 50% will be
due
on January 21, 2008. 6% interest is payable in quarterly installments on
outstanding notes with the first installment to be paid June 1, 2007. On April
9, 2007, the Company closed the transaction and received approximately $460
thousand, net of offering costs of approximately $40 thousand which are
amortized over the life of the Note.
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
NATURE
OF EXPENSE AMOUNT
SEC
Registration fee
|
|
$
|
113
|
|
Accounting
fees and expenses
|
|
10,000
|
*
|
Legal
fees and expenses
|
|
65,000
|
*
|
Miscellaneous
|
|
35,000
|
|
TOTAL
|
|
$
|
110,113 |
*
|
* Estimated.
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our
Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State
of
Delaware, that our directors or officers shall not be personally liable to
us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation,
as
amended, are necessary to attract and retain qualified persons as directors
and
officers.
Our
By
Laws also provide that the Board of Directors may also authorize us to indemnify
our employees or agents, and to advance the reasonable expenses of such persons,
to the same extent, following the same determinations and upon the same
conditions as are required for the indemnification of and advancement of
expenses to our directors and officers. As of the date of this Registration
Statement, the Board of Directors has not extended indemnification rights to
persons other than directors and officers.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
On
March
28, 2007, we entered into a Note Purchase Agreement for the sale of $500
thousand of senior secured debentures (the “Note”) and warrants to purchase
approximately 1.0 million shares of common stock, par value $.001 per share.
The
investor purchased the Note with a conversion price of $0.35 per share that
may
convert into approximately 1.4 million shares of common stock and warrants
exercisable at $0.48 per share into approximately 1.0 million shares of common
stock expiring in 4.2 years. If the Notes are not converted, 50% of the
principal amount will be due on July 21, 2007 and the remaining 50% will be
due
on January 21, 2008. 6% interest is payable in quarterly installments on
outstanding notes with the first installment to be paid June 1, 2007. On April
9, 2007, we closed the transaction and received approximately $460 thousand,
net
of offering costs of approximately $40 thousand which are amortized over the
life of the Note.
In
2006,
we issued options to purchase an aggregate of 114,855 shares of common stock
at
a weighted average price of $2.64 per share to employees as compensation for
services performed on behalf of our company. In addition, we issued options
to
purchase an aggregate of 3,900 shares of common stock at a price equal to $2.60
per share to a director as compensation for services performed on our behalf
as
his capacity as director of our company.
On
July
21, 2006, we entered into several Note Purchase Agreements for the sale of
approximately $5.99 million of senior secured debentures (the “Notes”) together
with warrants to purchase approximately 1.8 million shares of common stock.
The
Notes may convert into approximately $2.3 million shares at a conversion price
of $2.60. The 5 year warrants are exersiable at $3.60 per share into
approximately 1.6 million shares of common stock. 50% of the aggregate principal
amount matures on July 21, 2007 and the remaining 50% matures on January 21,
2008. For the year ended December 31, 2006, two note holders converted their
promissory notes valued at approximately $0.22 million and were issued an
aggregate of approximately 85 thousand shares.
On
October 20, 2005, the Company entered into a Securities Purchase Agreement,
pursuant to which the Company sold and issued 1,661,906 shares of common stock,
par value $0.001 per share, at a price of $5.50 per share and warrants to
purchase up to 997,143 shares of common stock for an aggregate purchase price
of
approximately $9.14 million. The warrants are exercisable at a price of $10.00
per share and expire on April 20, 2011. Of the 997,143 warrants, 664,763 of
the
warrants are exercisable on or after May 20, 2006. The remaining 332,381 are
exercisable after March 31, 2007.
In
2005,
we issued options to purchase an aggregate of 267,900 shares of common stock
at
a weighted average price of $12.10 per share to employees as compensation for
services performed on behalf of our company. In addition, we issued options
to
purchase an aggregate of 49,750 shares of common stock at a weighted average
price of $6.80 per share to directors as compensation for services performed
on
our behalf in each of their capacities as directors of our company.
On
January 9, 2004, the Company entered into a Securities Purchase Agreement with
several accredited institutional and private investors whereby such investors
purchased an aggregate of 333,336 shares of common stock and 431,221 warrant
shares for an aggregate purchase price of approximately $4.2 million. The shares
of common stock were priced at a 20% discount to the average closing price
of
the stock from December 30, 2003 to January 6, 2004, which ranged from $13.80
to
$19.40 per share during the period for an average closing price of $12.60 per
share. In addition, the investors received warrants to purchase an aggregate
of
200,002 shares of common stock (subject to anti-dilution adjustments)
exercisable at a price of $17.40 per share for a period of five (5) years.
The
warrants were priced at a 10% premium to the average closing price of the stock
for the pricing period. In connection with the Securities Purchase Agreement,
eMagin also issued additional warrants to the investors to acquire an aggregate
of 231,219 shares of common stock. On April 9, 2007, the 116,573 outstanding
Series A Common Stock Purchase Warrants were re-priced to $0.35.
In
February 2004, the Company and all of the holders of the Secured Convertible
Notes (the "Notes"), which were due in November 2005, entered into an agreement
whereby the holders agreed to an early conversion of 100% of the principal
amount of the Notes aggregating $7.825 million, together with all of the accrued
interest of approximately $742,000 on the Notes, into 1,139,462 shares of the
Company's common stock. In consideration of the Noteholders agreeing to the
early conversion of the Notes, eMagin agreed to issue the Noteholders warrants
to purchase an aggregate of 250,000 shares of common stock (the "warrants"),
which warrants are exercisable at a price of $27.60 per share. 150,000 of the
warrants (series D warrants) expired on December 31, 2005. The remaining 100,000
of the warrants (series E warrants) are exercisable until June 10, 2008.
In
August
2004, the Company and certain of the holders of its outstanding Class A, B
and C
common stock purchase warrants entered into an agreement pursuant to which
the
Company and the holders of the warrants agreed to the $9.00 re-pricing and
exercise of Class A, B and C common stock purchase warrants. As a condition
to
the transaction, the holders of the warrants agreed to limit the right of
participation that they were granted in January 9, 2004. As a result of the
transaction, the holders agreed to re-price and exercise approximately, 209,989
Class A, B and/or C common stock purchase warrants for an aggregate of
$1,889,900.
On
October 21, 2004, the Company entered into a Securities Purchase Agreement,
pursuant to which eMagin sold and issued 1,033,453 shares of common stock,
and
series F common stock warrants to purchase 512,976 of common stock for an
aggregate purchase price of $10,772,500. The common stock was priced at $10.50.
The Series F Warrants are exercisable from April 25, 2005 until April 25, 2010
at an exercise price of $12.10 per share, subject to adjustment upon the
occurrence of specific events, including stock dividends, stock splits,
combinations or reclassifications of the Company’s common stock or distributions
of cash or other assets. In addition, the Series F Warrants contain provisions
protecting against dilution resulting from the sale of additional shares of
the
Company’s common stock for less than the exercise price of the Series F
Warrants, or the market price of the common stock, on the date of such issuance
or sale.
On
October 28, 2004, eMagin entered into a Securities Purchase Agreement, pursuant
to which eMagin sold and issued 274,048 shares of common stock, and series
F
common stock purchase warrants to purchase eMagin’s common stock to purchasers
for an aggregate purchase price of $2,877,500. The common stock was priced
at
$10.50. The Series F Warrants are exercisable from April 25, 2005 until April
25, 2010 to purchase up to 137,024 shares of common stock at an exercise price
of $12.10 per share, subject to adjustment upon the occurrence of specific
events, including stock dividends, stock splits, combinations or
reclassifications of eMagin’s common stock or distributions of cash or other
assets. In addition, the Series F Warrants contain provisions protecting against
dilution resulting from the sale of additional shares of eMagin’s common stock
for less than the exercise price of the Series F Warrants, or the market price
of the common stock, on the date of such issuance or sale. On April 9, 2007,
the
outstanding 650,001 Series F Common Stock Purchase Warrants were re-priced
to
$7.12.
In
2004,
we issued options to purchase an aggregate of 313,300 shares of common stock
at
a weighted average price of $15.30 per share to employees as compensation for
services performed on behalf of our company. In addition, we issued options
to
purchase an aggregate of 16,250 shares of common stock at a weighted average
price of $17.70 per share to directors as compensation for services performed
on
our behalf in each of their capacities as directors of our company.
*All
of
the above issuances and sales were deemed to be exempt under Rule 506 of
Regulation D and Section (2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities.
The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of eMagin or executive officers of
eMagin, and transfer was restricted by eMagin in accordance with the requirement
of the Securities Act of 1933. In addition to representations by the
above-reference persons, we have made independent determinations that 11 of
the
above-referenced person were accredited or sophisticated investors, and that
they were capable of analyzing the merits and risks of their investment, and
that they understood the speculative nature of their investment. Furthermore,
all of the above-referenced persons were provided with access to our Securities
and Exchange Commission filings.
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The
following exhibits are included as part of this Form S-1. References to “the
Company” in this Exhibit List mean eMagin Corp., a Delaware
corporation.
Exhibit
Number
|
|
Description
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger between Fashion Dynamics Corp., FED Capital Acquisition
Corporation and FED Corporation dated March 13, 2000 (incorporated
by
reference to exhibit 2.1 to the Registrant's Current Report on Form
8-K/A
filed on March 17, 2000).
|
3.1
|
|
Amended
and Restated Articles of Incorporation (incorporated by reference
to
exhibit 99.2 to the Registrant's Definitive Proxy Statement filed
on June
14, 2001).
|
3.2
|
|
Amended
Articles of Incorporation (incorporated by reference to exhibit A
to the
Registrant's Definitive Proxy Statement filed on June 13, 2003).
|
3.3
|
|
Bylaws
of the Registrant (incorporated by reference to exhibit 99.3 to the
Registrant's Definitive Proxy Statement filed on June 14,
2001).
|
3.4
|
|
Form
of Certificate of Designation on Series A Senior Secured Convertible
Preferred Stock, filed July 25, 2007, incorporated by reference to
the Company's Form 8-K as filed on July 25, 2007. |
4.1
|
|
Form
of Warrant dated as of April 25, 2003 (incorporated by reference
to
exhibit 4.3 to the Registrant's Current Report on Form 8-K filed
on April
28, 2003).
|
4.2
|
|
Form
of Series A Common Stock Purchase Warrant dated as of January 9,
2004
(incorporated by reference to exhibit 4.1 to the Registrant's Current
Report on Form 8-K filed on January 9, 2004).
|
4.3
|
|
Form
of Series B Common Stock Purchase Warrant dated as of January 9,
2004
(incorporated by reference to exhibit 4.2 to the Registrant’s Current
Report on Form 8-K filed on January 9, 2004).
|
4.4
|
|
Form
of Series C Common Stock Purchase Warrant dated as of January 9,
2004
(incorporated by reference to exhibit 4.3 to the Registrant's Current
Report on Form 8-K filed on January 9, 2004).
|
4.5
|
|
Form
of Series D Warrant (incorporated by reference to exhibit 4.1 to
the
Registrant's current report on Form 8-K filed on March 4,
2004).
|
4.6
|
|
Form
of Series E Warrant (incorporated by reference to exhibit 4.2 to
the
Registrant's current report on Form 8-K filed on March 4,
2004).
|
10.1
|
|
2000
Stock Option Plan, (incorporated by reference to exhibit 99.1 to
the
Registrant's Registration Statement on Form S-8 filed on March 14,
2000).*
|
10.2
|
|
Form
of Agreement for Stock Option Grant pursuant to 2003 Stock Option
Plan
(incorporated by reference to exhibit 99.2 to the Registrant's
Registration Statement on Form S-8 filed on March 14, 2000).*
|
4.7
|
|
Form
of Series F Warrant (incorporated by reference to exhibit 4.1 to
the
Registrant's current report on Form 8-K filed on October 26,
2004).
|
4.8
|
|
Form
of Common Stock Purchase Warrant dated October 20, 2005, filed October
31,
2005, as filed in the Registrant's Form 8-K incorporated herein by
reference.
|
5.1
|
|
Opinion
of Sichenzia Ross Friedman Ference LLP (Filed herewith)
|
10.3
|
|
Nonexclusive
Field of Use License Agreement relating to OLED Technology for miniature,
high resolution displays between the Eastman Kodak Company and FED
Corporation dated March 29, 1999 (incorporated by reference to exhibit
10.6 to the Registrant's Annual Report on Form 10-K/A for the year
ended
December 31, 2000 filed on April 30, 2001).
|
10.4
|
|
Amendment
Number 1 to the Nonexclusive Field of Use License Agreement relating
to
the LED Technology for miniature, high resolution displays between
the
Eastman Kodak Company and FED Corporation dated March 16, 2000
(incorporated by reference to exhibit 10.7 to the Registrant's Annual
Report on Form 10-K/A for the year ended December 31, 2000 filed
on April
30, 2001).
|
10.5
|
|
Lease
between International Business Machines Corporation and FED Corporation
dated May 28, 1999 (incorporated by reference to exhibit 10.9 to
the
Registrant's Annual Report on Form 10-K for the year ended December
31,
2000 filed on March 30, 2001).
|
10.6
|
|
Amendment
Number 1 to the Lease between International Business Machines Corporation
and FED Corporation dated July 9, 1999 (incorporated by reference
to
exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the
year
ended December 31, 2000 filed on
March
30, 2001).
|
10.7
|
|
Amendment
Number 2 to the Lease between International Business Machines Corporation
and FED Corporation dated January 29, 2001 (incorporated by reference
to
exhibit 10.11 to the Registrant's Annual Report on Form 10-K for
the year
ended December 31, 2000 filed on March 30, 2001).
|
10.8
|
|
Amendment
Number 3 to Lease between International Business Machines Corporation
and
FED Corporation dated May 28, 2002.
|
10.9
|
|
Amendment
Number 4 to Lease between International Business Machines Corporation
and
FED Corporation dated December 14, 2004.
|
10.10
|
|
Registration
Rights Agreement dated as of April 25, 2003 by and among eMagin and
certain initial investors identified on the signature pages thereto
(incorporated by reference to exhibit 10.3 to the Registrant's Current
Report on Form 8-K filed on April 28, 2003).
|
10.11
|
|
Securities
Purchase Agreement dated as of January 9, 2004 by and among eMagin
and the
investors identified on the signature pages thereto (incorporated
by
reference to exhibit 10.1 to the Registrant's Current Report on Form
8-K
filed on January 9, 2004).
|
10.12
|
|
Registration
Rights Agreement dated as of January 9, 2004 by and among eMagin
and
certain initial investors identified on the signature pages thereto
(incorporated by reference to exhibit 10.2 to the Registrant's Current
Report on Form 8-K filed on January 9, 2004).
|
10.13
|
|
Master
Amendment Agreement dated as of February 17, 2004 by and among eMagin
and
the investors identified on the signature pages thereto (incorporated
by
reference to exhibit 10.1 to the Registrant's Current Report on Form
8-K
filed on March 4, 2004).
|
10.14
|
|
Registration
Rights Agreement dated as of February 17, 2004 by and among eMagin
and
certain initial investors identified on the signature pages thereto
(incorporated by reference to exhibit 10.2 to the Registrant's Current
Report on Form 8-K filed on March 4, 2004).
|
10.15
|
|
Letter
Agreement amending the Master Amendment Agreement dated as of March
1,
2004 by and among eMagin and the parties to the Master Amendment
Agreement
(incorporated by reference to exhibit 10.3 to the Registrant's Current
Report on Form 8-K filed on March 4, 2004).
|
10.16
|
|
Lease
between International Business Machines Corporation and FED Corporation
dated May 28, 1999, as filed in the Registrant's Form 10-K/A for
the year
ended December 31, 2000 incorporated by reference
herein.
|
10.17
|
|
Amendment
Number 2 to the Lease between International Business Machines Corporation
and FED Corporation dated January 29, 2001, as filed in the Registrant's
Form 10-K/A for the year ended December 31, 2000 incorporated by
reference
herein.
|
10.18
|
|
Secured
Note Purchase Agreement entered into as of November 27, 2001, by
and among
eMagin Corporation and certain investors named therein, as filed
in the
Registrant's Form 8-K dated December 18, 2001 incorporated herein
by
reference.
|
10.19
|
|
Securities
Purchase Agreement dated as of April 25, 2003 by and among eMagin
and the
investors identified on the signature pages thereto, filed April
28, 2003,
as filed in the Registrant's Form 8-K incorporated herein by
reference.
|
10.20
|
|
Registration
Rights Agreement dated as of April 25, 2003 by and among eMagin and
certain initial investors identified on the signature pages thereto
filed
April 28, 2003, as filed in the Registrant's Form 8-K incorporated
herein
by reference.
|
10.21
|
|
Securities
Purchase Agreement dated as of January 9, 2004 by and among eMagin
and the
investors identified on the signature pages thereto, filed January
9,
2004, as filed in the Registrant's Form 8-K incorporated herein by
reference.
|
10.22
|
|
Registration
Rights Agreement dated as of January 9, 2004 by and among eMagin
and
certain initial investors identified on the signature pages thereto.
Incorporated herein by reference to our January 9, 2004 Form
8-K.
|
10.23
|
|
Master
Amendment Agreement dated as of February 17, 2004 by and among eMagin
and
the investors identified on the signature pages thereto, filed March
4,
2004, as filed in the Registrant's Form 8-K incorporated herein by
reference.
|
10.24
|
|
Registration
Rights Agreement dated as of February 17, 2004 by and among eMagin
and
certain initial investors identified on the signature pages thereto,
filed
March 4, 2004, as filed in the Registrant's Form 8-K incorporated
herein
by reference.
|
10.25
|
|
Letter
Agreement amending the Master Amendment Agreement dated as of March
1,
2004 by and among eMagin and the parties to the Master Amendment
Agreement, filed March 4, 2004, as filed in the Registrant's Form
8-K
incorporated herein by reference.
|
10.26
|
|
2004
Non-Employee Compensation Plan, filed July 7, 2004, as filed in the
Registrant’s Form S-8, incorporated herein by reference.*
|
10.27
|
|
Form
of Letter Agreement by and among eMagin and the holders of the Class
A,
Class B and Class C common stock purchase warrants, filed August
9, 2004,
as filed in the Registrant's Form 8-K incorporated herein by reference.
|
10.28
|
|
Securities
Purchase Agreement dated as of October 21, 2004 by and among eMagin
and
the purchasers listed on the signature pages thereto, filed October
26,
2004, as filed in the Registrant's Form 8-K incorporated herein by
reference.
|
10.29
|
|
Placement
Agency Agreement dated as of October 21, 2004 by and among eMagin
and W.R.
Hambrecht & Co., LLC, filed October 26, 2004, as filed in the
Registrant's Form 8-K incorporated herein by reference.
|
10.30
|
|
Agreement,
dated as of June 29, 2004, by and between eMagin and Larkspur Capital
Corporation, filed October 26, 2004, as filed in the Registrant's
Form 8-K
incorporated herein by reference.
|
10.31
|
|
Amendment
No. 4 to Lease by and between eMagin and International Business Machines
Corporation, filed December 20, 2004, as filed in the Registrant's
Form
8-K incorporated herein by reference.
|
10.32
|
|
Sublease
Agreement dated as of July 14, 2005 by and between eMagin and Capgemini
U.S., LLC, filed August 2, 2005, as filed in the Registrant's Form
8-K
incorporated herein by reference.
|
10.33
|
|
Amended
and Restated 2003 Stock Option Plan, filed September 1, 2005, as
filed in
the Registrant’s Definitive Proxy Statement, incorporated herein by
reference.*
|
10.34
|
|
Amended
and Restated 2004 Non-Employee Compensation Plan, filed September
1, 2005,
as filed in the Registrant’s Definitive Proxy Statement, incorporated
herein by reference.*
|
10.35
|
|
2005
Employee Stock Purchase Plan, filed September 1, 2005, as filed in
the
Registrant’s Definitive Proxy Statement, incorporated herein by
reference.*
|
10.36
|
|
Securities
Purchase Agreement dated as of October 20, 2005, by and among eMagin
and
the purchasers listed on the signature pages thereto, filed October
31,
2005, as filed in the Registrant's Form 8-K incorporated herein by
reference.
|
10.37
|
|
Registration
Rights Agreement dated as of October 20, 2005, by and among eMagin
and the
purchasers listed on the signature pages thereto, filed October 31,
2005,
as filed in the Registrant's Form 8-K incorporated herein by reference.
|
10.38
|
|
Employment
Agreement effective as of January 1, 2006 by and between eMagin and
Gary
Jones, filed January 27, 2006, as filed in the Registrant's Form
8-K
incorporated herein by reference.
|
10.39
|
|
Employment
Agreement effective as of January 1, 2006 by and between eMagin and
Susan
Jones, filed January 27, 2006, as filed in the Registrant's Form
8-K
incorporated herein by reference.
|
10.40
|
|
Amendment
to Employment Agreement as of April 17, 2006 by and between eMagin
and
Gary Jones.
|
10.41
|
|
Amendment
to Employment Agreement as of April 17, 2006 by and between eMagin
and
Susan Jones.
|
10.42
|
|
Form
of Note Purchase Agreement dated July 21, 2006, by and among the
Company
and the investors named on the signature pages thereto, filed July
25,
2006, as filed in the Registrant's Form 8-K incorporated herein by
reference.
|
10.43
|
|
Form
of 6% Senior Secured Convertible Note Due 2007-2008 of the Company
dated
July 21, 2006, filed July 25, 2006, as filed in the Registrant's
Form 8-K
incorporated herein by reference.
|
10.44
|
|
Form
of Common Stock Purchase Warrant of the Company dated July 21, 2006,
filed
July 25, 2006, as filed in the Registrant's Form 8-K incorporated
herein
by reference.
|
10.45
|
|
Pledge
and Security Agreement dated as of July 21, 2006 by and between the
Company and Alexandra Global Master Fund Ltd., as collateral agent,
filed
July 25, 2006, as filed in the Registrant's Form 8-K incorporated
herein
by reference.
|
10.46
|
|
Patent
and Trademark Security Agreement dated as of July 21, 2006 by and
between
the Company and Alexandra Global Master Fund Ltd., as collateral
agent,
filed July 25, 2006, as filed in the Registrant's Form 8-K incorporated
herein by reference.
|
10.47
|
|
Lockbox
Agreement dated as of July 21, 2006 by and between the Company and
Alexandra Global Master Fund Ltd., as collateral agent, filed July
25,
2006, as filed in the Registrant's Form 8-K incorporated herein by
reference.
|
10.48
|
|
Form
of Note Purchase Agreement dated July 21, 2006, by and between the
Company
and Stillwater LLC, filed July 25, 2006, as filed in the Registrant's
Form
8-K incorporated herein by reference.
|
10.49*
|
|
2004
Amended and Restated Non-Employee Compensation Plan, filed September
21,
2006, as filed in the Registrant's Definitive Proxy Statement incorporated
herein by reference.
|
10.50
|
|
Executive
Separation and Consulting Agreement dated as of January 11, 2007
by and
between eMagin Corporation and Gary W. Jones, filed January 19, 2007,
as
filed in the Registrant's Form 8-K/A incorporated herein by
reference.
|
10.51
|
|
Letter
Agreement dated as of February 12, 2007 by and between eMagin Corporation
and Dr. K.C. Park, filed February 16, 2007, as filed in the Registrant's
Form 8-K incorporated herein by
reference.
|
10.52
|
|
Allonge
to the 6% Senior Secured Convertible Notes Due 2007-2008 of eMagin
Corporation dated as of March 9, 2007, filed March 13, 2007, as
filed in
the Registrant's Form 8-K incorporated herein by
reference
|
10.53
|
|
Amendment
Agreement, dated as of July 23, 2007, incorporated by reference
to the
Company’s Form 8-K as filed on July 25, 2007.
|
10.54
|
|
Form
of Amended and Restated 8% Senior Secured Convertible Note due
2008,
incorporated by reference to the Company’s Form 8-K as filed on July 25,
2007.
|
10.55
|
|
Form
of Amended and Restated Common Stock Purchase Warrant, incorporated
by
reference to the Company’s Form 8-K as filed on July 25,
2007.
|
10.56
|
|
Form
of Amendment No. 1 to Patent and Security Agreement, , filed July
25,
2007, Incorporated by reference to the Company’s Form 8-K as filed on July
25, 2007.
|
10.57
|
|
Form
of Amendment No. 1 to Pledge and Security Agreement, filed July
25, 2007,
Incorporated by reference to the Company’s Form 8-K as filed on July 25,
2007
|
10.58
|
|
Form
of Lockbox Agreement, , filed July 25, 2007, incorporated by reference
to
the Company’s Form 8-K as filed on July 25, 2007.
|
23.3
|
|
Consent
of Independent Registered Public Accounting Firm (filed
herewith).
|
|
*
Each of the Exhibits noted by an asterisk is a management compensatory
plan or arrangement.
|
ITEM
17. UNDERTAKINGS.
The
undersigned registrant hereby undertakes to:
(1)
File,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement to:
(i)
Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the “Securities Act”);
(ii)
Reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of the securities offered would not exceed
that which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) under the Securities Act
if,
in the aggregate, the changes in volume and price represent no more than a
20%
change in the maximum aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration statement,
and
(iii)
Include any additional or changed material information on the plan of
distribution.
(2)
For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3)
File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(4)
For
purposes of determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5)
For
determining any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement
for
the securities offered in the registration statement, and that offering of
the
securities at that time as the initial bona fide offering of those
securities.
(6)
Insofar as indemnification for liabilities arising under the Securities Act
may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant certifies
that
it has reasonable grounds to believe that it meets all of the requirements
for
filing on Form S-1 and has duly caused this registration statement to be signed
on its behalf by the undersigned, in the City of Bellevue, State of Washington
on July 25, 2007.
|
|
EMAGIN
CORP.
|
|
|
|
|
|
By:
|
/s/
K.C. Park
|
|
|
|
Dr.
K.C. Park
|
|
|
|
Interim
Chief Executive Officer and President
|
|
|
|
|
|
By:
|
/s/
John Atherly
|
|
|
|
John
Atherly
|
|
|
|
Chief
Financial Officer
|
POWER
OF ATTORNEY
Each
person whose signature appears below constitutes and appoints K.C. Park and
John
Atherly his true and lawful attorneys-in-fact and agent with full powers of
substitution and resubstitution, for him and in his name, place and stead,
in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, any Amendments thereto and any
Registration Statement of the same offering which is effective upon filing
pursuant to Rule 462(b) under the Securities Act, and to file the same, with
all
exhibits thereto, and other documents in connection therewith, with the
Commission, granting unto said attorney-in-fact and agent, each acting alone,
full powers and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent, acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed below by the following persons in the capacities
and
on the dates indicated below.
Signature
|
Title
|
Date
|
|
|
|
/s/
K.C.
Park
|
Interim
President and Chief Executive Officer, Director
|
July
25, 2007
|
K.C.
Park
|
(Principal
Executive Officer)
|
|
|
|
|
/s/
John Atherly
|
Chief
Financial Officer
|
|
John
Atherly
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
/s/
Thomas Paulsen
|
Chairman
of the Board, Director
|
July
25, 2007
|
Adm.
Thomas Paulsen
|
|
|
|
|
|
/s/
Claude Charles
|
Director
|
|
Claude
Charles
|
|
|
|
|
|
/s/
Paul Cronson
|
Director
|
|
Paul
Cronson
|
|
|
|
|
|
/s/
Irwin Engelman
|
Director
|
|
Irwin
Engelman
|
|
|
|
|
|
/s/
Dr. Jacob E. Goldman
|
Director
|
|
Dr.
Jacob E. Goldman
|
|
|
|
|
|
/s/
Brig. Gen. Stephen Seay
|
Director
|
|
Brig.
Gen. Stephen Seay
|
|
|
95