EMAGIN CORP - Annual Report: 2007 (Form 10-K)

 

R	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2007
	or
£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware	56-1764501
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

 

 

DOCUMENTS INCORPORATED BY REFERENCE – None

 

 

		Page
	PART I
Item 1	Business	4
Item 1A	Risk Factors	16
Item 1B	Unresolved Staff Comments	21
Item 2	Properties	21
Item 3	Legal Proceedings	21
Item 4	Submission of Matters to a Vote of Security Holders	21
	PART II
Item 5	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	22
Item 6	Selected Financial Data	23
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	30
Item 8	Financial Statements and Supplementary Data	31
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	56
Item 9A	Controls and Procedures	56
Item 9B	Other Information	57
	PART III
Item 10	Directors, Executive Officers, and Corporate Governance	58
Item 11	Executive Compensation	61
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	68
Item 13	Certain Relationships and Related Transactions	70
Item 14	Principal Accountant Fees and Services	71
	PART IV
Item 15	Exhibits and Financial Statement Schedules	71
	Signatures

 

 

·	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.

 

 

 

 

·

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.

·

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.

·

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.

·	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.

 

 

·

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.

 

·	Low manufacturing cost;

·	Low cost system solutions;

·	Wide angle light emission resulting in large apparent screen size;

·	Low power consumption for improved battery life and longer system life;

·	High brightness for improved viewing;

·	High-speed performance resulting in clear video images;

·	Wide operating temperature range; and

·	Good environmental stability (vibration and humidity).

 

·	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.

 

 

 

 

 

·	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

 

 

 

 

 

 

 

 

·	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.

 

 

 

 

 

		For the Year Ended December 31,
		2007				2006				2005				2004				2003
		(In thousands, except per share data)
Revenue		$	17,554			$	8,169			$	3,745			$	3,593			$	2,578
Cost of goods sold			12,628				11,359				10,219				5,966				5,141
Gross profit (loss)			4,926				(3,190	)			(6,474	)			(2,373	)			(2,563	)
Operating expenses:
Research and development			2,949				4,406				4,020				898				19
Selling, general and administrative			6,591				8,860				6,316				4,428				5,712
Total operating expenses			9,540				13,266				10,336				5,326				5,731
Loss from operations			(4,614	)			(16,456	)			(16,810	)			(7,699	)			(8,294	)
Other (expense) income, net			(13,874	)			1,190				282				(5,012	)			3,571
Net loss		$	(18,488	)		$	(15,266	)		$	(16,528	)		$	(12,711	)		$	(4,723	)
Basic and diluted loss per share		$	(1.59	)		$	(1.52	)		$	(1.94	)		$	(1.98	)		$	(1.31	)
Shares used in calculation of loss per share:
Basic and diluted			11,633				10,058				8,541				6,428				3,599

		December 31,
		2007				2006				2005				2004				2003
Cash and cash equivalents		$	713			$	1,415			$	6,727			$	13,457			$	1,054
Working capital (deficit)		$	(4,708	)		$	(305	)		$	8,868			$	14,925			$	106
Total assets		$	6,648			$	7,005			$	14,142			$	18,436			$	3,749
Long-term obligations		$	60			$	2,229			$	56			$	22			$	6,161
Total Shareholders’ (capital deficit) equity		$	(3,975	)		$	(1,164	)		$	10,401			$	16,447			$	(4,767	)

 

 

 

		As a Percentage of Total Revenue Year Ended December 31,
		2007				2006				2005
Consolidated Statements of Operations Data:
Revenue			100	%			100	%			100	%
Cost of goods sold			72				139				273
Gross profit (loss)			28				(39	)			(173	)
Operating expenses:
Research and development			17				54				107
Selling, general and administrative			38				109				169
operating expenses			55				163				276
Loss from operations			(27	)			(202	)			(449	)
Other (expense) income			(78	)			15				8
Net loss			(105	) %			(187	) %			(441	) %

 

		Payments due by period
		Total				1 Year				2-3 Years				4-5 Years
Operating lease obligations		$	1,982			$	1,444			$	538			$	—
Purchase obligations (a)			1,647				1,647				—				—
Other long-term liabilities (b)			7,119				6,597				272				250
Total		$	10,748			$	9,688			$	810			$	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 Notes and estimated interest, royalty payments, capitalized software and the New York Urban Development settlement.

	Page
Report of Independent Registered Public Accounting Firm	32
Consolidated Balance Sheets as of December 31, 2007 and 2006	33
Consolidated Statements of Operations for the years ended December 31, 2007, 2006, and 2005	34
Consolidated Statements of Changes in Shareholders’ Equity (Capital Deficit) for the years ended December 31, 2007, 2006, and 2005	35
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005	36
Notes to the Consolidated Financial Statements	37

		December 31,
		2007				2006
		(In thousands, except
		share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	713			$	1,415
Investments – held to maturity			94				171
Accounts receivable, net			2,383				908
Inventory			1,815				2,485
Prepaid expenses and other current assets			850				656
Total current assets			5,855				5,635
Equipment, furniture and leasehold improvements, net			292				666
Intangible assets, net			51				55
Other assets			232				233
Deferred financing costs, net			218				416
Total assets		$	6,648			$	7,005
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Accounts payable		$	620			$	1,192
Accrued compensation			891				959
Other accrued expenses			729				749
Advance payments			35				444
Deferred revenue			179				126
Current portion of debt			7,089				1,223
Derivative liability - warrants			—				1,195
Other current liabilities			1,020				52
Total current liabilities			10,563				5,940
Long-term debt			60				2,229
Total liabilities			10,623				8,169
Commitments and contingencies
Capital deficit:
Preferred stock, $.001 par value: authorized 10,000,000 shares; no shares issued and outstanding			—				—
Series A Senior Secured Convertible Preferred stock, stated value $1,000 per share, $.001 par value:  3,198 shares designated and none issued			—				—
Common stock, $.001 par value: authorized 200,000,000 shares, issued and outstanding, 12,620,900 shares in 2007 and 10,341,029 shares in 2006			12				10
Additional paid in capital			195,326				179,651
Accumulated deficit			(199,313	)			(180,825	)
Total capital deficit			( 3,975	)			( 1,164	)
Total liabilities and capital deficit		$	6,648			$	7,005

 

		For the Year Ended December 31,
		2007				2006				2005
		(In thousands, except per share data)
Revenue:
Product revenue		$	16,169			$	7,983			$	3,709
Contract revenue			1,385				186				36
Total revenue, net			17,554				8,169				3,745
Cost of goods sold			12,628				11,359				10,219
Gross profit (loss)			4,926				(3,190	)			(6,474	)
Operating expenses:
Research and development			2,949				4,406				4,020
Selling, general and administrative			6,591				8,860				6,316
Total operating expenses			9,540				13,266				10,336
Loss from operations			(4,614	)			(16,456	)			(16,810	)
Other income (expense):
Interest expense			(3,087	)			(1,306	)			(4	)
Loss on extinguishment of debt			(10,749	)			—				—
(Loss) gain on warrant derivative liability			(853	)			2,405				—
Other income, net			815				91				286
Total other (expense) income, net			(13,874	)			1,190				282
Net loss		$	(18,488	)		$	(15,266	)		$	(16,528	)
Loss per share, basic and diluted		$	(1.59	)		$	(1.52	)		$	(1.94	)
Weighted average number of shares outstanding:
Basic and diluted			11,633				10,058				8,541

 

 

																		Total
		Common Stock								Additional				Accumulated				Shareholders’ Equity
		Shares				Amount				Paid –in Capital				Deficit				(Capital Deficit)
		(In thousands)
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	)
Debt to equity conversion			797				1				310				—				311
Issuance of common stock for services			1,473				1				1,324				—				1,325
Exercise of common stock warrants			10				—				3				—				3
Stock-based compensation			—				—				1,652				—				1,652
Expiration of derivative liability- warrants			—				—				2,653				—				2,653
Beneficial conversion premium			—				—				5,078				—				5,078
Fair value of warrants issued			—				—				4,655				—				4,655
Net loss			—				—								(18,488	)			(18,488	)
Balance, December 31, 2007			12,621			$	12			$	195,326			$	(199,313	)		$	( 3,975	)

 

		Year Ended December 31,
		2007				2006				2005
		(In thousands)
Cash flows from operating activities:
Net loss		$	(18,488	)		$	(15,266	)		$	(16,528	)
Adjustments to reconcile net loss to net cash used in    operating activities:
Depreciation and amortization			392				841				908
Amortization of deferred financing fees			418				221				---
Reduction of provision for sales returns and doubtful accounts			(79	)			(39	)			(284	)
Stock based compensation			1,652				2,891				---
Issuance of common stock for services, net			1,325				553				470
Amortization of discount on notes payable			1,925				956				---
Loss (gain) on warrant derivative liability			853				(2,405	)			---
Loss on extinguishment of debt			10,749				---				---
Loss on other asset			---				157				---
Write-off of miscellaneous receivable			103				---				---
Changes in operating assets and liabilities:
Accounts receivable			(1,390	)			(42	)			(2	)
Inventory			670				1,354				(1,821	)
Prepaid expenses and other current assets			(194	)			389				(175	)
Advance payments			(409	)			384				(4	)
Deferred revenue			53				30				96
Accounts payable, accrued compensation, and accrued expenses			(381	)			(566	)			1,613
Other current liabilities			858				153				14
Net cash used in operating activities			(1,943	)			(10,389	)			(15,713	)
Cash flows from investing activities:
Purchase of equipment			(16	)			(204	)			(898	)
Proceeds from maturity of (purchase of) investments – held to maturity			77				(51	)			(120	)
Purchase of intangibles and other assets			---				(2	)			(54	)
Net cash provided by (used in) investing activities			61				(257	)			(1,072	)
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs			---				---				8,400
Proceeds from exercise of stock options and warrants			3				10				1,621
Proceeds from long-term debt			1,608				5,970				50
Payments related to deferred financing costs			(368	)			(591	)			---
Payments of long-term debt and capitalized lease obligations			(63	)			(55	)			(16	)
Net cash provided by financing activities			1,180				5,334				10,055
Net decrease in cash and cash equivalents			(702	)			(5,312	)			(6,730	)
Cash and cash equivalents, beginning of year			1,415				6,727				13,457
Cash and cash equivalents, end of year		$	713			$	1,415			$	6,727
Cash paid for interest		$	426			$	128			$	4
Cash paid for taxes		$	78			$	40			$	15
Supplemental non-cash transactions:
Conversion of debt to equity		$	311			$	220			$	---
During the year ended December 31, 2007, the Company