EMAGIN CORP - Annual Report: 2009 (Form 10-K)

R	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934
For the fiscal year ended December 31, 2009
	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.)

		Page
	PART I
Item 1	Business	4
Item 1A	Risk Factors	11
Item 1B	Unresolved Staff Comments	17
Item 2	Properties	17
Item 3	Legal Proceedings	17
Item 4	Submission of Matters to a Vote of Security Holders	17
	PART II
Item 5	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	18
Item 6	Selected Financial Data	19
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	26
Item 8	Financial Statements and Supplementary Data	27
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	53
Item 9A	Controls and Procedures	53
Item 9B	Other Information	54
	PART III
Item 10	Directors, Executive Officers, and Corporate Governance	55
Item 11	Executive Compensation	58
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	67
Item 13	Certain Relationships and Related Transactions and Director Independence	68
Item 14	Principal Accounting Fees and Services	69
	PART IV
Item 15	Exhibits and Financial Statement Schedules	69
	Signatures	70

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

·	High-speed performance resulting in clear video images;

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

·	Wide operating temperature range;

·	Good environmental stability (vibration and humidity);

·	Low manufacturing cost; and

·	Low cost system solutions.

·

Strengthen our technology leadership. As the first to exploit AMOLED microdisplays, we believe that we enjoy a significant advantage in bringing this technology to market. By continuing to invest in research and development, and protecting our intellectual property, we expect to further develop performance improvements and provide a competitive edge for our customers who integrate our displays into their end products.

·

Optimize microdisplay manufacturing efficiencies while protecting proprietary processes. We intend to reduce our production costs primarily through increasing manufacturing yield and lowering fixed costs through reduced cycle time and increased automation, as well as equipment upgrades. We outsource certain portions of microdisplay production, such as chip fabrication, to minimize both our costs and time to market. We intend to retain the OLED-related processes in-house, where we have a core competency and manufacturing expertise. We also believe that by keeping these processes under tight control we can better protect our proprietary technology and process know-how. This strategy will also enhance our ability to continue to optimize and customize processes and devices to meet customer needs.

·

Build and maintain strong design capabilities. We employ in-house design capabilities supplemented by outsourced design services. Building and maintaining this capability will allow us to reduce engineering costs, accelerate the design process and enhance design accuracy to respond to our customers' needs as new markets develop. In addition, we intend to maintain a product design staff capable of rapidly developing prototype products for our customers and strategic partners. Contracting third party design support to meet demand and for specialized design skills will also remain a part of our overall long term strategy.

·

Leverage strategic relationships. External relationships play an important role in our research and development efforts. Suppliers, equipment vendors, government organizations, contract research groups, external design companies, customer and corporate partners, consortia, and university relationships all enhance the overall research and development effort and bring us new ideas and solutions. In addition, we participate in industry associations such as Society Information Display, FlexTech Alliance (formerly known as United States Display Consortium), OLED Association, Consumer Electronics Association, and the Association of the United States Army, among others. Furthermore, we have established a CRADA (Cooperative Research and Development Agreement) with the US Army/RDECOM/NVESD for the purpose of evaluating and characterizing new and existing AMOLED microdisplay configurations. We believe that strategic relationships allow us to better determine the demands of the marketplace and, as a result, allow us to focus our future research and development activities to satisfy our customers’ evolving requirements.

·	OLED Materials, Structures, and Processes;

·	Display Color Processing and Sealing;

·	Active Matrix Circuit Methodologies and Designs;

·	Lenses and Tracking (Eye and Head);

·	Ergonomics and Industrial Design;

·	Wearable Computer Interface Methodology; and

·	Legacy Field Emission and General Display Technologies.

·	the receipt and timing of orders and the timing of delivery of orders;

·	the inability to adjust expense levels or delays in adjusting expense levels, in either case in response to lower than expected revenues or gross margins;

·	the volume of orders relative to our manufacturing capacity;

·	product introductions and market acceptance of new products or new generations of products;

·	changes in cost and availability of labor and components;

·	product mix;

·	variation in operating expenses; regulatory requirements, foreign currency fluctuations and changes in duties and tariffs;

·	pricing and availability of competitive products and services; and

·	changes, whether or not anticipated, in economic conditions.

·	variability in our process repeatability and control;

·	contamination of the manufacturing environment or equipment;

·	equipment failure, power outages, or variations in the manufacturing process;

·	lack of consistency and adequate quality and quantity of piece parts and other raw materials;

·	defects in packaging either within or without our control; and

·	any transitions or changes in our production process, planned or unplanned.

 

·	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.

·	achievement of technology breakthroughs required to make commercially viable devices;

·	the accuracy of our predictions of market requirements;

·	acceptance of our new product designs;

·	acceptance of new technology in certain markets;

·	the availability of qualified research and development and product development personnel;

·	our timely completion of product designs and development;

·	our ability and available resources to expand sales;

·	our ability to develop repeatable processes to manufacture new products in sufficient quantities and at low enough costs for commercial sales;

·	our customers’ ability to develop competitive products incorporating our products; and

·	acceptance of our customers’ products by the market.

·	variations in our operating results and financial conditions;

·	actual or anticipated announcements of technical innovations, new product developments, or design wins by us or our competitors;

·	general conditions in the semiconductor and flat panel display industries; and

·	worldwide economic and financial conditions.

		2008								2009
		High				Low				High				Low
First quarter		$	1.47			$	0.88			$	0.85			$	0.32
Second quarter		$	1.05			$	0.63			$	1.40			$	0.60
Third quarter		$	0.83			$	0.52			$	2.08			$	0.97
Fourth quarter		$	0.75			$	0.21			$	2.00			$	1.38

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 – 2003 Stock Option Plan			1,251,882			$	1.00				53,006
Equity compensation plans not approved by security holders – 2008 Incentive Stock Plan			1,565,692			$	1.47				222,626

		For the Year Ended December 31,
		2009				2008				2007				2006				2005
		(In thousands, except per share data)
Revenue		$	23,822			$	18,739			$	17,554			$	8,169			$	3,745
Cost of goods sold			10,175				10,673				12,628				11,359				10,219
Gross profit (loss)			13,647				8,066				4,926				(3,190	)			(6,474	)
Operating expenses:
Research and development			1,996				2,081				2,949				4,406				4,020
Selling, general and administrative			6,900				6,254				6,591				8,860				6,316
Total operating expenses			8,896				8,335				9,540				13,266				10,336
Income (loss) from operations			4,751				(269	)			(4,614	)			(16,456	)			(16,810	)
Other (expense) income, net			(399	)			(1,590	)			(13,874	)			1,190				282
Net income (loss) prior to income tax provision			4,352				(1,859	)			(18,488	)			(15,266	)			(16,528	)
Net income (loss)		$	4,262			$	(1,859	)		$	(18,488	)		$	(15,266	)		$	(16,528	)
Income (loss) per share, basic		$	0.26			$	(0.13	)		$	(1.59	)		$	(1.52	)		$	(1.94	)
Income (loss) per share, diluted		$	0.17			$	(0.13	)		$	(1.59	)		$	(1.52	)		$	(1.94	)
Shares used in calculation of income (loss) per share:
Basic			16,344				14,175				11,633				10,058				8,541
Diluted			25,503				14,175				11,633				10,058				8,541

		December 31,
		2009				2008				2007				2006			2005
Cash and cash equivalents		$	5,295			$	2,404			$	713			$	1,415		$	6,727
Working capital (deficit)		$	8,615			$	3,300			$	(4,708	)		$	(305	)	$	8,868
Total assets		$	13,980			$	10,104			$	6,648			$	7,005		$	14,142
Long-term obligations		$	—			$	—			$	60			$	2,229		$	56
Total shareholders’ equity (capital deficit)		$	9,771			$	3,661			$	(4,170	)		$	(1,164	)	$	10,401

		As a Percentage of Total Revenue Year Ended December 31,
		2009				2008				2007
Consolidated Statements of Operations Data:
Revenue			100	%			100	%			100	%
Cost of goods sold			43				57				72
Gross profit			57				43				28
Operating expenses:
Research and development			8				11				17
Selling, general and administrative			29				33				38
Total operating expenses			37				44				55
Income (loss) from operations			20				(1	)			(27	)
Other expense			(2	)			(9	)			(78	)
Income (loss) before provision for income taxes			18				(10	)			(105	)
Provision for income taxes			—				—				—
Net income (loss)			18	%			(10	)%			(105	)%

 

		For the Year ended December 31,
			2009				2008
Product revenue gross profit		$	11,910			$	6,644
Product revenue gross margin			60	%			42	%
Contract revenue gross profit		$	1,737			$	1,422
Contract revenue gross margin			43	%			47	%
Total gross profit		$	13,647			$	8,066
Total gross margin			57	%			43	%

 

		For the Year ended December 31,
		2008				2007
Product revenue gross profit		$	6,644			$	4,280
Product revenue gross margin			42	%			26	%
Contract revenue gross profit		$	1,422			$	646
Contract revenue gross margin			47	%			47	%
Total gross profit		$	8,066			$	4,926
Total gross margin			43	%			28	%

		Payments due by period
		Total				1 Year				2-3 Years				4-5 Years
Operating lease obligations		$	4,913			$	1,094			$	2,276			$	1,543
Line of credit			40				40				—				—
Purchase obligations (a)			3,066				3,066				—				—
Total		$	8,019			$	4,200			$	2,276			$	1,543

	Page
Report of Independent Registered Public Accounting Firm	28
Consolidated Balance Sheets as of December 31, 2009 and 2008	29
Consolidated Statements of Operations for the years ended December 31, 2009, 2008, and 2007	30
Consolidated Statements of Changes in Shareholders’ Equity (Capital Deficit) for the years ended December 31, 2009, 2008, and 2007	31
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008, and 2007	32
Notes to the Consolidated Financial Statements	33

 

 

 

		December 31,
		2009				2008
		(In thousands, except
		share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	5,295			$	2,404
Investments – held to maturity			100				97
Accounts receivable, net			4,563				3,643
Inventory			2,179				2,374
Prepaid expenses and other current assets			687				796
Total current assets			12,824				9,314
Equipment, furniture and leasehold improvements, net			1,021				381
Intangible assets, net			43				47
Other assets			92				—
Deferred financing costs, net			—				362
Total assets		$	13,980			$	10,104
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,122			$	1,026
Accrued compensation			956				837
Other accrued expenses			791				804
Advance payments			211				694
Deferred revenue			238				164
Current portion of debt			—				1,691
Other current liabilities			891				798
Total current liabilities			4,209				6,014
Commitments and contingencies  (Note 12)
Redeemable common stock:  522,500 shares redeemable as of December 31, 2008			—				429
Shareholders’ equity:
Preferred stock, $.001 par value: authorized 10,000,000 shares:
Series B Convertible Preferred stock, (liquidation preference of $5,739,000) stated value $1,000 per share, $.001 par value:  10,000 shares designated and 5,739 issued and outstanding as of December 31, 2009 and 2008			—				—
Common stock, $.001 par value: authorized 200,000,000 shares, issued and outstanding, ­­­­­­­­­­­16,967,244 shares in 2009 and 15,213,959 shares, net of redeemable common stock, in 2008			17				15
Additional paid in capital			206,664				204,818
Accumulated deficit			(196,910	)			(201,172	)
Total shareholders’ equity			9,771				3,661
Total liabilities and shareholders’ equity		$	13,980			$	10,104

 

		For the Year Ended December 31,
		2009			2008				2007
		(In thousands, except per share data)
Revenue:
Product		$	19,775		$	15,730			$	16,169
Contract			4,047			3,009				1,385
Total revenue, net			23,822			18,739				17,554
Cost of goods sold:
Product			7,865			9,086				11,889
Contract			2,310			1,587				739
Cost of goods sold			10,175			10,673				12,628
Gross profit			13,647			8,066				4,926
Operating expenses:
Research and development			1,996			2,081				2,949
Selling, general and administrative			6,900			6,254				6,591
Total operating expenses			8,896			8,335				9,540
Income (loss) from operations			4,751			(269	)			(4,614	)
Other income (expense):
Interest expense			(466	)		(1,990	)			(3,087	)
Loss on extinguishment of debt			—			—				(10,749	)
(Loss) gain on warrant derivative liability			—			—				(853	)
Other income, net			67			400				815
Total other expense, net			(399	)		(1,590	)			(13,874	)
Income (loss) before provision for income taxes			4,352			(1,859	)		$	(18,488	)
Provision for income taxes			90			—				—
Net income (loss)		$	4,262		$	(1,859	)		$	(18,488	)
Income (loss) per common share, basic		$	0.26		$	(0.13	)		$	(1.59	)
Income (loss) per common share, diluted		$	0.17		$	(0.13	)		$	(1.59	)
Weighted average number of shares outstanding:
Basic			16,344			14,175				11,633
Diluted			25,503			14,175				11,633

 

See notes to Consolidated Financial Statements.

		Preferred Stock								Common Stock
		Shares				Amount				Shares				Amount				Additional Paid-in Capital				Accumulated Deficit				Total Shareholders’ Equity (Capital Deficit)
Balance, December 31, 2006			—			$	—				10,341			$	10				179,651			$	(180,825	)		$	(1,164	)
Debt conversion			—				—				797				1				310				—				311
Issuance of common stock for services			—				—				1,310				1				1,129				—				1,130
Exercise of common stock warrants			—				—				10				—				3				—				3
Stock-based compensation			—				—				—				—				1,652				—				1,652
Expiration of derivative liability- warrants			—				—				—				—				2,653				—				2,653
Beneficial conversion premium			—				—				—				—				5,078				—				5,078
Fair value of warrants issued			—				—				—				—				4,655				—				4,655
Net loss			—				—				—				—								(18,488	)			(18,488	)
Balance, December 31, 2007			—			$	—				12,458			$	12			$	195,131			$	(199,313	)		$	(4,170	)
Sale of preferred stock, net of issuance costs			4				—				—				—				3,933				—				3,933
Sale of common stock, net of issuance costs			—				—				1,587				2				1,578				—				1,580
Debt conversion			2				—				718				1				1,956				—				1,957
Issuance of common stock for services			—				—				326				—				303				—				303
Stock-based compensation			—				—				—				—				928				—				928
Put option waiver			—				—				125								150				—				150
Fair value of warrants issued			—				—				—				—				883				—				883
Deemed dividend, put option			—				—				—				—				(44	)			—				(44	)
Net loss			—				—				—				—				—				(1,859	)			(1,859	)
Balance, December 31, 2008			6			$	—				15,214			$	15			$	204,818			$	(201,172	)		$	3,661
Issuance of common stock for services			—				—				499				—				304				—				304
Expiration of put options			—				—				522				1				428				—				429
Exercise of common stock warrants			—				—				727				1				(1	)			—				—
Exercise of common stock options			—				—				5				—				5				—				5
Stock-based compensation			—				—				—				—				1,110				—				1,110
Net income			—				—				—				—				—				4,262				4,262
Balance, December 31, 2009			6			$	—				16,967			$	17			$	206,664			$	(196,910	)		$	9,771