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Summary of Significant Accounting Policies
6 Months Ended
Jun. 30, 2019
Summary of Significant Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

Note 1:   Summary of Significant Accounting Policies 



The Business 



eMagin Corporation (the “Company”) designs, develops, manufactures and markets OLED (organic light emitting diode)–on-silicon microdisplays and virtual imaging products which utilize OLED microdisplays. The Company’s products are sold mainly in North America, Asia, and Europe. 



Basis of Presentation 



In the opinion of management, the accompanying unaudited condensed consolidated financial statements of eMagin Corporation and its subsidiary reflect all adjustments, including normal recurring accruals, necessary for a fair presentation.  All significant intercompany balances and transactions have been eliminated in consolidation.  Certain information and footnote disclosure normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the SEC.  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, 2018.  The results of operations for the periods ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year.  The consolidated condensed financial statements as of December 31, 2018 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. 



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 related to, among others, allowance for doubtful accounts, warranty reserves, inventory reserves, stock-based compensation expense, deferred tax asset valuation allowances, litigation and other loss contingencies. 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. 



Reclassifications



Certain immaterial prior period amounts have been reclassified to conform to current period presentation with no impact on previously reported net income, assets or shareholders’ equity.



Intangible Assets – Patents



Acquired patents are recorded at purchase price as of the date acquired and amortized over the expected useful life which is generally the remaining life of the patent.   



The total intangible amortization expense was approximately $9 thousand and $14 thousand for the three and six month periods ended June 30, 2019 and 2018, respectively. 



Product warranty



The Company generally offers a one-year product replacement warranty. The standard policy is to repair or replace the defective products. The Company accrues for estimated returns of defective products at the time revenue is recognized based on historical activity as well as for specific known product issues. The determination of these accruals requires the Company to make estimates of the frequency and extent of warranty activity and estimate future costs to replace the products under warranty. If the actual warranty activity and/or repair and replacement costs differ significantly from these estimates, adjustments to cost of revenue may be required in future periods.



The following table provides a summary of the activity related to the Company's warranty liability included in other current liabilities, (in thousands): 







 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Six Months Ended



 

June 30,

 

June 30,



 

2019

 

2018

 

2019

 

2018



 

 

(unaudited)

 

 

(unaudited)

Beginning balance

 

$

321 

 

$

362 

 

$

423 

 

$

468 

Warranty accruals and adjustments

 

 

39 

 

 

55 

 

 

(39)

 

 

(17)

Warranty claims

 

 

(43)

 

 

(35)

 

 

(67)

 

 

(69)

Ending balance

 

$

317 

 

$

382 

 

$

317 

 

$

382 





Net Loss per Common Share   



Basic loss per share is computed using the weighted average number of common shares outstanding during the period, and excludes any dilutive effects of common stock equivalent shares such as stock options, warrants, and convertible preferred stock. Diluted loss per share is computed using the weighted average number of common shares outstanding and potentially dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive. 



The Company’s Series B Convertible Preferred stock (“Preferred Stock – Series B”) is considered a participating security as the preferred stock participates in dividends with the common stock, which requires the use of the two-class method when computing basic and diluted earnings per share.  The Preferred Stock – Series B is not required to absorb any net loss. Although the Company paid a one-time special dividend in 2012, the Company does not expect to pay dividends on its common or preferred stock in the near future.   



The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2019 and 2018 (in thousands, except per share and share data):







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Six Months Ended



 

June 30,

 

June 30,



 

2019

 

2018

 

2019

 

2018



 

(unaudited)

 

(unaudited)

Net Loss

 

$

(2,337)

 

$

(5,065)

 

$

(3,777)

 

$

(7,146)



 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding
  - Basic

 

 

48,817,940 

 

 

45,111,273 

 

 

46,979,505 

 

 

43,691,117 

Dilutive effect of stock options

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Weighted average common shares outstanding
  - Diluted

 

 

48,817,940 

 

 

45,111,273 

 

 

46,979,505 

 

 

43,691,117 



 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

    Basic

 

$

(0.05)

 

$

(0.11)

 

$

(0.08)

 

$

(0.16)

    Diluted

 

$

(0.05)

 

$

(0.11)

 

$

(0.08)

 

$

(0.16)



The following table sets forth the potentially dilutive common stock equivalents for the three and six month periods ended June 30, 2019 and 2018 that were not included in diluted EPS as their effect would be anti-dilutive:







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Three Months Ended

 

Six Months Ended



 

June 30,

 

June 30,



 

2019

 

2018

 

2019

 

2018



 

(unaudited)

 

(unaudited)

Options

 

4,832,468 

 

4,817,370 

 

4,832,468 

 

4,817,370 

Warrants

 

19,295,773 

 

9,055,773 

 

19,295,773 

 

9,055,773 

Convertible preferred stock

 

7,545,333 

 

7,545,333 

 

7,545,333 

 

7,545,333 

Total potentially dilutive common stock equivalents

 

31,673,574 

 

21,418,476 

 

31,673,574 

 

21,418,476 



Fair Value of Financial Instruments



Cash, cash equivalents, accounts receivable, short-term investments and accounts payable are stated at cost, which approximates fair value, due to the short-term nature of these instruments.  The revolving credit facility is also stated at cost, which approximates fair value because the interest rate is based on a market based rate plus a margin. 



We have categorized our assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy in accordance with GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3).

 

Assets and liabilities recorded in the balance sheets at fair value are categorized based on a hierarchy of inputs as follows:

 

Level 1 – Unadjusted quoted prices in active markets of identical assets or liabilities.

Level 2 – Quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability,   either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

Level 3 – Unobservable inputs for the asset or liability.



The common stock warrant liability is currently the only financial asset or liability recorded at fair value on a recurring basis, and is considered a Level 3 liability. The fair value of the common stock warrant liability is included in current liabilities on the Condensed Consolidated Balance Sheets, as the warrants are currently exercisable.



The following table shows the reconciliation of the Level 3 warrant liability measured and recorded at fair value on a recurring basis, using significant unobservable inputs (in thousands):







 

 

 

 

 

Estimated
Fair Value



 

(unaudited)

Balance as of January 1, 2019

 

$

1,496 

Change in fair value of warrant liability, net

 

 

(1,330)

Balance as of June 30, 2019

 

$

166 



The fair value of the liability for common stock purchase warrants at issuance and at June 30, 2019 was estimated using the Black Scholes option pricing model based on the market value of the underlying common stock at the measurement date, the remaining contractual term of the warrants from 2.9 to 3.5 years, risk-free interest rates of 1.74%,  no expected dividends and expected volatility of the price of the underlying common stock ranging from 40.1% to 46.2%.



Concentrations



The Company purchases principally all of its silicon wafers, which are a key ingredient in its OLED production process, from two suppliers located in Taiwan and Korea.



For the three and six month periods ended June 30, 2019, one customer accounted for 11% and no single customer was over 10% of net revenues, respectively.  For the three and six months ended June 30, 2018, there were no other customers individually accounting for over 10% of net revenues. As of June 30, 2019,  three customers accounted for 13%,  13% and 12%, respectively of the Company’s consolidated accounts receivable balance and no other single customer accounted for over 10% of the consolidated accounts receivable.  As of June 30, 2018 one customer accounted for 11% of the consolidated accounts receivable.



Liquidity and Going Concern   



The accompanying consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  For the six months ended June 30, 2019, the Company incurred a net loss of $3.8 million and used cash in operating activities of $3.2 million.  As of June 30, 2019, the Company had $3.7 million of cash, $0.9 million of outstanding indebtedness under its revolving credit asset based lending facility (the “ABL Facility”), and borrowing availability under its ABL Facility of  $1.0 million.   For the year ended December 31, 2018, the Company incurred a net loss of $9.5 million and used cash in operating activities of $6.4 million. 



Due to continuing losses, the Company’s financial position, and uncertainty regarding the Company’s ability to borrow under its ABL Facility, the Company may not be able to meet its financial obligations as they become due without additional financing or sources of capital.    The Company’s ABL Facility expires on December 31, 2019 and, while relations with the lender are positive and the facility upon its expiration renews automatically for another year unless terminated pursuant to its terms, there is no assurance the lender will renew or extend this facility, or continue to make funds available during 2019 and beyond at present availability levels, or at all.   Therefore, in accordance with applicable accounting guidance, and based on the Company’s current financial condition and availability of funds, there is substantial doubt about the Company’s ability to continue as a going concern through twelve months from the date these financial statements were issued.



The Company has taken actions to increase revenues and to reduce expenses and is considering financing alternatives, but there can be no assurance that the Company will be successful in sufficiently increasing revenues, reducing expenses or securing additional financing to meet its operating needs.  The Company’s plans with regard to these matters include the following actions:  1) focus production and engineering resources on improving manufacturing yields and increasing production volumes, 2) reduce discretionary and other expenses, and 3) considering financing and/or strategic alternatives.



Based on the Company’s current projections and the anticipated availability of the ABL Facility, the Company estimates it will have sufficient liquidity to fund operations through December 2019. However. there can be no assurance the Company’s plans will be achieved, or that the Company will be able to continue to borrow under its ABL Facility, secure additional financing, and/or pursue strategic alternatives on terms acceptable to the Company, or at all.



Recently adopted accounting pronouncements



The Company's accounting policies are the same as those described in Note 1 to the Company's consolidated financial statements in its 2018 Form 10-K with the exception of the accounting policies related to leases.



In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532 - Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule was effective on November 5, 2018. The Company adopted the guidance on January 1, 2019, and such adoption did not have a material impact on its financial statements.



In February 2016, the FASB issued guidance which requires lessees to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term and, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis for all leases (with the exception of short-term leases).  Under the new guidance, leases previously defined as operating leases will be presented on the balance sheet. As a result, these leases will be recorded as an asset and a corresponding liability at the present value of the total lease payments. The asset will be decremented over the life of the lease on a pro-rata basis resulting in lease expense while the liability will be decremented using the interest method (i.e. principal and interest).  The Company adopted the guidance effective January 1, 2019. The Company elected the transition package of three practical expedients permitted under the transition guidance and elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption, without a restatement of prior periods. Further, the Company elected a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. As a result of the adoption, the Company adjusted its beginning balance for the quarter ended March 31, 2019 by recording operating lease ROU assets and liabilities through a cumulative-effect adjustment. The adoption impacted the accompanying condensed balance sheet, but did not have an impact on the condensed statements of operations and comprehensive loss.



At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, the Company calculates the associated lease liability and corresponding ROU assets upon lease commencement using a discount rate based on a credit-adjusted secured borrowing rate commensurate with the term of the lease. The Company records lease liabilities within current or noncurrent liabilities based upon the length of time associated with the lease payments. The operating lease ROU assets includes any lease payments made and excludes lease incentives and initial direct costs incurred, if any, and are recorded as noncurrent assets. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.



Leases with an initial term of 12 months or less are not recorded on the accompanying condensed balance sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.



The impact of the adoption of ASC 842 on the accompanying condensed balance sheet as of January 1, 2019 was as follows (in thousands. 







 

 

 

 

 

 

 

 

 

 



 

December 31,
2018

 

 

Adjustments
Due to the
Adoption of
ASC 842

 

 

January 1,
2019

Right of Use Assets (1)

 

 

 

 

 

 

 

 

 

 

Operating lease - right of use asset

 

$

 —

 

$

4,267 

 

 

$

4,267 



 

 

 

 

 

 

 

 

 

 

Operating lease liabilities

 

 

 

 

 

 

 

 

 

 

Current

 

$

 —

 

$

964 

 

 

$

964 

Noncurrent

 

$

 —

 

$

3,432 

 

 

$

3,432 



 

 

 

 

 

 

 

 

 

 

 (1) Operating lease right-of-use assets includes deferred rent of $129 thousand.



Recently issued accounting pronouncements



In August 2018, the FASB issued guidance which adds, amends and removes certain disclosure requirements related to fair value measurements.  Among other changes, this standard requires certain additional disclosure surrounding Level 3 assets, including changes in unrealized gains or losses in other comprehensive income and certain inputs in those measurements.  This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Certain amended or eliminated disclosures in this standard may be adopted early, while certain additional disclosure requirements in this standard can be adopted on its effective date.  In addition, certain changes in the standard require retrospective adoption, while other changes must be adopted prospectively.  The Company is currently evaluating this new standard and its impact on our consolidated financial statements.



Note 1A:  Impairment of Consumer Night Vision Business Assets



During the quarter ended June 30, 2018 the Company made a decision to exit the business associated with its two consumer night vision products, BlazeSpark and BlazeTorch (the “Consumer Night Vision Business”).  The Company’s decision was based on lower than anticipated sales and an assessment performed during the quarter of the anticipated level of additional engineering, marketing and financial resources necessary to modify the products for an expanded market.  As a result, the Company concluded an impairment had occurred and wrote-down $2.7 million of related Consumer Night Vision Business inventory, which includes an accrual of $1.4 million of inventory purchased by a contract manufacturer in anticipation of future production, and $0.1 million of production tooling, which are reflected in cost of revenues in the accompanying Consolidated Statements of Operations.