10-Q 1 b311513_10q.txt FORM 10Q U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2001 [ ] Transition report pursuant section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to _______________ eMAGIN CORPORATION (Exact name of small business issuer as specified in its charter) Commission file number: 000-24757 NEVADA 88-0378451 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 2070 Route 52 Hopewell Junction, New York 12533 (Address of principal executive offices) (845) 892-1900 (Issuer's telephone number) ------------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Not applicable APPLICABLE ONLY TO CORPORATE REGISTRANTS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of May 15, 2001 the Registrant had 25,069,143 shares of Common Stock outstanding. TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one): Yes [ ] No [X] Index Page Number PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets at March 31, 2001 (unaudited) and December 31, 2000 1 Unaudited Consolidated Statements of Operations For the Three-Months ended March 31, 2001 and March 31, 2000 and for the period from inception (January 23, 1996) to March 31, 2001 2 Unaudited Consolidated Statements of Cash Flows for the Three-Months ended March 31, 2001 and March 31, 2000 and for the Period from Inception (January 23, 1996) to March 31, 2001 3 Selected Notes to Unaudited Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 10 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 10 SIGNATURE 10 eMAGIN CORPORATION (a development stage corporation) CONSOLIDATED BALANCE SHEETS
March 31, December 31, ASSETS 2001 2000 ------------- ------------- (unaudted) CURRENT ASSETS: Cash and cash equivalents $ 3,806,668 $ 7,367,257 Contract receivables 151,753 825,733 Unbilled costs and estimated profits on contracts in progress 1,423,357 627,347 Prepaid expenses and other current assets 1,212,084 665,222 ------------- ------------- Total current assets 6,593,862 9,485,559 Equipment and leasehold improvements, net of accumulated depreciation of $721,602, and $556,365, respectively 1,255,915 1,268,304 Goodwill and purchased intangibles, net of accumulated amortization of $26,784,012 and $20,932,320 respectively 45,838,247 51,689,938 Other long-term assets 105,394 105,394 ------------- ------------- Total assets $ 53,793,418 $ 62,549,195 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 1,513,576 $ 1,096,771 Accrued Payroll 1,479,162 1,376,888 Current portion of long-term debt 201,624 313,074 Other current liabilities 247,290 455,812 ------------- ------------- Total current liabilities 3,441,652 3,242,545 ------------- ------------- LONG-TERM DEBT 140,556 122,984 SHAREHOLDERS' EQUITY: Common Stock, par value $0.001 per share Shares authorized - 76,350,000 Shares issued and outstanding - 25,069,143 25,069 25,069 Additional paid-in capital 116,559,331 116,622,811 Deferred compensation (8,466,938) (9,266,397) Deficit accumulated during the development stage (57,906,252) (48,197,817) ------------- ------------- Total shareholders' equity 50,211,210 59,183,666 ------------- ------------- Total liabilities and shareholders' equity $ 53,793,418 $ 62,549,195 ============= =============
See selected notes to financial statements 1 eMAGIN CORPORATION (a development stage corporation) CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Period from Three-Months Three-Months inception ended ended (January 23, 1996) March 31, 2001 March 31, 2000 to March 31, 2001 -------------- -------------- ------------------ CONTRACT REVENUE: Contract revenue $ 2,030,201 $ 12,266 $ 4,587,788 ------------ ------------ ------------- Total revenue 2,030,201 12,266 4,587,788 ------------ ------------ ------------- COSTS AND EXPENSES: Research and development, net of funding under cost sharing arrangements of $201,467, $358,760 and $1,529,588, respectively 3,441,105 623,030 13,076,053 Amortization of purchased intangibles 5,851,692 1,186,698 26,784,012 Acquired in-process research and development -- -- 12,820,000 Non-cash charge for stock-based compensation 735,978 254,946 3,275,806 Selling, general and administrative 1,775,401 241,657 6,955,914 ------------ ------------ ------------- Total costs and expenses, net 11,804,176 2,306,331 62,911,785 ------------ ------------ ------------- OTHER INCOME 65,540 36,909 417,745 ------------ ------------ ------------- Loss before provision for income taxes (9,708,435) (2,257,156) (57,906,252) PROVISION FOR INCOME TAXES -- -- -- ------------ ------------ ------------- Net loss $ (9,708,435) $ (2,257,156) $ (57,906,252) ============ ============ ============= Basic and diluted net loss per common share $ (0.39) $ (0.17) ============ ============ Basic and diluted weighted average common shares outstanding 25,069,143 13,312,240 ============ ============
See selected notes to financial statements. 2 eMAGIN CORPORATION (a development stage corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Period from Three-Months Three-Months inception ended ended January 23 1996 March 31, 2001 March 31, 2000 to March 31, 2000 --------------- --------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($ 9,708,435) ($ 2,257,156) ($57,906,252) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 6,016,929 1,213,923 27,506,450 Loss on sale of assets 97,713 Non-cash charge for stock based compensation 735,978 254,946 3,275,806 Acquired in-process research and development 12,820,000 Changes in operationg assets and liabilities, net of acquisition: Contract receivables 673,980 (12,696) (19,790) Unbilled costs and estimated profits on contracts in progress (796,010) (803,793) Prepaid expenses and other current assets (546,863) (58,792) (906,369) Other long-term assets (94,943) Accounts payable, accured expenses and other current liabilities 310,558 (6,224) 673,409 ------------ ------------ ------------ Net cash used in operating activities (3,313,863) (865,999) (15,357,769) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment (152,848) (35,001) (955,881) Net proceeds from acquisition -- 1,239,162 1,239,162 ------------ ------------ ------------ Net cash used in investing activities (152,848) 1,204,161 283,281 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sales of common stock, net of issuance costs (93,878) 21,250,000 21,281,000 Payments of long term debt and capital leases -- 49,224 (2,399,844) ------------ ------------ ------------ Net cash provided by financing activities (93,878) 21,299,224 18,881,156 ------------ ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS (3,560,589) 21,637,386 3,806,668 CASH AND CASH EQUIVALENTS, beginning of period 7,367,257 -- -- ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 3,806,668 $ 21,637,386 $ 3,806,668 ============ ============ ============
See selected notes to financial statements. 3 eMAGIN CORPORATION Selected Notes to Unaudited Consolidated Financial Statements Note 1 - BASIS OF PRESENTATION The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. Certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. The results of operations for the period ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year. Note 2 - NATURE OF BUSINESS Fashion Dynamics Corporation (FDC) was organized January 23, 1996, under the laws of the State of Nevada. FDC had no active business operations other than to acquire an interest in a business. On March 16, 2000, FDC acquired FED Corporation ("FED") (the Merger). The merged company changed its name to eMagin Corporation (the "Company" or eMagin) (Note 3). FED is a developer and manufacturer of optical systems and microdisplays for use in the electronics industry. FED's wholly-owned subsidiary, Virtual Vision, Inc. develops and markets microdisplay systems and optics technology for commercial, industrial and military applications. Following the Merger, the business conducted by the Company is the business conducted by FED prior to the Merger. The Company continues to be a development stage company, as defined by Statement of Financial Accounting Standards ("SFAS") No. 7, Accounting and Reporting by Development Stage Enterprises", as it continues to devote substantially all of its efforts to establishing a new business, and it has not yet commenced its planned principal operations. Revenues earned by the Company to date are primarily related to research and development type contracts and are not related to the Company's planned principal operations of commercialization of products using organic light emitting diode (OLED) technology. Note 3 - FED ACQUISITION On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the terms of the agreement, FDC issued approximately 10.5 million shares of its common stock and approximately 3.9 million options and warrants to purchase common stock to FED shareholders. The total preliminary purchase price of the transaction was approximately $98.5 million, including $73.4 million of value relating to the shares issued (at a fair value of $7 per share, the value of the simultaneous private placement transaction of similar securities), $20.9 million of value relating to the options and warrants exchanged, $0.3 million of acquisition costs and $3.8 million of assumed liabilities. The transaction was accounted for using the purchase method of accounting. Under the purchase method of accounting, the assets and liabilities were recorded based upon their fair values at the date of acquisition. 4 The purchase price was allocated as follows: Deferred compensation $13,025,000 In-process research and development 12,820,000 Fixed assets 1,215,000 Other intangible assets 16,805,000 Goodwill 54,635,000 ----------- $98,500,000 =========== Goodwill and other intangible assets acquired are amortized over their estimated useful lives of three years. The Company recorded approximately $5.9 million in amortization expense related to purchased intangibles and goodwill for the three months ended March 31, 2001. In accordance with SFAS No. 2, "Accounting for Research and Development Costs", as clarified by Financial Accounting Standards Board Interpretation No. 4, amounts assigned to in-process research and development will be charged to expense as part of the allocation of purchase price. Accordingly, based on the results of an independent appraisal, the Company recognized a charge of approximately $12.8 million associated with the write-off of acquired in-process research and technology. This charge was recognized by the company during the quarter ended September 30, 2000 and is included in the accompanying statement of operations for the period from inception (January 23, 1996) to March 31, 2001. Note 4 - REVENUE AND COST RECOGNITION The Company has historically earned revenues from certain of its research and development activities under both firm fixed-price contracts and cost-type contracts, including some cost-plus-fee contract. Revenues relating to firm fixed-price contracts are generally recognized on the percentage-of-completion method of accounting as costs are incurred (cost-to-cost basis). Revenues on cost-plus-fee contracts include costs incurred plus a portion of estimated fees or profits based on the relationship of costs incurred to total estimated costs. Contract costs include all direct material and labor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates. Note 5 - RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. To date, activities of the Company (and its predecessor) have included the performance of research and development under cooperative agreements with United States Government agencies. Funding from such research and development contracts is recognized as a reduction in operating expenses during the period in which the services are performed and related direct expenses are incurred. 5 Note 6 - NET LOSS PER COMMON SHARE In accordance with SFAS No. 128, net loss per common share amounts ("basic EPS") were computed by dividing net loss by the weighted average number of common shares outstanding and excluding any potential dilution. Net loss per common share assuming dilution ("diluted EPS") was computed by reflecting potential dilution from the exercise of stock options and warrants. Common equivalent shares have been excluded from the computation of diluted EPS as their effect is antidilutive. Note 7 - STOCKHOLDERS' EQUITY The authorized common stock of the Company consists of 76,350,000 shares with a par value of $0.001 per share. Prior to the Merger on March 16, 2000, net proceeds of approximately $23.3 million was raised through the private placement issuance of approximately 3.5 million shares of common stock. Additionally, approximately 9.4 million shares of common stock held by FDC's principal shareholders were cancelled at the time of the Merger. On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the terms of the agreement, FDC issued approximately 10.5 million shares of its common stock to FED shareholders, and issued approximately 3.9 million options and warrants in exchange for existing FED options and warrants. The total purchase price of the transaction was approximately $98.5 million, including $73.4 million of value relating to the shares issued (at a fair value of $7 per share, the value of the simultaneous private placement transaction of similar securities), $20.9 million of value relating to the options and warrants exchanged, based on the difference between the fair value and the exercise price of said equity instruments and $3.8 million of assumed liabilities. The transaction was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the fair value of assets acquired and liabilities assumed. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Statement of Forward-Looking Information This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms, or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those in the forward-looking statements as a result of various important factors. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such should not be regarded as a representation by the Company, or any other person, that such forward-looking statements will be achieved. The business and operations of the Company are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this release. We undertake no duty to update any of the forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on the forward-looking statements contained in this report. Overview eMagin Corporation is a leading developer of organic light emitting diode ("OLED") microdisplays, and optics systems. We currently provide custom video display headsets, in limited quantities, largely to government customers. We are seeking to transition into commercial distribution of our products and technology as components to OEM system manufacturers for near-eye and headset applications in products such as handheld telecommunication and internet devices, wearable computers, and computer and entertainment headsets. The Company has produced several preliminary prototype versions of the OLED microdisplay, including monochromatic and color display devices. The Company expects to continue funding the development of prototype and demonstration versions of products incorporating OLED microdisplay and optics technology at least through 2001. Future revenues, profits and cash flow and the Company's ability to achieve its strategic objectives will depend on a number of factors including acceptance of the OLED technology by various industries and OEMs, market acceptance of products incorporating the OLED technology, and the technical performance of such products. The Company expects to continue to incur significant operating losses until such time that it is selling its products in commercial quantities. 7 THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 (Pro Forma). Prior to the acquisition of FED Corporation (the "Predecessor"), the Company had no operations. Management believes that the comparison of eMagin's financial results to that of the Predecessor provides the most meaningful comparative information to the reader. Accordingly, the following comparative information reflects the operating results of eMagin Corporation for the three months ended March 31, 2001 and it should be read in conjunction with the consolidated interim financial statements and notes thereto in Part 1 Item 1 of this Quarterly Report. The comparison of financial information below for the period ended March 31, 2000 reflects pro forma results of eMagin for the period January 1, 2000 through March 31, 2000 and the Predecessor for the period January 1, 2000 to March 15, 2000, on a combined basis, such that the amounts presented and discussed reflect the full three months of operations for each period. Reference is made to the Company's consolidated financial statements that are included herein for further detail on the results of eMagin and the Predecessor for their respective periods of ownership.
Three-Months Ended Pro Forma (1) March 31, 2001 March 31, 2000 --------------- --------------- CONTRACT REVENUE: Contract revenue $ 2,030,201 $ 580,750 ------------ ------------ Total revenue 2,030,201 580,750 ------------ ------------ COSTS AND EXPENSES: Research and development, net of funding under cost sharing arrangements of $201,467 and $533,750, respectively $ 3,441,105 $ 2,803,549 Selling, general and administrative 1,775,401 912,312 Amortization of purchased intangibles 5,851,692 1,511,793 Non-cash charge for stock-based compensation 735,978 8,033,796 ------------ ------------ Total costs and expenses, net 11,804,176 13,261,450 ------------ ------------ INTEREST, (EXPENSE)/INCOME $ 65,540 $ (2,931,505) ------------ ------------ Net Loss $ (9,708,435) $(15,612,205) ============ ============
(1) Represents the Pro Forma results of eMagin Corporation for the three months ended March 31, 2000 and FED Corporation for the period January 1 to March 15, 2000. Revenues Revenues for the three months ended March 31, 2001 were $2.0 million as compared to $0.6 million respectively, for the three months ended March 31, 2000. Revenues consist primarily of contracts funded by certain U.S. government programs. The amount of revenues earned in any period is dependent upon, among other factors, the execution of new government contracts and funding issues, and may not be predictable or consistent from period to period but remains subject to unpredictable government funding issues. 8 Costs and Expenses Research and Development Research and development expenses include salaries, development materials, equipment lease and depreciation expenses, electronics, rent, utilities and costs associated with operating the Company's manufacturing facility. The Company and, historically, the Predecessor, have received cost sharing awards from certain U.S. government agencies to fund certain research and development. As of March 31, 2001, the remaining costs to be incurred and billed on these three active "cost sharing" contracts totaled $1.4 million. Gross research and development expenses for the three months ended March 31, 2001 were $3.6 million. For the same period in 2000, the Company's gross research and development expenses were $3.3 million. Of these amounts, the Company received $0.2 million in cost sharing from the U.S. Government for the three months ended March 31, 2001 and $0.5 million for the same period in 2000. The $0.3 million increase in gross expenses for the three months ended March 31, 2001 reflects the additional costs associated with equipment leases and material costs resulting from increased research and development activities and equipment additions at the Company's manufacturing facility. Selling, General and Administrative Selling, general and administrative expenses consist principally of salaries and fees for professional services, legal fees incurred in connection with patent filings and related matters, amortization, as well as other marketing and administrative expenses. Selling, general and administrative expenses, for the three months ending March 31, 2001 were $1.8 million as compared to $0.9 million for the three months ended March 31, 2000. The increase in selling, general and administrative expenses is primarily due to increases in marketing activity, personnel costs, patent filings and legal fees. Amortization of Purchased Intangibles Amortization of purchased intangibles expense for the three months ending March 31, 2001 was $5.9 million as compared to $1.5 million for the three months ended March 31, 2000. The increase in amortization for purchased intangibles expense is the result of a full quarter's charge of the non-cash charges related to the amortization of goodwill created by the Merger. Non-cash for stock-based compensation amortization Non-cash stock-based compensation expense for the three months ending March 31, 2001 were $0.7 million as compared to $8.0 million for the three months ended March 31, 2000. The activity for the three months ending March 31, 2001 reflects amortization of deferred compensation costs related to the issuance of stock options at below fair market values in the first quarter of 2000. The activity for the three months ending March 31, 2000 primarily reflects a one-time charge of $7.8 million of repriced options and warrants by the Predecessor prior to the Merger. Liquidity and Capital Resources Since inception we have financed our operations primarily through private placements of equity securities and research and development contracts. Net cash used in operating activities was $3.3 million for the three months ended March 31, 2001. Cash used in operating activities resulted primarily from our net loss offset by increases from non-cash charges. Net cash used in investing activities was $0.2 million for the three months ended March 31, 2001. This represented capital expenditures of $0.2 million. 9 Net cash used in financing activities was $.01 million for the three months ended March 31, 2001, and consisted primarily of cash payments on long-term debt and capital leases. As of March 31, 2001, we had $3.8 million in cash and cash equivalents. Need for Additional Financing During the next 12 months, the Company's foreseeable cash requirements are expected to be met by a combination of existing cash, revenue generated by the Company's sales, and additional equity or debt financing. The Company is currently devoting substantial resources to the establishment of sales and distribution relationships and its initial product launch cycles. The Company believes that it will be able to secure financing in the near term and that the proceeds from such financings, along with its remaining cash resources at March 31, 2001, will be sufficient to fund the Company's operations into the first quarter of 2002 and beyond. However, there can be no assurance that sufficient capital will be available, when required, to permit the Company to realize its plan, or even if such capital is available, that it will be at terms favorable to the Company. Additionally, there can be no assurance that the Company's efforts to produce a commercially viable product will be successful, or that the Company will generate sufficient revenues to provide positive cash flows from operations. These and other factors raise substantial doubt about the Company's ability to continue as a going concern. To the extent the Company raises additional capital by issuing equity or securities convertible into equity, ownership dilution to the Company's shareholders will result. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue in existence. Item 3. Quantitative and Qualitative Disclosures About Marked Risk N/A PART II--OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (b) Reports on Form 8-K., during the quarter ended March 31, 2001 None. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. eMAGIN CORPORATION Dated: May 15, 2001 By: /s/ Andrew P. Savadelis ----------------------------- Andrew P. Savadelis Executive Vice President, Finance and Chief Financial Officer 10