-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hr7m8wiz2jNeF0k05Y5At1qfZ+TaKk1oPfZd/Yb3Phl6WV6zsA/eYwvXBHPNj4ZK RwokWKBCJwa6iWcY0q+BxQ== 0001125282-01-502659.txt : 20020410 0001125282-01-502659.hdr.sgml : 20020410 ACCESSION NUMBER: 0001125282-01-502659 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMAGIN CORP CENTRAL INDEX KEY: 0001046995 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 880378451 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-15751 FILM NUMBER: 1791436 BUSINESS ADDRESS: STREET 1: 1580 ROUTE 52 STREET 2: SUITE 2000 V6E 2K3 CITY: HOPEWELL JUNCTION STATE: NY ZIP: 12533 BUSINESS PHONE: 9148921900 MAIL ADDRESS: STREET 1: 1580 ROUTE 52 STREET 2: SUITE 2000 V6E 2K3 CITY: HOPEWELL JUNCITON STATE: NY ZIP: 12533 FORMER COMPANY: FORMER CONFORMED NAME: FASHION DYNAMICS CORP DATE OF NAME CHANGE: 19980805 10QSB 1 b314791_10qsb.txt QUARTERLY REPORTY 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 September 30, 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 Delaware 56-1764501 (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 November 14, 2001 the Registrant had 25,085,145 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 September 30, 2001 (unaudited) and December 31, 2000 1 Unaudited Consolidated Statements of Operations For the Three-Months ended September 30, 2001 and September 30, 2000 2 Unaudited Consolidated Statements of Operations For the Nine-Months ended September 30, 2001, September 30, 2000 and for the period from Inception (January 23, 1996) to September 30, 2001 3 Unaudited Consolidated Statements of Cash Flows for the Nine-Months ended September 30, 2001, September 30, 2000 and for the period from Inception (January 23, 1996) to September 30, 2001 4 Selected Notes to Unaudited Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation 8 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURE 12
eMAGIN CORPORATION (a development stage corporation) CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 2001 December 31, 2000 ------------------ ----------------- (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 2,764,424 $ 7,367,257 Contract receivables 659,049 825,733 Unbilled costs and estimated profits on contracts in progress 371,284 627,347 Prepaid expenses and other current assets 335,718 665,222 Inventory 41,600 -- ------------- ------------- Total current assets 4,172,075 9,485,559 Equipment and leasehold improvements, net of accumulated depreciation of $1,016,535, and $556,365, respectively 1,234,853 1,268,304 Goodwill and purchased intangibles, (Note 3) 1,988,687 51,689,938 Other long-term assets 195,201 105,394 ------------- ------------- Total assets $ 7,590,816 $ 62,549,195 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 2,940,820 $ 1,096,771 Accrued payroll and related benefits 1,306,954 1,376,888 Advanced payments on contracts to be completed 275,000 -- Current portion of long-term debt 690,611 313,044 Current portion of capital lease obligations 154,848 -- Notes payable 1,000,000 -- Deferred revenue 121,322 311,812 Other current liabilities 42,235 144,000 ------------- ------------- Total current liabilities 6,531,790 3,242,545 LONG-TERM DEBT Long-term debt, net of current portion 1,787,880 -- Non-current portion of capital lease obligations 87,966 122,984 ------------- ------------- Total long-term debt 1,875,846 122,984 SHAREHOLDERS' EQUITY: Common Stock, par value $0.001 per share Shares authorized - 100,000,000 Shares issued and outstanding - 25,085,145 and 25,069,143, respectively 25,085 25,069 Additional paid-in capital 117,086,056 116,622,811 Deferred compensation (6,811,184) (9,266,397) Deficit accumulated during the development stage (111,116,777) (48,197,817) ------------- ------------- Total shareholders' equity (816,820) 59,183,666 ------------- ------------- Total liabilities and shareholders' equity $ 7,590,816 $ 62,549,195 ============= =============
See selected notes to unaudited consolidated financial statements 1 eMAGIN CORPORATION (a development stage corporation) CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three-Months Three-Months ended ended September 30, 2001 September 30, 2000 ------------------ ------------------ CONTRACT REVENUE: Contract revenue $ 898,755 $ 1,011,763 Product revenue 277,873 -- ------------ ------------ Total revenue 1,176,628 1,011,763 ------------ ------------ COSTS AND EXPENSES: Research and development, net of funding under cost sharing arrangements of $846,734, and $201,467, respectively 2,692,869 2,830,773 Amortization and write-down of goodwill and purchased intangibles 37,997,868 6,703,593 Non-cash charge for stock-based compensation 719,907 710,049 Acquired in-process research and development -- 12,820,000 Selling, general and administrative expense 1,895,761 2,054,945 ------------ ------------ Total costs and expenses, net 43,306,405 25,119,360 ------------ ------------ OTHER (EXPENSE)/INCOME (247,992) 70,947 ------------ ------------ Loss before provision for income taxes (42,377,769) (24,036,650) PROVISION FOR INCOME TAXES -- -- ------------ ------------ Net loss $(42,377,769) $(24,036,650) ============ ============ Basic and diluted net loss per common share $ (1.69) $ (0.96) ============ ============ Basic and diluted weighted average common shares outstanding 25,085,145 25,069,143 ============ ============
See selected notes to unaudited consolidated financial statements. 2 eMAGIN CORPORATION (a development stage corporation) CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Period from Nine-Months Nine-Months inception ended ended (January 23, 1996) September 30, 2001 September 30, 2000 to September 30, 2001 ------------------ ------------------ ----------------------- CONTRACT REVENUE: Contract revenue $ 4,332,233 $ 1,852,423 $ 6,889,820 Product revenue 490,601 -- 490,601 ------------- ------------- ------------- Total revenue 4,822,834 1,852,423 7,380,421 ------------- ------------- ------------- COSTS AND EXPENSES: Research and development, net of funding under cost sharing arrangements of $1,289,759, $1,205,107 and $2,621,151, respectively 9,901,465 6,070,487 19,536,413 Amortization and write-down of goodwill and purchased intangibles 49,701,252 15,010,479 70,633,573 Acquired in-process research and development -- 12,820,000 12,820,000 Non-cash charge for stock-based compensation 2,189,361 1,799,772 4,729,189 Selling, general and administrative expense 5,732,757 3,748,632 10,913,270 ------------- ------------- ------------- Total costs and expenses, net 67,524,835 39,449,370 118,632,445 ------------- ------------- ------------- OTHER (EXPENSE)/INCOME (216,959) 298,755 135,247 ------------- ------------- ------------- Loss before provision for income taxes (62,918,960) (37,298,192) (111,116,777) PROVISION FOR INCOME TAXES -- -- -- ------------- ------------- ------------- Net loss $ (62,918,960) $ (37,298,192) $(111,116,777) ============= ============= ============= Basic and diluted net loss per common share $ (2.51) $ (1.76) ============= ============= Basic and diluted weighted average common shares outstanding 25,076,294 21,164,124 ============= =============
See selected notes to unaudited consolidated financial statements 3 eMAGIN CORPORATION (a development stage corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Period from Nine-Months Nine-Months inception ended ended (January 23 1996) September 30, 2001 September 30, 2000 to September 30, 2001 ------------------ ------------------ --------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (62,918,960) $ (37,298,192) $(111,116,777) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization and impairment loss 50,161,423 15,333,175 71,650,944 Loss on disposal of assets 44,191 -- 141,904 Non-cash charge for stock based compensation 2,189,361 1,799,772 4,729,189 Non-cash related to issuance of warrants 189,508 189,508 Non-cash charge due to beneficial conversion 2,922 2,922 Acquired in-process research and development -- 12,820,000 12,820,000 Changes in operationg assets and liabilities, net of acquisition: Contract receivables 166,684 48,907 (527,086) Unbilled costs and estimated profits on contracts in progress 256,063 (433,962) 248,280 Inventory (41,600) (41,600) Prepaid expenses and other current assets 329,504 (75,687) (30,002) Other long-term assets (89,808) -- (184,751) Advance payments 275,000 275,000 Deferrred revenue (190,490) (190,490) Accounts payable, accrued expenses and accrued payroll 1,761,766 1,761,766 Other current liabilities (101,766) (17,856) 261,085 ------------- ------------- ------------- Net cash used in operating activities (7,966,202) (7,823,843) (20,010,108) ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment (470,910) (849,739) (1,273,943) Net proceeds from acquisition -- 995,594 1,239,162 ------------- ------------- ------------- Net cash (used in)/provided by investing activities (470,910) 145,855 (34,781) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of warrants 27,523 21,467,638 21,308,523 Payments of long term debt and capital leases (193,244) (2,219,591) (2,499,210) Proceeds from long-term and short term debt 4,000,000 4,000,000 ------------- ------------- ------------- Net cash provided by/(used in) financing activities 3,834,279 19,248,047 22,809,313 ------------- ------------- ------------- NET (DECREASE) \ INCREASE IN CASH AND CASH EQUIVALENT'S (4,602,833) 11,570,059 2,764,424 CASH AND CASH EQUIVALENTS, beginning of period 7,367,257 -- -- ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, end of period $ 2,764,424 $ 11,570,059 $ 2,764,424 ============= ============= =============
See selected notes to unaudited consolidated financial statements. 4 eMAGIN CORPORATION Selected Notes to Unaudited Consolidated Financial Statements Note 1 - BASIS OF PRESENTATION The unaudited 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 September 30, 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 (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, 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 manufacturing business, and it is just beginning to commence 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 the 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 will be recorded based upon their fair values at the date of acquisition. 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. 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 were 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. During the quarter ended September 30, 2001, the Company recorded an amortization and impairment write-down of its goodwill of approximately, $38.0 million to reduce the carrying amount of the goodwill to its estimated fair value. The goodwill impairment charge is included in the unaudited consolidated statement of operations for the quarter ended September 30, 2001. An explanation of the impairment write down is detailed in the Management's Discussion and Analysis of Financial Condition and Results of Operations under Amortization of Purchased Intangibles. 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 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 profit 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. Product revenue is recorded when products are shipped to customers, at which time, title passes to the customer and the Company has no remaining future obligations. Except for product defects, no right of return is provided to the customers who have purchased the products, and no significant returns of such goods have been received by the Company to date. 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. Note 6 - NET LOSS PER COMMON SHARE In accordance with SFAS No. 128, "Earnings Per Share" 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 - DEBT On August 20, 2001 (the "closing date") the Company entered into a $1.0 million bridge loan arrangement with The Travelers Insurance Company ("Travelers"). The loan accrues interest at an annual rate of 9.25% and matures on May 20, 2002. Additionally for each week the loan is outstanding following the closing date of the arrangement, the Company is required to issue $50,000 worth of warrants to Travelers. The Company issued 184,104 warrants to Travelers during the three months ended September 30, 2001 and recognized related interest expense of $187,064 based upon the fair value of the warrants on the date of grant calculated with the Black - Scholes option pricing model. On September 18, 2001 (the "closing date") the Company entered into a $3.0 million convertible debt arrangement with SK Corporation. The debt accrues interest at an annual rate of 4% and matures on September 18, 2004. In connection with this debt arrangement, the Company issued warrants for the purchase of 205,479 shares of the Company's common stock at an exercise price of $1.46 per share. The intrinsic value of these warrants of $240,000 has been recorded as original issue discount, resulting in a reduction in the carrying value of this debt. The original issue discount will be amortized into interest expense over the period of the debt. In the event the debt is converted prior to maturity, the remaining discount will be amortized into interest expense at the conversion date. For the three months ended September 30, 2001 $2,500 has been amortized and is included in interest expense in the accompanying unaudited consolidated statements of operations for the three and nine months ended September 30, 2001. Based on the terms of the debt arrangement with SK Corporation, the conversion terms of the debt provide for a beneficial conversion feature. The value of the beneficial feature of approximately $285,000 is recorded as an offset to the debt account and will be amortized into interest expense over the period of the debt. In the event the debt is converted prior to maturity, the remaining discount will be amortized into interest expense at the conversion date. Additionally, the terms of the debt arrangement provide for a put option, exercisable at the option of SK Corporation to redeem up to 25% of the face value of the debt each 90 day period beginning on September 19, 2002. Accordingly, 25% of the face value of the debt has been classified as short-term debt as of September 30, 2001. Note 8 - STOCKHOLDERS' EQUITY The authorized common stock of the Company consists of 100,000,000 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 were 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. Note 9 - RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,"Business Combinations" ("FAS 141") and No. 142, "Goodwill and other Intangible Assets" ("FAS 142"). FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives ( but with no maximum life). The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt FAS 142 effective January 1, 2002. The Company is currently evaluating the effect that adoption of the provisions of FAS 142 that are effective January 1, 2002 will have on its results of operations and financial position. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 is required for adoption for fiscal years beginning after June 15, 2002. Management has reviewed the provisions of SFAS 143, and believes that upon adoption, it will not have a significant effect on the Company's consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed of" and certain provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations ? Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 establishes a single accounting model for long-lived assets to be disposed of by sale. SFAS 144 must be adopted in the first quarter of the first fiscal year beginning after December 15, 2001. The Company will adopt SFAS 144 on January 1, 2002. The Company is currently evaluating the impact that SFAS 144 will have on its consolidated financial statements. 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. The products are targeted for 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 and has begun selling limited quantities of its first commercial OLED microdisplay product. Initial shipments of the Company's product have been evaluation kits (consisting of an OLED SVGA+ microdisplay and associated electronics for engineering evaluation) and follow-on orders, primarily from military contractors. To date, the primary customers of the Company's evaluation kit have been military contractors and commercial customers for medical applications as well as consumer product oriented customers. After an evaluation process of one to three months, customers are typically expected to order additional microdisplays for further evaluation and product prototypes. The size and pricing of follow-on orders will depend upon the customer and end product application and quantity. The Company expects to continue funding the development of prototype and demonstration versions of products incorporating OLED microdisplay and optics technology at least through 2002. 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. THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000. 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 effects the operating results of eMagin Corporation for the three and nine months ended September 30, 2001 and it should be read in conjunction with the unaudited 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 September 30, 2000 reflects pro forma results of eMagin for the period January 1, 2000 through September 30, 2000 and 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 nine months of operations for each period. Reference is made to the Company's unaudited consolidated financial statements that are included herein, for further detail on the results of eMagin and Predecessor for their respective periods of ownership.
Three Months Ended Nine Months Ended ------------------------------ ---------------------------- Pro Forma (1) September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- CONTRACT REVENUE: Contract revenue $ 898,755 $ 1,011,763 $ 4,332,233 $ 2,420,907 Product revenue 277,873 -- 490,601 -- ------------ ------------ ------------ ------------ Total revenue 1,176,628 1,011,763 4,822,834 2,420,907 ------------ ------------ ------------ ------------ COSTS AND EXPENSES: Research and development, net of funding under cost-sharing arrangements of $846,734, $201,467, $1,289,759 $1,380,107 respectively $ 2,692,869 $ 2,830,773 $ 9,901,465 $ 8,251,006 Amortization and write-down of goodwill and purchased intangibles 37,997,868 6,703,593 49,701,252 15,335,574 Non-cash charge for stock-based compensation 719,907 710,049 2,189,361 9,578,622 Acquired in process research and development 0 12,820,000 0 12,820,000 Selling, general and administrative 1,895,761 2,054,945 5,732,757 4,419,287 ------------ ------------ ------------ ------------ Total costs and expenses, net 43,306,405 25,119,360 67,524,835 50,404,489 ------------ ------------ ------------ ------------ OTHER (EXPENSE)/INCOME ($ 247,992) $ 70,947 ($ 216,959) ($ 2,669,659) ------------ ------------ ------------ ------------ Net Loss ($42,377,769) ($24,178,544) ($62,918,960) ============ ============ ============ ============
1 Represents the Pro Forma results of eMagin Corporation for the nine months ended September 30, 2000 and FED Corporation for the period January 1 to March 15, 2000. Revenues Net revenue for the three and nine months ended September 30, 2001 were $1.2 million and $4.8 million, respectively, as compared to $1.0 million and $2.4 million, respectively, for the three and nine months ended September 30, 2000. Revenues consist primarily of contracts funded by certain U.S. government programs, and 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. Product revenues of $0.3 million and $0.5 million, respectively, for the three and nine months ended September 30, 2001 included SVGA+ microdisplay evaluation kits and follow-on shipments, primarily to government contractors. Evaluation kits are composed of an OLED microdisplay with associated electronics for customer evaluation. Costs and Expenses Research and Development Research and development expenses include salaries, development materials, equipment lease and depreciation expense, electronics, rent, utilities and costs associated with operating the Company's manufacturing facility. The Company and, historically, the Predecessor, has received cost sharing awards from certain U.S. government agencies to fund certain research and development efforts. As of September 30, 2001, the remaining costs to be incurred and billed on active cost sharing contracts totaled $0.9 million. Gross research and development expenses for the three and nine months ended September 30, 2001 were $3.5 million and $11.2 million respectively and for the same periods in 2000, the Company's gross research and development expenses were $3.0 million and $9.6 million, respectively. Of these amounts, the Company received $0.8 million and $1.3 million in cost sharing from the U.S. Government for the three months and nine months ended September 30, 2001 and $0.2 million and $1.4 million, respectively for the same periods in 2000. The $0.5 million and $1.6 million increase in gross expenses for the three months and nine months ended September 30, 2001 reflects additional costs associated with personnel and material costs resulting from increased research and development activities oriented towards commercializing the Company's products. Amortization of Purchased Intangibles and Impairment Charge The Company's ability to realize its goodwill is dependent upon its ability to raise sufficient financing in order to expand the rollout and commercialization of its products. In the third quarter of 2001, the Company was able to secure a limited amount of additional financing to fund its operations, however such financing was not in the amount the Company expected to be able to secure, nor was it enough to rollout commercialization of its product on a wide scale basis, as had been contemplated by its business plan. Based on these current factors, the Company revised its future business plan and evaluated the carrying value of the goodwill that was a result of its acquisition of FED. Based on this evaluation, the Company determined that the goodwill was impaired and accordingly, recorded an adjustment to the carrying value of the goodwill of $32 million based on the estimated discounted net cash flow to be generated over the remaining life of the asset. Inclusive of this impairment write-off, amortization of purchased intangibles expense for the three and nine months ending September 30, 2001 was $38.0 million and $49.7 million respectively as compared to $6.9 million and $15.3 million, respectively for the three and nine months and ended September 30, 2000. Non-cash charge for stock-based compensation Non-cash charge for stock-based compensation expense for the three and nine months ending September 30, 2001 was $0.7 million and $2.2 million, respectively, as compared to $0.7 million and $9.6 million, respectively, for the three and nine months ended September 30, 2000. The activity for the three months ending September 30, 2001 reflects amortization of deferred compensation costs related to the value of unvested options exchanged in the acquisition of FED in the first quarter of 2000. The activity for the nine months ended September 30, 2000, on a pro-forma basis, primarily reflects a one-time charge of $7.8 million related to option and warrant activity by the Predecessor prior to the Merger. 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 filing and related matters, amortization, as well as other marketing and administrative expenses. Selling, general and administrative expenses for the three and nine months ending September 30, 2001 were $2.1 million and $5.8 million respectively, as compared to $1.9 million and $4.4 million, respectively, for the three and nine months ended September 30, 2000. The increase in selling, general and administrative expenses is primarily due to increases in marketing activity, legal and accounting fees. 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 $8.0 million for the nine months ended September 30, 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 $0.5 million for the nine months ended September 30, 2001, representing capital expenditures. Net cash generated by financing activities was $3.8 million for the nine months ended September 30, 2001, and consisted primarily of long-term debt financing. The Company completed a bridge loan with The Travelers Insurance Company for $1.0 million at an annual interest rate of 9.25% and a maturity date of May 20, 2002. The Company also completed a $3.0 million convertible note with SK Corporation with a term of three years at an annual interest rate of 4%. As of September 30, 2001, we had $2.8 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 it's 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 September 30, 2001, will be sufficient to fund the Company's operations into the second 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 unaudited consolidated financial statements do not include any adjustments that might result should the Company be unable to continue in existence. PART II--OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Reports on Form 8 The Company filed three reports on form 8-K during the quarter ended September 30, 2001. Information regarding the items reported on is as follows:
DATE OF REPORT ITEM REPORTED ON -------------- ---------------- July 20, 2001 Update results of the shareholders proxy voting. September 4, 2001 Disclosed the bridge loan with "The Travelers Insurance Company" including the terms of the agreement. September 26, 2001 Disclosed the convertible note debt with SK Corporation including the terms of the agreement
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: November 14, 2001 By: /s/ Andrew P. Savadelis ---------------------------------- Andrew P. Savadelis Executive Vice President, Finance and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----