NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Description of the Business and 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 interim 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 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, 2019. The results of operations for the periods ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements as of December 31, 2019 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Use of estimates
In accordance with accounting principles generally accepted in the United States of America (“GAAP”), 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.
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 $2.0 thousand and $9.0 thousand for the three months ended March 31, 2020 and 2019 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
|
|
|
March 31,
|
|
|
2020
|
|
2019
|
Beginning balance
|
|
$
|
300
|
|
$
|
423
|
Warranty accruals and adjustments
|
|
|
38
|
|
|
(78)
|
Warranty claims
|
|
|
(7)
|
|
|
(24)
|
Ending balance
|
|
$
|
331
|
|
$
|
321
|
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.
For the three months ended March 31, 2020 and 2019, the Company reported a net loss and as a result, basic and diluted loss per common share are the same. Therefore, in calculating net loss per share amounts, shares underlying the potentially dilutive common stock equivalents were excluded from the calculation of diluted net income per common share because their effect was anti-dilutive.
The following table sets forth the potentially dilutive common stock equivalents for the three months ended March 31, 2020 and 2019 that were not included in diluted EPS as their effect would be anti-dilutive:
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2020
|
|
2019
|
Options
|
|
5,183,360
|
|
5,160,445
|
Warrants
|
|
19,295,773
|
|
9,055,773
|
Convertible preferred stock
|
|
7,545,333
|
|
7,545,333
|
Total potentially dilutive common stock equivalents
|
|
32,024,466
|
|
21,761,551
|
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 asset based lending facility (the “ABL 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
|
Balance as of January 1, 2020
|
|
$
|
23
|
Fair value of warrants issuance during period
|
|
|
-
|
Change in fair value of warrant liability, net
|
|
|
20
|
Balance as of March 31, 2020
|
|
$
|
43
|
The fair value of the liability for common stock purchase warrants at issuance and at March 31, 2020 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 ranging from 2.2 to 2.8 years, at risk-free interest rates of 0.5%, with no expected dividends, and expected volatility of the price of the underlying common stock of 73.1%.
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 months ended March 31, 2020, three customers accounted for 19.5%, 14.9%, and 10.2% of net revenues, respectively. For the three months ended March 31, 2019, one customer accounted for 11.0% of net revenues. As of March 31, 2020, three customers accounted for 34.2%, 16.1%, and 10.2% of the Company’s consolidated accounts receivable balance.
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 three months ended March 31, 2020, the Company incurred a net loss of $1.4 million and used cash in operating activities of $0.9 million. As of March 31, 2020, the Company had $3.1 million of cash, $2.2 million of outstanding indebtedness and borrowing availability of $0.9 million under its ABL Facility. For the three months ended March 31, 2020, the Company raised $1.6 million, net of offering expenses, through the sale of shares under its At The Market (“ATM”) facility entered into in November 2019. For the year ended December 31, 2019, the Company incurred a net loss of $4.3 million and used cash in operating activities of $5.1 million.
The COVID-19 pandemic has significantly increased economic and demand uncertainty. It is likely that the current outbreak and continued spread of COVID-19 will cause the economic slowdown to continue, and it is possible that it could cause a global recession. There is a significant degree of uncertainty and lack of visibility as to the extent and duration of the current slowdown or any recession. If either were prolonged, demand for the Company’s products will be significantly harmed. The Company is currently seeing delays in product shipments and is expecting slowing economic conditions to adversely affect its business in the second half of 2020. Given the significant economic uncertainty and volatility created by the pandemic, it is difficult to predict the nature and extent of the impact on demand for the Company’s products. These expectations are subject to change without warning and investors are cautioned not to place undue reliance on them. Unanticipated consequences of the pandemic and resulting economic uncertainty could adversely affect the Company’s liquidity and capital resources in the future as well as its ability to continue as a going concern.
Due to continuing losses, the Company’s financial position, the COVID-19 pandemic, and uncertainty regarding the Company’s ability to borrow under its ABL Facility, or continue to raise funds under its ATM facility, the Company may not be able to meet its financial obligations as they become due without additional financing or sources of capital. Management is prepared to reduce expenses and raise additional capital, but there can be no assurance that the Company will be successful in sufficiently reducing expenses or raising capital to meet its operating needs.
The Company’s ABL Facility expires on December 31, 2020, and renews automatically for another year unless terminated pursuant to its terms. Although preliminary renewal discussions with the lender are positive there is no assurance the lender will renew or extend this facility, or continue to make funds available during 2020 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. In addition, the Company has entered into its ATM Facility. There can be no assurance, however, that the Company will be successful in sufficiently increasing revenues, mitigating the impacts of COVID-19, 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) continuing a Work Status Reduction program that began in October 2019 wherein senior management work status was reduced by approximately 20%, 3) reduce headcount and not replace departed employees, 4) reduce discretionary and other expenses, and 5) considering financing and/or strategic alternatives.
Based on the Company’s current projections, operational and yield improvements, and the anticipated availability of the ABL Facility, the Company estimates it will have sufficient liquidity to fund operations through the end of the first quarter of 2021. 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, continue to raise funds under its ATM facility, secure additional financing, and/or pursue strategic alternatives on terms acceptable to the Company, or at all. The Company’s common stock is listed on the NYSE American, and it is subject to its continued listing requirements, including maintaining certain share prices and a minimum amount of shareholder’s equity. If the Company is unable to comply with the NYSE American continued listing requirements, including its trading price requirements, our common stock may be suspended from trading on and/or delisted from the NYSE American.
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 Annual Report on Form 10-K for the year ended December 31, 2019.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) a guidance that 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. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted the guidance on January 1, 2020, on a prospective basis and such adoption did not have a material impact on our financial statements.
Recently issued accounting pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) as part of its initiative to reduce complexity in accounting standards. This standard simplify the accounting for income taxes. This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. 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 does not expect the adoption of this ASU to have a significant impact on the consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) and subsequently issued amendments. The guidance affects the Company's accounts receivable, and it requires the measurement of expected credit losses to be based on relevant information from past events, including historical experiences, current conditions and reasonable and supportable forecasts that affect collectability. This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Based on the composition of the Company's receivables, current market conditions and historical credit loss activity, the Company does not expect the adoption of this ASU to have a significant impact on the consolidated financial statements.
Note 2 – Revenue Recognition
All of the Company’s revenues are earned from contracts with customers and are classified as either Product or Contract revenues. Contracts include R&D activities performed pursuant to written agreements and purchase orders, as well as arrangements that are implied by customary practices or law.
Product revenue is generated primarily from contracts to produce, ship and deliver OLED microdisplays. eMagin’s performance obligations are satisfied, control of our products is transferred, and revenue is recognized at a single point in time when control transfers to our customer for product shipped. Our customary terms are FOB our factory and control is deemed to transfer upon shipment. The Company has elected to treat shipping and other transportation costs charged to customers as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. As customers are invoiced at the time control transfers and the right to consideration is unconditional at that time, the Company does not maintain contract asset balances for product revenue. Additionally, the Company does not maintain contract liability balances for product revenues, as performance obligations are satisfied prior to customer payment for product. The Company generally offers a one-year product warranty, for replacement of product only, and does not allow returns. The Company offers industry standard payment terms that typically require payment from our customers from 30 to 60 days after title transfers.
The Company also recognizes revenues under the over time method from certain research and development (“R&D”) activities (contract revenues) under both firm fixed-price contracts and cost-type contracts. Progress and revenues from research and development activities relating to firm fixed-price contracts and cost-type contracts are generally recognized on an input method of accounting as costs are incurred. Under the input method, revenue is recognized based on efforts expended to date (e.g., the costs of resources consumed or labor hours worked, or machine hours used) relative to total efforts intended to be expended. Contract costs include all direct material, labor and subcontractor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates. These rates are subject to audit by the other party. Any changes in estimate related to contract accounting are accounted for prospectively over the remaining life of the contract. Under the over time method, billings may not correlate directly to the revenue recognized. Based upon the terms of the specific contract, billings may be in excess of the revenue recognized, in which case the amounts are included in deferred revenues as a liability on the Condensed Consolidated Balance Sheets. Likewise, revenue recognized may exceed customer billings in which case the amounts are reported as unbilled receivables. Unbilled revenues are expected to be billed and collected within one year. The incidental costs related to obtaining product sales contracts are non-recoverable from customers and, accordingly, are expensed as incurred.
Disaggregation of Revenue
The Company sells products directly to military contractors and OEM’s and they use our displays in a diverse range of applications encompassing the military and commercial, including medical and industrial, market sectors. Revenues are classified as either military, commercial, consumer or multiple based on management’s knowledge of the customer’s products and markets served by displays or the R&D contract work. Revenues classified as multiple are for sales to customers that incorporate the Company’s displays in products that could be used for either military or commercial applications. R&D activities are performed for both military customers and U.S. Government defense related agencies and consumer companies. Product and contract revenues are disclosed on the Consolidated Statements of Operations.
Additional disaggregated revenue information for three months ended March 31, 2020 and 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2020
|
|
|
2019
|
North and South America
|
|
$
|
3,540
|
|
|
$
|
3,398
|
Europe, Middle East, and Africa
|
|
|
2,701
|
|
|
|
2,327
|
Asia Pacific
|
|
|
490
|
|
|
|
387
|
Total
|
|
$
|
6,731
|
|
|
$
|
6,112
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
|
2020
|
|
|
|
2019
|
Military
|
|
$
|
4,799
|
|
|
$
|
4,447
|
Commercial, including industrial and medical
|
|
|
313
|
|
|
|
336
|
Consumer
|
|
|
688
|
|
|
|
422
|
Multiple
|
|
|
931
|
|
|
|
907
|
|
|
$
|
6,731
|
|
|
$
|
6,112
|
Accounts Receivable from Customers
Accounts receivable, net of allowances, associated with revenue from customers were approximately $3.7 million and $4.0 million for the three months ended March 31, 2020 and December 31, 2019, respectively.
Contract Assets and Liabilities
Unbilled Accounts Receivables (Contract Assets) - Pursuant to the over time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled accounts receivable is recorded to reflect revenue that is recognized when the cost based input method is applied and such revenue exceeds the amount invoiced to the customer. Unbilled receivables are disclosed on the Condensed Consolidated Balance Sheet.
Customer Advances and Deposits (Contract Liabilities) - The Company recognizes a contract liability when it has billed and received consideration from the customer pursuant to the terms of a contract but has not yet recognized the related revenue. These billings in excess of revenue are classified as deferred revenue on the Condensed Consolidated Statements of Operations.
Total contract assets and liabilities consisted of the following amounts (in thousands):
|
|
|
|
|
|
|
|
|
21
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
Unbilled Receivables (contract assets)
|
|
$
|
470
|
|
|
$
|
155
|
|
|
|
|
|
|
|
|
Deferred Revenue (contract liabilities)
|
|
$
|
(294)
|
|
|
$
|
(277)
|
For the three months ended March 31, 2020 and 2019 the Company recognized $30 thousand and $38 thousand of revenue related to its contract liabilities that existed at December 31, 2019 and 2018, respectively.
Remaining Performance Obligations
The Company has elected the practical expedient, which allows disclosure of remaining performance obligations only for contracts with an original duration of greater than one year. Such remaining performance obligations primarily relate to engineering and design services. For the three months ended March 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $1.0 million. The Company expects to recognize revenue on all of its remaining performance obligations over the next 12 months.
Note 3 – Accounts Receivable, net
The majority of the Company’s commercial accounts receivable are due from OEM’s. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required.
Accounts receivable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2020
|
|
2019
|
Accounts receivable
|
|
$
|
3,876
|
|
$
|
4,105
|
Less allowance for doubtful accounts
|
|
|
(139)
|
|
|
(139)
|
Accounts receivable, net
|
|
$
|
3,737
|
|
$
|
3,966
|
Note 4 – Inventories, net
The components of inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2020
|
|
2019
|
Raw materials
|
|
$
|
2,707
|
|
$
|
2,788
|
Work in process
|
|
|
1,986
|
|
|
1,561
|
Finished goods
|
|
|
5,038
|
|
|
5,248
|
Total inventories
|
|
|
9,731
|
|
|
9,597
|
Less inventory reserve
|
|
|
(910)
|
|
|
(765)
|
Total inventories, net
|
|
$
|
8,821
|
|
$
|
8,832
|
Note 5 – Line of Credit
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Revolving credit facility
|
|
$
|
2,191
|
|
$
|
2,891
|
On December 21, 2016, the Company entered into the ABL Facility with a lender that provides for up to a maximum amount of $5 million based on a borrowing base equivalent to 85% of eligible accounts receivable plus the lesser of $2 million or 50% of eligible inventory. The interest on the ABL Facility is equal to the Prime Rate plus 3% but may not be less than 6.5% with a minimum monthly interest payment of $2 thousand. The Company is also obligated to pay the lender a monthly administrative fee of $1 thousand and an annual facility fee equal to 1% of the maximum amount borrowable under the facility.
The ABL Facility will automatically renew on December 31, 2020 for a one-year term unless written notice to terminate the agreement is provided by either party.
The ABL Facility is secured by a lien on all receivables, property and the proceeds thereof, credit insurance policies and other insurance relating to the collateral, books, records and other general intangibles, inventory and equipment, proceeds of the collateral and accounts, instruments, chattel paper, and documents. Collections received on accounts receivable are directly used to pay down the outstanding borrowings on the credit facility.
The ABL Facility contains customary representations and warranties, affirmative and negative covenants and events of default. The Company is required to maintain a minimum tangible net worth of $13 million and a minimum working capital balance of $4 million at all times. For the three months ended March 31, 2020, the Company had $2.2 million in borrowings outstanding, had unused borrowing availability of $0.9 million and was in compliance with all financial debt covenants.
Note 6 – Stock Compensation
The Company uses the fair value method of accounting for share-based compensation arrangements. The fair value of stock options is estimated at the date of grant using the Black-Scholes option valuation model. Stock-based compensation expense is reduced for estimated forfeitures and is amortized over the vesting period using the straight-line method.
The following table summarizes the allocation of non-cash stock-based compensation to our expense categories for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2020
|
|
2019
|
Cost of revenues
|
|
$
|
6
|
|
$
|
8
|
Research and development
|
|
|
17
|
|
|
24
|
Selling, general and administrative
|
|
|
20
|
|
|
161
|
Total stock compensation expense
|
|
$
|
43
|
|
$
|
193
|
At March 31, 2020, total unrecognized compensation costs related to stock options was approximately $0.2 million, net of estimated forfeitures. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of approximately 0.4 years.
The following key assumptions were used in the Black-Scholes option pricing model to determine the fair value of stock options granted:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2020
|
|
2019
|
Dividend yield
|
|
0
|
%
|
|
0
|
%
|
Risk free interest rates
|
|
2.48
|
%
|
|
2.48
|
%
|
Expected volatility
|
|
41.7 to 49.2
|
%
|
|
41.7 to 49.2
|
%
|
Expected term (in years)
|
|
3.5 to 4.8
|
|
|
3.5 to 4.8
|
|
The Company does not expect to pay dividends in the near future. Therefore, the Company used an expected dividend yield of 0%. The risk-free interest rate used in the Black-Scholes option pricing model is based on applicable yield available at the date of the option grant on U.S. Treasury securities with an equivalent term. Expected volatility is based on the weighted average historical volatility of the Company’s common stock for the equivalent term. The expected term of the options represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience and vesting schedules of similar awards.
A summary of the Company’s stock option activity for three months ended March 31, 2020 is presented in the following table (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life (In Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2019
|
|
|
5,404,985
|
|
$
|
2.40
|
|
|
|
|
|
|
Options granted
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Options exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Options forfeited
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Options cancelled or expired
|
|
|
(221,625)
|
|
|
3.46
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
5,183,360
|
|
$
|
2.40
|
|
|
3.27
|
|
$
|
—
|
Vested or expected to vest at March 31, 2020 (1)
|
|
|
5,180,131
|
|
$
|
2.40
|
|
|
3.27
|
|
$
|
—
|
Exercisable at March 31, 2020
|
|
|
5,021,954
|
|
$
|
2.40
|
|
|
3.27
|
|
$
|
—
|
|
(1)
|
|
The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total unvested options.
|
The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock. The aggregate intrinsic value of options exercised was zero for the three months ended March 31, 2020. The Company issues new shares of common stock upon exercise of stock options.
Note 7 – Income Taxes
The Company’s effective tax rate is calculated quarterly based upon current assumptions relating to the full year’s estimated operating results and various tax-related items. The Company’s effective tax rate was 0% for the three months ended March 31, 2020 and 2019. The difference between the effective tax rate of 0% and the U.S. federal statutory rate of 21% for the three months ended March 31, 2020 and 2019 was primarily due to recognizing a full valuation allowance on deferred tax assets.
The Company determined that, based on all available evidence, both positive and negative, including the Company’s latest forecasts and cumulative losses in recent years, it was more likely than not that none of its deferred tax assets would be realized and therefore it continued to record a full valuation allowance as of March 31, 2020.
The Company’s net operating loss carry-forward amounts expire through 2037 and are subject to certain limitations that may occur due to a change in the ownership provisions under Section 382 of the Internal Revenue Code and similar state provisions.
Due to the Company’s operating loss carry-forwards, all tax years remain open to examination by the major taxing jurisdictions to which the Company is subject. In the event that the Company is assessed interest or penalties at some point in the future, it will be classified in the financial statements as tax expense.
On March 27, 2020, the President of the United States signed the Coronavirus Aid Relief and Economic Security Act (“CARES Act”). The CARES Act provides several provisions that effect businesses from an income tax perspective. Due to the history of the tax losses, most of the CARES Act provisions have no current benefit to the Company. The Company can, however, benefit from one provision which allows for the immediate refund of the Alternative Minimum Tax Credit (“AMT Credit”). The Company has filed an amendment to claim the AMT Credit and is anticipating a refund of $212 thousand. This tax receivable was recorded during 2017, in Prepaid Expenses and Other Current Assets on the condensed consolidated balance sheet as of March 31, 2020.
Note 8 – Commitments and Contingencies
Equipment Purchase Commitments
The Company has committed to equipment purchases of approximately $0.2 million at March 31, 2020.
Litigation
From time to time, the Company may become subject to various legal proceedings that are incidental to the ordinary conduct of is business. In March 2019, the Company received a demand letter seeking payment of $0.9 million of outstanding invoices relating to purchased inventory from Suga Electronics Limited, (“Suga”), a contract manufacturer located in China, which manufactured product sold by our consumer night vision business. The Company has responded to the demand letter, and requested that Suga provide substantiation of purchased inventory. On August 1, 2019 the Company was notified by Suga that they intend to pursue arbitration. During September and October, 2019, Company held preliminary discussions with Suga to attempt to reach a settlement, however in November 2019 the Company received a formal request for arbitration which Suga filed with the International Chamber of Commerce (“ICC”). The Company retained local counsel in Hong Kong to represent it before the ICC and in December 2019 filed an answer to Suga’s request for arbitration including a counterclaim seeking repayment of amounts previously paid to Suga. An arbitrator has been appointed and arbitral proceedings for the consideration of the claims and counterclaims are expected to run through the first quarter of 2021. The parties are permitted to settle at any point during the arbitration proceedings.
As disclosed in the financial statements of our Annual Report on Form 10-K for the year ended December 31, 2018, during the quarter ended June 30, 2018, the Company made a decision to exit the Consumer Night Vision Business and accrued approximately $1.0 million related to invoices received for inventory purchased by Suga in anticipation of future production. While the Company believes that it has adequately accrued for the losses and is in discussions to resolve related claims by the contract manufacturers, there is the risk that additional losses or litigation related expenses may be incurred above the amounts accrued for as of March 31, 2020 if the Company fails to resolve these claims in a timely and/or favorable manner.
Note 9 – Warrants
The Company accounts for common stock warrants pursuant to applicable accounting guidance contained in ASC 815, "Derivatives and Hedging - Contracts in Entity's Own Equity" and makes a determination as to their treatment as either equity instruments or a warrant liability based on an analysis of the underlying warrant agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
Outstanding
|
|
Exercise Price
|
|
Expire
|
2015 Warrant Issuance
|
|
|
383,500
|
|
|
383,500
|
|
|
2.05
|
|
|
Jun 2021
|
2016 Warrant Issuance
|
|
|
2,947,949
|
|
|
2,947,949
|
|
|
2.60
|
|
|
Feb 2022
|
2017 Warrant Issuance (1)(2)
|
|
|
100,000
|
|
|
100,000
|
|
|
2.25
|
|
|
Mar 2022
|
2017 Warrant Issuance (1)
|
|
|
1,650,000
|
|
|
1,650,000
|
|
|
2.45
|
|
|
Nov 2022
|
2018 Warrant Issuance (1)
|
|
|
4,004,324
|
|
|
3,974,324
|
|
|
1.55
|
|
|
Jul 2023
|
2019 Warrant Issuance
|
|
|
240,000
|
|
|
240,000
|
|
|
0.55
|
|
|
Apr 2024
|
2019 Warrant Issuance (3)
|
|
|
4,000,000
|
|
|
4,000,000
|
|
|
0.49
|
|
|
Oct 2024
|
2019 Warrant Issuance (4)
|
|
|
6,000,000
|
|
|
6,000,000
|
|
|
0.78
|
|
|
Oct 2024
|
|
|
|
|
|
|
19,295,773
|
|
|
|
|
|
|
|
(1)
|
|
Warrants are subject to liability accounting.
|
|
(2)
|
|
Issued in conjunction with an unsecured line of credit as described in Note 9: Debt / Line of Credit.
|
|
(3)
|
|
Immediately exercisable pre-funded warrants at an exercise price of $0.01 per share.
|
|
(4)
|
|
Private Placement unregistered warrants exercisable six months following issuance.
|
Equity classified warrants
The 2015, 2016, and 2019 warrants share similar terms, and the exercise price of the Warrant Shares are subject to adjustment in the event of any stock dividends and splits, reverse stock splits, stock dividends, recapitalizations, reorganizations or similar transactions. The Warrants will be exercisable on a “cashless” basis in certain circumstances, including in the event a registration statement is not in effect at time of exercise. The warrant agreements contain a clause specifying that in the event there is no effective registration in effect for the underlying warrant shares to be issued at time of exercise, in no circumstance will the Company be required to net cash settle the warrants.
Based on the Company’s analysis of the terms and conditions of the warrants, the Company has concluded that they meet the conditions outlined in applicable accounting guidance to be classified as equity instruments. As a result, the Company has accounted for the exercise price paid by investors for purchase of the pre-funded warrants as additional paid in capital on the accompanying Balance Sheets.
Liability classified warrants
The 2017 and 2018 warrants have alternative settlement provisions that, at the option of the holder, provide for physical settlement or if, at the time of settlement there is no effective registration statement, a cashless exercise as defined in the warrant agreement.
Based on analysis of the underlying warrant agreement and applicable accounting guidance, the Company concluded that these registered warrants require the issuance of registered securities upon exercise and do not sufficiently preclude an implied right to net cash settlement. Accordingly, these warrants were classified in the accompanying Consolidated Balance Sheet as a current liability upon issuance and will be revalued at each subsequent balance sheet date.
The fair value of the liability for common stock purchase warrants is estimated using the Black Scholes option pricing model based on the market value of the underlying common stock at the measurement date, the contractual term of the warrant, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common stock.
Based on the Black Sholes method the fair value of the Company’s warrants are as follows (in thousands):
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2020
|
|
2019
|
2018 January and February Issuance
|
|
|
Fair Value
|
|
$
|
39
|
|
$
|
22
|
|
|
|
|
|
|
|
2017 May issuance
|
|
|
|
|
|
|
Fair Value
|
|
|
4
|
|
|
1
|
|
|
$
|
43
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
(in thousands)
|
Change in Fair Value of common stock warrant liability (1)
|
|
$
|
(20)
|
|
$
|
794
|
|
(1)
|
|
The combined changes in fair value is reflected as income from change in the fair market value of common stock warrant liability.
|
Note 10 – Leases
The Company leases office and manufacturing facilities in Hopewell Junction, NY under a non-cancelable operating lease agreement. The lease for these facilities, as amended, expires in May 2024 and does not contain a renewal option. The lease agreement does not contain any residual value guarantees, or material restrictive covenants.
The Company also leases an office facility for its design group in Santa Clara, California. During the fourth quarter of 2019, the Company signed a two-year extension of this lease that expires on October 31, 2021. The lease agreement does not contain any residual value guarantees or material restrictive covenants.
The Company's operating leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.
The components of lease expense were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
March 31, 2020
|
|
March 31, 2019
|
Finance Lease Cost:
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
4
|
|
$
|
-
|
Interest on lease liabilities
|
|
|
1
|
|
|
-
|
Operating lease cost
|
|
|
246
|
|
|
246
|
Short-term lease cost
|
|
|
15
|
|
|
14
|
Total Lease Cost
|
|
$
|
266
|
|
$
|
260
|
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement lease liabilities:
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
266
|
|
$
|
250
|
Financing cash flows from finance leases
|
|
$
|
5
|
|
$
|
-
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
$
|
-
|
|
$
|
-
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Finance lease right-of-use assets
|
|
$
|
36
|
|
$
|
40
|
Operating lease right-of-use assets
|
|
$
|
3,545
|
|
$
|
3,729
|
Finance lease liability, current
|
|
$
|
16
|
|
$
|
16
|
Finance lease liability, non-current
|
|
$
|
20
|
|
$
|
24
|
Operating lease liabilities, current
|
|
$
|
791
|
|
$
|
775
|
Operating lease liabilities, non-current
|
|
$
|
2,863
|
|
$
|
3,067
|
Weighted average remaining lease terms - finance leases
|
|
|
2.08 years
|
|
|
2.33 years
|
Weighted average remaining lease terms - operating leases
|
|
|
4.17 years
|
|
|
4.42 years
|
Weighted average discount rate - finance leases
|
|
|
10.91%
|
|
|
10.91%
|
Weighted average discount rate - operating leases
|
|
|
8.48%
|
|
|
8.48%
|
Future annual minimum lease payments and finance lease commitments as of March 31, 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
2020 (excluding the three months ended March 31, 2020)
|
|
$
|
798
|
|
$
|
15
|
2021
|
|
|
1,054
|
|
|
20
|
2022
|
|
|
1,014
|
|
|
6
|
2023
|
|
|
1,022
|
|
|
-
|
2024
|
|
|
426
|
|
|
-
|
Total undiscounted future minimum lease payments
|
|
|
4,314
|
|
|
41
|
Less imputed interest
|
|
|
660
|
|
|
5
|
Lease liability
|
|
$
|
3,654
|
|
$
|
36
|
Note 11 – Shareholders’ Equity
Equity Raises
On February 13, 2020, the Company entered into an amendment to its ATM facility, dated November 22, 2019, with H. C. Wainwright & Co., LLC (“Wainwright”). The amendment modifies the agreement to increase the aggregate offering price up to $2.5 million related to shares that the Company may offer and sell through Wainwright from time to time. The Company intends to use the net proceeds from sales made under the ATM offering for working capital and other general corporate purposes. During the quarter ended March 31, 2020 the Company raised $1.6 million, net of offering expenses, through the sale of shares under the ATM facility.