NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: Summary of Significant Accounting Policies
The Business
eMagin Corporation (the “Company”) designs, develops, manufactures and markets OLED (organic light emitting diode)–on-silicon microdisplays and virtual imaging products which utilize OLED microdisplays. The Company’s products are sold mainly in North America, Asia, and Europe.
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements of eMagin Corporation and its subsidiary reflect all adjustments, including normal recurring accruals, necessary for a fair presentation. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosure normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the SEC. The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited condensed consolidated financial statements are read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The results of operations for the period ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year. The consolidated condensed financial statements as of December 31, 2018 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Use of estimates
In accordance with accounting principles generally accepted in the United States of America, management utilizes certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments related to, among others, allowance for doubtful accounts, warranty reserves, inventory reserves, stock-based compensation expense, deferred tax asset valuation allowances, litigation and other loss contingencies. Management bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Reclassifications
Certain immaterial prior period amounts have been reclassified to conform to current period presentatio
n with no impact on previously reported net income, assets or shareholders’ equity.
Intangible Assets – Patents
Acquired patents are recorded at purchase price as of the date acquired and amortized over the expected useful life which is generally the remaining life of the patent.
The total intangible amortization expense was approximately
$9
thousand and
$14
thousand for the three month periods ended March 31, 2019 and 2018, respectively.
Product warranty
The Company generally offers a
one
-year product replacement warranty. The standard policy is to repair or replace the defective products. The Company accrues for estimated returns of defective products at the time revenue is recognized based on historical activity as well as for specific known product issues. The determination of these accruals requires the Company to make estimates of the frequency and extent of warranty activity and estimate future costs to replace the products under warranty. If the actual warranty activity and/or repair and replacement costs differ significantly from these estimates, adjustments to cost of revenue may be required in future periods.
The following table provides a summary of the activity related to the Company's warranty liability included in other current liabilities, (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
|
|
(unaudited)
|
Beginning balance
|
|
$
|
423
|
|
$
|
468
|
Warranty accruals and adjustments
|
|
|
(78)
|
|
|
(72)
|
Warranty claims
|
|
|
(24)
|
|
|
(34)
|
Ending balance
|
|
$
|
321
|
|
$
|
362
|
Net Loss per Common Share
Basic loss per share is computed using the weighted average number of common shares outstanding during the period, and excludes any dilutive effects of common stock equivalent shares such as stock options, warrants, and convertible preferred stock. Diluted loss per share is computed using the weighted average number of common shares outstanding and potentially dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.
The Company’s Series B Convertible Preferred stock (“Preferred Stock – Series B”) is considered a participating security as the preferred stock participates in dividends with the common stock, which requires the use of the two-class method when computing basic and diluted earnings per share. The Preferred Stock – Series B is not required to absorb any net loss. Although the Company paid a one-time special dividend in 2012, the Company does not expect to pay dividends on its common or preferred stock in the near future.
The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2019 and 2018 (in thousands, except per share and share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
|
(unaudited)
|
Net Loss
|
|
$
|
(1,439)
|
|
$
|
(2,081)
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
- Basic
|
|
|
45,161,273
|
|
|
42,255,189
|
Dilutive effect of stock options
|
|
|
—
|
|
|
—
|
Weighted average common shares outstanding
- Diluted
|
|
|
45,161,273
|
|
|
42,255,189
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03)
|
|
$
|
(0.05)
|
Diluted
|
|
$
|
(0.03)
|
|
$
|
(0.05)
|
The following table sets forth the potentially dilutive common stock equivalents for the three month periods ended March 31, 2019 and 2018 that were not included in diluted EPS as their effect would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
|
(unaudited)
|
Options
|
|
5,160,445
|
|
4,911,801
|
Warrants
|
|
9,055,773
|
|
9,055,773
|
Convertible preferred stock
|
|
7,545,333
|
|
7,545,333
|
Total potentially dilutive common stock equivalents
|
|
21,761,551
|
|
21,512,907
|
Fair Value of Financial Instruments
Cash, cash equivalents, accounts receivable, short-term investments and accounts payable are stated at cost, which approximates fair value, due to the short-term nature of these instruments. The revolving credit facility is also stated at cost, which approximates fair value because the interest rate is based on a market based rate plus a margin.
We have categorized our assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy in accordance with GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3).
Assets and liabilities recorded in the balance sheets at fair value are categorized based on a hierarchy of inputs as follows:
Level 1 – Unadjusted quoted prices in active markets of identical assets or liabilities.
Level 2 – Quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 – Unobservable inputs for the asset or liability.
The common stock warrant liability is currently the only financial asset or liability recorded at fair value on a recurring basis, and is considered a Level 3 liability. The fair value of the common stock warrant liability is included in current liabilities on the Condensed Consolidated Balance Sheets, as the warrants are currently exercisable.
The following table shows the reconciliation of the Level 3 warrant liability measured and recorded at fair value on a recurring basis, using significant unobservable inputs (in thousands):
|
|
|
|
|
|
Estimated
Fair Value
|
|
|
(unaudited)
|
Balance as of January 1, 2019
|
|
$
|
1,497
|
Change in fair value of warrant liability, net
|
|
|
(794)
|
Balance as of March 31, 2019
|
|
$
|
703
|
The fair value of the liability for common stock purchase warrants at issuance and at March 31, 2019 was estimated using the Black Scholes option pricing model based on the market value of the underlying common stock at the measurement date, the remaining contractual term of the warrants from
3.2
to
3.8
years, risk-free interest rates of
2.37%
,
no
expected dividends and expected volatility of the price of the underlying common stock ranging from
40.5%
to
41.8%
.
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, 2019,
one
customer accounted for
11%
of net revenues. For the three months ended March 31, 2019, there were no other customers individually accounting for over 10% of net revenues.
As of March 31, 2019
,
two
customers accounted for
13%
and
11%
, respectively of the Company’s consolidated accounts receivable balance and no other single customer accounted for over 10% of the consolidated accounts receivable.
For the three months ended March 31, 2018,
one
customer accounted for
11%
of net revenues and there were no other single customers accounting for over 10% of net revenues.
Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared on the 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, 2019 the Company incurred a net loss of
$1.4
million and used cash in operating activities of
$2.3
million. As of March 31, 2019, the Company had
$3.5
million of cash,
$2.5
million of outstanding debt, and borrowing availability under our ABL Facility of
$0.8
million. For the year ended December 31, 2018, the Company incurred a net loss of
$9.5
million and used cash in operating activities of
$6.4
million. The Company conducted an equity raise in April 2019 that generated
$3.6
million in net proceeds.
Due to continuing losses, the Company’s financial position, and uncertainty regarding the Company’s ability to borrow under its ABL Facility, the Company may not be able to meet its financial obligations as they become due without additional financing or sources of capital. 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, 2019 and, while relations with the lender are positive, there is no assurance the lender will renew or extend this facility, or continue to make funds available during 2019 and beyond at present availability levels, or at all. Therefore, in accordance with applicable accounting guidance, and based on the Company’s current financial condition and availability of funds, there is substantial doubt about the Company’s ability to continue as a going concern through twelve months from the date these financial statements were issued.
Based on the Company’s current projections and the availability of the ABL Facility, the Company estimates it will have sufficient liquidity through the end of the second quarter of 2020. However, there can be no assurance projected results will be achieved or funds will be available under our ABL Facility. If actual results are less than projected or additional needs for liquidity arise, the Company may be able to raise additional debt or equity financing and is prepared to reduce expenses or enter into a strategic transaction. However, the Company can make no assurance that it will be able to reduce expenses sufficiently, raise additional capital, or enter into a strategic transaction on terms acceptable to the Company, or at all.
Recently adopted accounting pronouncements
The Company's accounting policies are the same as those described in Note 1 to the Company's consolidated financial statements in its 2018 Form 10-K with the exception of the accounting policies related to leases.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532,
Disclosure Update and Simplification
, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule was effective on November 5, 2018. The Company adopted the guidance on January 1, 2019, and such adoption did not have a material impact on its financial statements.
In February 2016, the FASB issued guidance which requires lessees to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term and, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis for all leases (with the exception of short-term leases). Under the new guidance, leases previously defined as operating leases will be presented on the balance sheet. As a result, these leases will be recorded as an asset and a corresponding liability at the present value of the total lease payments. The asset will be decremented over the life of the lease on a pro-rata basis resulting in lease expense while the liability will be decremented using the interest method (i.e. principal and interest). The Company adopted the guidance effective January 1, 2019. The Company elected the transition package of three practical expedients permitted under the transition guidance and elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption, without a restatement of prior periods. Further, the Company elected a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. As a result of the adoption, the Company adjusted its beginning balance for the quarter ended March 31, 2019 by recording operating lease ROU assets and liabilities through a cumulative-effect adjustment. The adoption impacted the accompanying condensed balance sheet, but did not have an impact on the condensed statements of operations and comprehensive loss.
At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, the Company calculates the associated lease liability and corresponding ROU assets upon lease commencement using a discount rate based on a credit-adjusted secured borrowing rate commensurate with the term of the lease. The Company records lease liabilities within current or noncurrent liabilities based upon the length of time associated with the lease payments. The operating lease ROU assets includes any lease payments made and excludes lease incentives and initial direct costs incurred, if any, and are recorded as noncurrent assets. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. There are no finance leases as of March 31, 2019.
Leases with an initial term of 12 months or less are not recorded on the accompanying condensed balance sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The impact of the adoption of ASC 842 on the accompanying condensed balance sheet as of January 1, 2019 was as follows (in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
Adjustments
Due to the
Adoption of
ASC 842
|
|
|
January 1,
2019
|
Right of Use Assets (1)
|
|
|
|
|
|
|
|
|
|
|
Operating lease - right of use asset
|
|
$
|
—
|
|
$
|
4,267
|
|
|
$
|
4,267
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
$
|
964
|
|
|
$
|
964
|
Noncurrent
|
|
$
|
—
|
|
$
|
3,432
|
|
|
$
|
3,432
|
|
|
|
|
|
|
|
|
|
|
|
(1) Operating lease right-of-use assets includes deferred rent of
$129
thousand
|
Recently issued accounting pronouncements
In August 2018, the FASB issued guidance which adds, amends and removes certain disclosure requirements related to fair value measurements. Among other changes, this standard requires certain additional disclosure surrounding Level 3 assets, including changes in unrealized gains or losses in other comprehensive income and certain inputs in those measurements. This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Certain amended or eliminated disclosures in this standard may be adopted early, while certain additional disclosure requirements in this standard can be adopted on its effective date. In addition, certain changes in the standard require retrospective adoption, while other changes must be adopted prospectively. The Company is currently evaluating this new standard and its impact on our consolidated financial statements.
Note 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 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.
The Company adopted the provisions of ASC No. 606,
Revenue from Contracts with Customers,
and related amendments (“ASC 606”) on January 1, 2018 using the modified retrospective adoption method
with the cumulative effect of initially applying the guidance recognized at the date of initial application. During 2017, the Company analyzed its revenue recognition policies under ASC 606 and then current revenue recognition policies and determined that the performance obligations, transaction price, allocation of transaction price, recognition of contract costs and timing of revenue recognition would not be materially impacted by adopting ASC 606. Accordingly, there was
no
modified retrospective adoption adjustment necessary as of January 1, 2018
.
Disaggregation of Revenue
The Company's sells its products directly to original equipment manufacturers or OEM’s and military contractors in a diverse range of industries
encompassing the military, industrial, medical, and consumer market sectors
. R&D activities are performed for both military customers and U.S. Government defense related agencies. Product and Contract revenues are disclosed on the Condensed Consolidated Statements of Operations. Additional disaggregated revenue information for the three month periods ended March 31, 2019 and 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
|
2018
|
|
|
(unaudited)
|
|
North and South America
|
$
|
3,398
|
|
|
$
|
2,948
|
|
Europe, Middle East, and Africa
|
|
2,327
|
|
|
|
2,444
|
|
Asia Pacific
|
|
387
|
|
|
|
1,475
|
|
Total
|
$
|
6,112
|
|
|
$
|
6,867
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
|
2018
|
|
|
(unaudited)
|
|
Military
|
|
69
|
%
|
|
|
72
|
%
|
Commercial, including industrial and medical
|
|
6
|
%
|
|
|
7
|
%
|
Consumer
|
|
7
|
%
|
|
|
11
|
%
|
Multiple
|
|
19
|
%
|
|
|
10
|
%
|
|
|
100
|
|
|
|
100
|
|
Accounts Receivable from Customers
Accounts receivable, net of allowances, associated with revenue from customers were approximately
$3.7
million and
$3.2
million as of March 31, 2019 and December 31, 2018, 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 proportional performance method is applied and such revenue exceeds the amount invoiced to the customer. Unbilled receivables are disclosed on the Condensed Consolidated Balance Sheet as of March 31, 2019.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
|
(unaudited)
|
|
|
|
|
|
Unbilled Receivables (contract assets)
|
$
|
69
|
|
|
$
|
224
|
|
Deferred Revenue (contract liabilities)
|
|
(95)
|
|
|
|
(38)
|
|
Net contract asset (liability)
|
$
|
(26)
|
|
|
$
|
186
|
|
In the first quarter of fiscal 2019, the Company recognized revenue of
$38
thousand related to its contract liabilities that existed at December 31, 2018. In the first quarter of fiscal 2018, the Company recognized revenue of
$762
thousand, related to its contract liabilities that existed at December 31, 2017.
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. As of March 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was
$864
thousand. 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,
|
|
|
2019
|
|
2018
|
|
|
(unaudited)
|
|
|
Accounts receivable
|
|
$
|
3,835
|
|
$
|
3,325
|
Less allowance for doubtful accounts
|
|
|
(139)
|
|
|
(139)
|
Accounts receivable, net
|
|
$
|
3,696
|
|
$
|
3,186
|
Note 4: Inventories, net
The components of inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
(unaudited)
|
|
|
Raw materials
|
|
$
|
3,672
|
|
$
|
3,701
|
Work in process
|
|
|
1,704
|
|
|
1,033
|
Finished goods
|
|
|
4,306
|
|
|
4,888
|
Total inventories
|
|
|
9,682
|
|
|
9,622
|
Less inventory reserve
|
|
|
(855)
|
|
|
(1,040)
|
Total inventories, net
|
|
$
|
8,827
|
|
$
|
8,582
|
Note 5: Line of Credit
On December 21, 2016, the Company entered into a revolving credit asset based lending facility, (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, 2019
for a
one
-year term unless written notice to terminate the agreement is provided by either party. In conjunction with entering into the financing, the Company incurred
$228
thousand of debt issuance costs including lender and legal costs that will be amortized over the life of the ABL facility. In accordance with recently issued accounting guidance, any revolving credit facility balances outstanding are presented net of these unamortized debt issuance costs on the accompanying Condensed Consolidated Balance Sheet.
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. As of March 31, 2019, the Company had
$2.5
million in borrowings outstanding, had unused borrowing availability of
$0.8
million and was in compliance with all financial debt covenants.
For the three months ended March 31, 2019 and 2018 interest expense includes interest paid, capitalized or accrued of
$52
thousand, and
$42
thousand, respectively, on outstanding debt. Interest expense for the three month periods ended March 31, 2019 and 2018 includes the amortization of debt issuance costs of
$21
thousand.
Note 6: Stock-based 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 and nine month periods ended March 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
|
|
(unaudited)
|
Cost of revenues
|
|
$
|
8
|
|
$
|
15
|
Research and development
|
|
|
24
|
|
|
22
|
Selling, general and administrative
|
|
|
161
|
|
|
168
|
Total stock compensation expense
|
|
$
|
193
|
|
$
|
205
|
At March 31, 2019, total unrecognized compensation costs related to stock options was approximately
$0.5
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
3
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,
|
|
2019
|
|
2018
|
|
(unaudited)
|
Dividend yield
|
|
0
|
%
|
|
0
|
%
|
Risk free interest rates
|
|
2.48
|
%
|
|
2.16-2.59
|
%
|
Expected volatility
|
|
41.7 to 49.2
|
%
|
|
46.4 to 50.0
|
%
|
Expected term (in years)
|
|
3.5 to 4.0
|
|
|
3.5 to 4.75
|
|
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 the three months ended March 31, 2019 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, 2018
|
|
|
4,678,420
|
|
$
|
2.81
|
|
|
|
|
|
|
Options granted
|
|
|
515,558
|
|
|
0.92
|
|
|
|
|
|
|
Options exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Options forfeited
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Options cancelled or expired
|
|
|
(33,533)
|
|
|
9.98
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
5,160,445
|
|
$
|
2.62
|
|
|
4.37
|
|
$
|
4,875
|
Vested or expected to vest at March 31, 2019
|
|
|
5,156,680
|
|
$
|
2.63
|
|
|
4.37
|
|
$
|
4,875
|
Exercisable at March 31, 2019
|
|
|
4,972,266
|
|
$
|
3.03
|
|
|
4.33
|
|
$
|
4,875
|
|
(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. There were no stock option exercises during
the three months ended March 31, 2019.
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 for the three month period ended March 31, 2019 and 2018 was
0%
.
The difference between the effective tax rate of 0% and the U.S. federal statutory rate of
21%
for the three month periods ended March 31, 2019 and 2018 was primarily due to recognizing a full valuation allowance on deferred tax assets.
As of March 31, 2019, 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.
The Company’s net operating loss carryforward 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 carryforwards, 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.
Note 8: Commitments and Contingencies
Equipment Purchase Commitments
The Company has committed to equipment purchases of approximately
$0.8
million at March 31, 2019.
Litigation
From time to time, we may become subject to various legal proceedings that are incidental to the ordinary conduct of our business. In March 2019, we received a demand letter seeking payment of
$0.9
million of outstanding invoices relating to purchased inventory from Suga Electronics Limited, or Suga, a contract manufacturer located in China, which manufactured product sold by our consumer night vision business. We have responded to the demand letter, and requested that Suga provide substantiation of purchased inventory. 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, we 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 we believe that we have adequately accrued for the losses and are 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, 2019, if we fail to resolve these claims in a timely and/or favorable manner
Note 9: Common Stock Warrant Liability
We account for common stock warrants pursuant to applicable accounting guidance contained in ASC 815, "Derivatives and Hedging - Contracts in Entity's Own Equity" and make a determination as to their treatment as either equity instruments or a warrant liability based on an analysis of the underlying warrant agreements.
During January 2018, in conjunction with a registered equity offering and a concurrent private placement that closed in
February 2018
, the Company issued warrants to purchase an aggregate of
4,004,324
common shares at an exercise price of
$1.55
. As of March 31, 2019, related warrants to purchase
3,974,324
shares of common stock remain outstanding. The 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 on the Condensed 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.
We determined that, based on the Black Sholes methodology, the liability for the January and February 2018 common stock warrants had a fair value as of March 31, 2019 of
$0.6
million. In addition, warrants the company issued during 2017 that were classified as liabilities had a fair value of
$0.1
million as of March 31, 2019. The combined changes in fair value as of March 31, 2019 was reflected as income from change in the fair market value of common stock warrant liability of
$0.8
million in the Condensed Consolidated Statement of Operations for the three month period ended March 31, 2019.
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, that expires on
October 31, 2019
. Because the remaining term is less than
one
year, the Company has elected not to apply the recognition requirement of the new leasing standard to this lease.
For the three months ended March 31, 2019, the components of operating lease expense were as follows:
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2019
|
Operating lease cost
|
|
$
|
246
|
Short-term lease cost
|
|
|
14
|
Total Lease Cost
|
|
$
|
260
|
The Company's 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 Company's weighted average remaining lease term and weighted average discount rate for operating leases as of March 31, 2019 are:
|
|
|
|
|
|
March 31, 2019
|
Weighted average remaining lease terms
|
|
|
5.17 Years
|
Weighted average discount rate
|
|
|
8.50%
|
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total operating lease liabilities recognized on the Condensed Consolidated Balance Sheets as of March 31, 2019:
|
|
|
|
April 1, 2019 through December 31, 2019
|
|
$
|
752
|
2020
|
|
|
1,002
|
2021
|
|
|
1,002
|
2022
|
|
|
1,014
|
2023
|
|
|
1,022
|
Thereafter
|
|
|
426
|
Total undiscounted future minimum lease payments
|
|
|
5,218
|
Less: Difference between undiscounted lease payments and discounted operating lease liabilities
|
|
|
981
|
Total operating lease liabilities
|
|
$
|
4,237
|
Cash paid for amounts included in the measurement of operating lease liabilities were
$250
thousand for the three months ended March 31, 2019, and this amount is included in operating activities in the Condensed Consolidated Statements of Cash Flows.
Note 11: Subsequent Events
April 2019 Equity Raises
On April 9, 2019, the Company closed a
registered direct offering of 4 million shares of Company common stock at a purchase price per share of
$0.50
, for gross proceeds of approximately
$2.0
million before deducting placement agent fees and other offering expenses. The Company also issued unregistered warrants to the investor to purchase up to
3
million shares of common stock at an exercise price of
$0.78
per share. The warrants are exercisable
six
months following issuance and will expire
five
and one-half years from the issuance date.
On April 9, 2019, the Company closed
an additional
$2.0
million registered direct offering consisting of immediately exercisable pre-funded warrants to purchase up to
4
million shares of Company common stock at a purchase price of
$0.49
per warrant and an exercise price of
$0.01
per share. In a concurrent private placement, the Company issued to the investor in the registered direct offering unregistered warrants to purchase up to
3
million shares of the Company’s common stock at an exercise price of
$0.78
per share. The unregistered warrants are exercisable
six
months following issuance and will expire
five
and one-half years from the issuance date.
The Company intends to use the net proceeds from these offerings for working capital and other general corporate purposes.