NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(
u
naudited)
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 Securities and Exchange Commission. 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, 201
6
. The results of operations for the period ended
September 30, 2017
are not necessarily indicative of the results to be expected for the full year. The consolidated condensed financial statements
as
of
December
31, 201
6
are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended
December
31, 201
6
.
Evaluation of Ability to Maintain Current Level of Operations
As of September 30, 2017, the Company has an accumulated deficit of $226.2 million. The Company incurred a net loss of $7.3 million and used cash in operating and investing activities of
$8.1
million during the first nine months of 2017. In addition, at September 30, 2017, the Company had cash and cash equivalents of $
2.0 million
,
$0.9
million in
outstanding borrowings under its asset based lending (“ABL”) debt facility, and borrowing availability under the facility of
$3.7
million
.
Management evaluated whether the conditions above raised substantial doubt about the Company’s ability to continue as a going concern.
The Company’s ability to continue current operations is dependent on its existing cash and working capital balances and the ability to generate sufficient cash flows from operations. The Company expects that it may need additional capital to fund its operations over the next twelve months from the date of issuance of these financial statements.
If the Company is unable to raise additional capital or obtain debt when required or on acceptable terms, the Company may have to reduce or delay operating expenses as deemed appropriate in order to conserve cash.
In March 2017, the Company entered into an unsecured debt financing arrangement with Stillwater Trust LLC, a significant investor in the Company. Under the financing agreement, the Company may borrow through
June 30, 2018
, up to
$2
million for general working capital purposes and up to an additional
$3
million should the Company’s existing lender not provide borrowing availability under its normal terms and conditions through its ABL debt facility. In accordance with the terms of the unsecured debt financing agreement, this arrangement expired on
May 24, 2017
, upon the completion of an equity offering.
On May 24, 2017, the Company completed an underwritten offering of
3,300,000
shares of its common stock and warrants to purchase up to
1,650,000
shares of common stock and realized net proceeds of
$5.8
million dollars after underwriting discounts and offering expenses.
Management believes its current operating plan, current working capital levels including proceeds from its May public offering, current financial projections, and the ability to borrow under its ABL debt facility, has alleviated substantial doubt about its ability to continue as a going concern. Accordingly,
these consolidated financial statements have been prepared on the basis that the Company will continue to meet its obligations and continue its operations for the next twelve months from the date of issuance of these financial statements.
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.
Revenues and Cost Recognition
Revenues from product sales are recognized when persuasive evidence of an arrangement exists, such as when a purchase order or contract is received from the customer, the price is fixed, title and risk of loss to the goods has changed and there is a reasonable assurance of collection of the sales proceeds. We obtain written purchase authorizations from our customers for a specified amount of product at a specified price and consider delivery to have occurred at the time of shipment. Product revenue is generally recognized when products are shipped to customers.
Revenues from research and development activities relating to firm fixed-price contracts and cost-type contracts are generally recognized on the percentage-of-completion method of accounting as costs are incurred (cost-to-cost basis). Progress is generally based on a cost-to-cost approach; however, an alternative method may be used such as physical progress, labor hours or others depending on the type of contract. Physical progress is determined as a combination of input and output measures as deemed appropriate by the circumstances. 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.
Revenues from sales or licenses of intellectual property are recognized when transferred to the customer, provided the license has stand-alone value and the contract provides the right to use the intellectual property as it exists at the point the license is granted, without further obligations of the Company to update the intellectual property after the license is transferred. If the license does not have standalone value, then the license is combined with other deliverables, such as Research and Development (“R&D”) or manufacturing services into a single unit of account. Revenue from the single unit of account is recognized when earned, typically as the R&D or manufacturing services are performed over the life of the contract.
Recently issued accounting
pronouncements
In
January 201
7, the
Financial Accounting Standards Board (“FASB”)
issued guidance that narrows the application of when an integrated set of assets and activities is considered a business and provides a framework to assist entities in evaluating whether both an input and a substantive process are present to be considered a business. It is expected that the new guidance will reduce the number of transactions that would need to be further evaluated and accounted for as a business. The guidance is required to be applied by the Company in the first quarter of 2018,
although
early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In March 2016, the FASB issued guidance which simplifies the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, financial statement presentation of excess tax benefits or deficiencies, and classification in the Consolidated Statement of Cash Flows. The guidance is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The Company elected to early adopt this guidance on a prospective basis as of December 31, 2016. The adoption of the new accounting guidance did not have a material impact on the company’s financial statements.
In February 2016, the FASB issued guidance which changes the accounting for leases. The guidance 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). As such, the Company expects the new guidance will impact the asset and liability balances of the Company’s financial statements and related disclosures at the time of adoption. The new guidance is effective January 1, 2019.
In November 2015, the FASB issued guidance which requires deferred tax liabilities and assets be classified as noncurrent in the statement of financial position. This guidance requires entities with a classified balance sheet to present all deferred tax assets and liabilities as non-current. The guidance is effective for annual and interim periods beginning after December 15, 2016 and can be applied prospectively or retrospectively to adjustments with early adoption permitted at the beginning of an interim or annual reporting period. The adoption of the new accounting guidance did not have a material impact on the Company’s financial statements.
In July 2015, the FASB issued guidance on the measurement of inventory, which requires that inventory be measured at the lower of cost or net realizable value. The updated standard was adopted prospectively and is effective for annual reporting periods (including interim periods therein) beginning after December 15, 2016 with early adoption permitted. The adoption of the new accounting guidance did not have a material impact on the Company’s financial statements.
In April 2015, the FASB issued guidance that simplifies the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company adopted this guidance in the first quarter of 2016 and has presented its revolving credit facility debt net of unamortized debt issuance costs in the accompanying consolidated balance sheet.
In August 2014, the FASB issued guidance which defines management’s responsibility to assess an entity’s ability to continue as a going concern; and to provide related footnote disclosures if there is substantial doubt about its ability to continue as a going concern. The pronouncement was effective for annual reporting periods ending after December 15, 2016 with early adoption permitted. The Company has provided an assessment and related disclosures in Note 1 to the Condensed Consolidated Financial Statements.
In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers, which will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance when it becomes effective. The guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2017. The Company is still finalizing its assessment of this guidance, but does not currently expect its adoption to have a material impact on its consolidated financial statements. Based on the evaluation of its product, contract and licensing revenue streams, most will be recorded consistently under both the current and new guidance with differences possible in the accounting for product warranties which are not expected to be material. The Company has determined it will use the modified retrospective method as its transition method in the adoption of the new revenue guidance. The Company will continue to accumulate information that will be necessary for implementation and will identify and implement any changes in its processes, systems and controls necessary to meet the new standards enhanced reporting and disclosure requirements. The Company will continue its evaluation of this new guidance though the date of adoption.
Unbilled Accounts Receivable
Unbilled accounts receivable represents contract revenue recognized but not yet invoiced due to contract terms or the timing of the accounting invoicing cycle.
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
$14
thousand and
$41
thousand
for the three
and nine month periods ended
September 30, 2017 and 2016
, respectively. Estimated future amortization expense as of
September 30, 2017
is as follows (in
thousands
):
|
|
|
|
|
|
|
|
Fiscal Years Ending December 31,
|
|
Total
Amortization
|
|
|
(unaudited)
|
2017 (three months remaining)
|
|
$
|
13
|
2018
|
|
|
54
|
2019
|
|
|
32
|
2020
|
|
|
9
|
2021
|
|
|
8
|
Later years
|
|
|
32
|
|
|
$
|
148
|
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
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
Beginning balance
|
|
$
|
589
|
|
$
|
540
|
|
$
|
584
|
|
$
|
599
|
Warranty accruals
|
|
|
(17)
|
|
|
(105)
|
|
|
118
|
|
|
3
|
Warranty claims
|
|
|
(8)
|
|
|
(23)
|
|
|
(138)
|
|
|
(190)
|
Ending balance
|
|
$
|
564
|
|
$
|
412
|
|
$
|
564
|
|
$
|
412
|
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 p
referred 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 (in
thousands, except per share and
share data) for the three
and nine months ended
September 30, 2017
and 201
6
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(unaudited)
|
|
(unaudited)
|
Net loss
|
|
$
|
(2,992)
|
|
$
|
(2,430)
|
|
$
|
(7,261)
|
|
$
|
(4,581)
|
Income allocated to participating securities
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Loss allocated to common shares
|
|
$
|
(2,992)
|
|
$
|
(2,430)
|
|
$
|
(7,261)
|
|
$
|
(4,581)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
- Basic
|
|
|
34,972,589
|
|
|
30,292,166
|
|
|
33,214,262
|
|
|
29,689,458
|
Dilutive effect of stock options
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Weighted average common shares outstanding
- Diluted
|
|
|
34,972,589
|
|
|
30,292,166
|
|
|
33,214,262
|
|
|
29,689,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.09)
|
|
$
|
(0.08)
|
|
$
|
(0.22)
|
|
$
|
(0.15)
|
Diluted
|
|
$
|
(0.09)
|
|
$
|
(0.08)
|
|
$
|
(0.22)
|
|
$
|
(0.15)
|
The following table sets forth the potentially dilutive common stock equivalents for the three
and nine
month periods ended
September, 2017
and 201
6
that were not included in diluted EPS as their effect would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(unaudited)
|
|
(unaudited)
|
Options
|
|
5,142,448
|
|
5,010,993
|
|
5,142,448
|
|
5,010,993
|
Warrants
|
|
5,081,449
|
|
3,331,449
|
|
5,081,449
|
|
3,331,449
|
Convertible preferred stock
|
|
7,545,333
|
|
7,545,333
|
|
7,545,333
|
|
7,545,333
|
Total potentially dilutive common stock equivalents
|
|
17,769,230
|
|
15,887,775
|
|
17,769,230
|
|
15,887,775
|
Note 2: Accounts Receivable, net
The majority of the Company’s commercial accounts receivable are due from Original Equipment Manufacturers (
“
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
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(unaudited)
|
|
|
Accounts receivable
|
|
$
|
3,555
|
|
$
|
2,961
|
Less allowance for doubtful accounts
|
|
|
(127)
|
|
|
(127)
|
Accounts receivable, net
|
|
$
|
3,428
|
|
$
|
2,834
|
Note 3: Inventories, net
The components of inventories are as follows (in
thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(unaudited)
|
|
|
Raw materials
|
|
$
|
4,153
|
|
$
|
3,619
|
Work in process
|
|
|
1,646
|
|
|
1,576
|
Finished goods
|
|
|
4,832
|
|
|
3,740
|
Total inventories
|
|
|
10,631
|
|
|
8,935
|
Less inventory reserve
|
|
|
(1,551)
|
|
|
(1,500)
|
Total inventories, net
|
|
$
|
9,080
|
|
$
|
7,435
|
Note 4: Line of Credit
On
December
21, 2016, the Company entered into a revolving credit facility with a lender that
provides for up to a maximum amount of $5
million
based on a borrowing base equivalent of 85% of eligible accounts receivable plus the lesser of $2
million
or 50% of eligible inventory
, (the “ABL facility”). 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, the revolving credit facility balance is presented net of these unamortized debt issuance costs on the accompanying 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
September
30,
201
7
, we had unused borrowing availability of
$
3.
7
million
and were in compliance with all debt covenants.
For the
three
and
nine
months
ended
September
30,
201
7
, interest expense includes interest paid, capitalized or accrued of
$
27
thousand
and
$
249
thousand
, respectively, on outstanding debt.
Interest expense for the
nine
months ended
September
30, 2017, also includes the write off of
$15
8
of capitalized debt issuance costs associated with the expiration of the unsecured debt financing agreement.
On
March
24, 2017, the Company entered into an unsecured debt financing arrangement with Stillwater Trust LLC, an investor who
,
with affiliates
,
collectively control approximately
46%
of the Company’s outstanding common stock. Under the financing agreement, the Company may borrow, through
June
30, 2018
, up to
$2
million
for general working capital purposes and up to an additional
$3
million
should the Company’s lender not provide borrowing availability under its normal terms and conditions through its ABL facility. The agreement expires and borrowings become due upon the earlier of
June
30, 2020
; the completion of one or a series of equity financings which raise collectively
$5
million
or greater of gross proceeds; or an event of default, as defined in the agreement. Amounts borrowed under the financing agreement, once repaid, cannot be reborrowed.
In accordance with the terms of the agreement, this arrangement expired on
May
24, 2017
, upon the completion of an equity offering. Upon termination of this facility, the Company wrote off $158
thousand
of related debt issuance costs, and recorded a charge to interest expense in the second quarter of 2017.
Mr. Christopher Brody, a member of the Company’s board of directors, is also the President and Managing Director of Stillwater Holdings LLC and is the Vice President of Stillwater Trust LLC, which is the Company’s largest stockholder. The decision of Stillwater Trust LLC to enter into the financing arrangement was made independently of Mr. Brody and the financing was not required or suggested by Mr. Brody. The terms of the financing were determined solely by negotiation among the Company and Stillwater Trust LLC. Mr. Brody did not participate in the deliberations of the Company’s board of directors or the special committee of the Company’s board formed to review the terms of the financing with respect to the approval of the financing and abstained from voting thereon.
Note 5: 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
n
i
ne
month
periods
ended
September
30,
2017
and 201
6
(in
thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
Cost of revenues
|
|
$
|
6
|
|
$
|
10
|
|
$
|
18
|
|
$
|
20
|
Research and development
|
|
|
25
|
|
|
108
|
|
|
74
|
|
|
141
|
Selling, general and administrative
|
|
|
159
|
|
|
280
|
|
|
428
|
|
|
497
|
Total stock compensation expense
|
|
$
|
190
|
|
$
|
398
|
|
$
|
520
|
|
$
|
658
|
At
September
30,
2017
, total unrecognized compensation costs related to stock options was approxima
tel
y
$
0
.
7
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
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30,
|
|
2017
|
|
2016
|
|
(unaudited)
|
Dividend yield
|
|
0
|
%
|
|
0
|
%
|
Risk free interest rates
|
|
0.71-1.65
|
%
|
|
0.71-1.01
|
%
|
Expected volatility
|
|
45.3
to
59.4
|
%
|
|
51.3
to
53.5
|
%
|
Expected term (in years)
|
|
3.5
to
5.0
|
|
|
3.5
to
5.0
|
|
The Company does not expect to pay dividends in the near future
. T
herefore
,
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 yield available
at dates of 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
nine months
ended
September
30
, 2017
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, 2016
|
|
|
5,055,741
|
|
$
|
3.00
|
|
|
|
|
|
|
Options granted (1)
|
|
|
498,803
|
|
|
2.25
|
|
|
|
|
|
|
Options exercised
|
|
|
(46,073)
|
|
|
1.52
|
|
|
|
|
|
|
Options forfeited
|
|
|
(50,001)
|
|
|
2.05
|
|
|
|
|
|
|
Options cancelled or expired
|
|
|
(316,022)
|
|
|
2.83
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
5,142,448
|
|
$
|
2.96
|
|
|
3.76
|
|
$
|
986,578
|
Vested or expected to vest at September 30, 2017
|
|
|
5,125,749
|
|
$
|
2.96
|
|
|
3.75
|
|
$
|
950,550
|
Exercisable at September 30, 2017
|
|
|
4,307,532
|
|
$
|
3.03
|
|
|
3.45
|
|
$
|
969,126
|
|
(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.
For the
nine
months ended
September
30,
2017
the aggregate intrinsic value of
options exercised
was
$
35
thousand
The Company issues new shares of common stock upon exercise of stock options.
Note 6: Shareholders’ Equity
Preferred Stock - Series B Convertible Preferred Stock
As of
September
30,
2017
and
December
31, 201
6
, there were
5,659
shares of Preferred Stock – Series B issued and
outstanding
.
Common Stock
During the
nine
-month period ended
September
30,
2017
,
options to purchase
46
,0
73
shares
were
exercised for proceeds of
$
69
thousand
.
Underwritten Public Offering
On
May
24, 2017, the Company completed an underwritten offering of
3,300,000
shares of its common stock at an offering price of
$2.00
and warrants to purchase up to
1,650,000
shares of common stock and realized net proceeds of
$
5.8
million
dollars after underwriting discounts and offering expenses. The shares and warrants were purchased by a single institutional investor and by Stillwater, LLC, an affiliate
of the Company
. The Warrants have an exercise price of
$2.45
per common share and a term of
five
years.
Warrants
On
August
18, 2016, the Company
entered into letter agreements with certain warrant
holders pursuant to which such
w
arrant
h
olders agreed to
exercise
warrants to purchase a total of
2,216,500
of the Company’s
c
ommon
s
tock, at an exercise price of
$2.05
per share, which
they
acquired in
December 201
5
.
On
August
24, 2016, in consideration
for the exercise of the
2,216,500
w
arrant
s
hares, the Company issued new
c
ommon
s
tock
p
urchase
w
arrants
(the
“New Warrants”)
to purchase
2,947,949
shares of the
Company’s
c
ommon
s
tock
which is equal to
133%
of the 2,216,500
w
arrant
s
hares
exercised
. The
N
ew
W
arrants have an exe
rcise price of
$2.60
per share and
are substantially similar to
the warrants issued in
December 201
5
, except
that they
are:
(a) restricted; (b) not exercisable for
six
months from the date of issuance; and (c) have a term of
five
and a half years from the issuance date.
The Company
raised approximately
$4.5
million
in gross proceeds
f
r
om
the
t
ransaction, which
was
used for general
c
orporate purposes.
The issuance of the New Warrants was exempt from
f
ederal and
s
tate registration requirements. T
he Company
has
file
d
a resale
registration statement to register
the
shares of
the
Company
’s
c
ommon Stock issuable
upon the exercise of the New Warrants.
At
September
30,
2017
there were New Warrants outstanding to purchase
2,947,949
shares of Company
’s
c
ommon
s
tock at an exercise price of
$2.60
, which expire in
February 202
3
. W
arrants to purchase
383,
500
shares remaining from the
December 201
5 issuance were outstanding at
September
30,
2017
at an exercise price of
$2.05
, which expire in
June 202
1
.
In addition, on
March
24, 2017
a warrant to purchase
100,000
shares of common stock at an exercise price of
$2.25
per share,
was issued in conjunction with an unsecured line of credit as desc
ribed in Note 4: Line of Credit,
all of
which remain outstanding as of
September
30, 2017.
On
May
24, 2017, as described above, the Company issued w
arrants to purchase up to
1,650,
000
shares of common stock at an exercise price of
$2.45
in conjunction with a
public offering
,
all of which
remain outstanding as of
September
30,
2017.
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
and nine month
periods
ended
September
30,
2017
and 201
6
was
0%
.
The difference between the effective tax rate of 0% and the U.S. federal statutory rate of
34%
for the
three
and nine
month periods
ended
September
30,
2017
and 201
6
was primarily due to
recognizing a full
valuation allowance
on deferred tax assets
.
As of
September
30,
2017
, the Company determined that based on all available eviden
ce, 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 rec
ord a full valuation allowance
.
The
Company’s net operating loss carry forward amounts
e
xpire
through
203
7
and are subject to certain limitation
s
that may occur due to change in 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.
2
million
at
September
30,
2017
.
Litigation
From time to time, the Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company accrues for losses related to li
ti
gation when a potential loss is probable and the loss can be reasonably estimated. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. All estimates are based on the best information available at the time which can be highly subjective.
During 2015, the Company received a letter from an attorney representing a former employee claiming damages for age discrimination and wrongful termination. In
September 201
6, this former employee commenced action against the Company in Superior Court for the State of Washington. In
February 201
7, the former employee’s counsel sent a discovery request to the Company.
In October 2017, the
parties
reached a tentative settlement
, subject to
payment of an amount not material to the Company,
documentation of the terms
and
the expiration of a revocation period.
Note 9: Concentrations
The following is a schedule of revenue
s
by geographic location (in
thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
North and South America
|
|
$
|
2,192
|
|
|
$
|
2,849
|
|
|
$
|
9,479
|
|
|
$
|
10,022
|
|
Europe, Middle East, and Africa
|
|
|
1,634
|
|
|
|
1,301
|
|
|
|
4,378
|
|
|
|
5,637
|
|
Asia Pacific
|
|
|
454
|
|
|
|
155
|
|
|
|
1,752
|
|
|
|
1,180
|
|
Total
|
|
$
|
4,280
|
|
|
$
|
4,305
|
|
|
$
|
15,609
|
|
|
$
|
16,839
|
|
The following table represents the domestic and international revenues as a percentage of total net revenues
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Domestic
|
|
|
51
|
%
|
|
|
66
|
%
|
|
|
61
|
%
|
|
|
60
|
%
|
International
|
|
|
49
|
%
|
|
|
34
|
%
|
|
|
39
|
%
|
|
|
40
|
%
|
The Company purchases principally all of its silicon wafers from
two
suppliers located in Taiwan
and Korea.
For the
nine
months ended
September
30,
2017
,
one
customer accounted for
1
0
%
of net revenue
s
and
there were no
other single
customers accounting for over
10
%
of net revenue
s
.
For
the
t
h
ree
months
ended
September
30,
201
7
,
one
customer accounted
for
over
10%
of
n
et revenue
s.
As of
September
30,
2017
,
two
customer
s
accounted for
15
%
and
10%
, respectively
of
the Company’s consolidated
accounts receivable
balance
and no other single customer accounted for over 10%
of the consolidated accounts re
ceivable.