NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature Of Business
eMagin Corporation and its wholly owned subsidiary, Virtual Vision, Inc. (the “Company”), designs, manufactures and supplies OLED-on-silicon microdisplays and virtual imaging products which utilize OLED microdisplays. The Company’s products are sold mainly in North America, Asia, and Europe.
Note 2 – Significant Accounting Policies
Basis of presentation
The accompanying consolidated financial statements include the accounts of eMagin Corporation and its wholly owned subsidiary. All intercompany transactions have been eliminated in consolidation. The Company manages its operations on a consolidated, integrated basis in order to optimize its equipment and facilities and to effectively service its global customer base, and concludes that it operates in a single business segment.
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.
Revenue and cost recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, selling price is fixed or determinable and collection is reasonably assured. Product revenue consists of sales of our microdisplays pursuant to purchase orders received from customers. Our shipping terms are FOB our factory, and accordingly revenue is recognized when products are shipped to customers.
The Company also earns revenues from certain research and development (“R&D”) activities (contract revenues) under both firm fixed-price contracts and cost-type contracts.
Revenues from research and development activities relating to firm fixed-price contracts and cost-type contracts are generally recognized on the proportional performance 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. Any changes in estimate related to contract accounting are accounted for prospectively over the remaining life of the contract.
See “Recently issued accounting standards” below for discussion of revenue recognition in future periods.
Product warranty
The Company offers a
one
-year product replacement warranty. In general, 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 experience 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, during the years ended December 31, 2017 and 2016 (in thousands):
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|
Twelve Months Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
584
|
|
$
|
599
|
|
|
Warranty accruals
|
|
|
136
|
|
|
375
|
|
|
Warranty claims
|
|
|
(252)
|
|
|
(390)
|
|
|
Ending balance
|
|
$
|
468
|
|
$
|
584
|
|
Research and development expenses
Research and development costs are expensed as incurred.
Cash and cash equivalents
All highly liquid instruments with an original maturity of three months or less at the date of purchase are considered to be cash equivalents.
Accounts receivable
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 are payable in U.S. dollars, are due within
30
-
90
days and are stated at amounts due from customers net of an allowance for doubtful accounts. Any account outstanding longer than the contractual payment terms is considered past due.
Unbilled accounts receivable
Unbilled receivables principally represent revenues recorded under the percentage-of-completion method of accounting that have not been billed to customers in accordance with the contractual terms of the arrangement. We anticipate that the majority of the balance at December 31, 2017 will be collected during the 2018 fiscal year. As of December 31, 2017 and 2016, unbilled accounts receivable was $0.4 million and $1.4 million, respectively.
Allowance for doubtful accounts
The allowance for doubtful accounts reflects an estimate of probable losses inherent in the accounts receivable balance. The allowance is determined based on a variety of factors, including the length of time receivables are past due, historical experience, the customer's current ability to pay its obligation, and the condition of the general economy and the industry as a whole. The Company will record a specific reserve for individual accounts when the Company becomes aware of a customer's inability to meet its financial obligations, deterioration in the customer's operating results or financial position, or deterioration in the customer’s credit history. If circumstances related to customers change, the Company would further adjust estimates of the recoverability of receivables. Account balances, when determined to be uncollectible, are charged against the allowance.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in first-out method. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. The Company regularly reviews inventory quantities on hand, future purchase commitments with the Company’s suppliers, and the estimated utility of the inventory. If the Company review indicates a reduction in utility below carrying value, the inventory is reduced to a new cost basis.
Equipment, furniture and leasehold improvements
Equipment, furniture and leasehold improvements are stated at cost. Depreciation on equipment is calculated using the straight-line method of depreciation over the estimated useful life ranging from
three
to
10
years. Amortization of leasehold improvements is calculated by using the straight-line method over the shorter of their estimated useful lives or lease terms. Expenditures for maintenance and repairs are charged to expense as incurred.
The Company performs impairment tests on its long-lived assets when circumstances indicate that their carrying amounts may not be recoverable. If required, recoverability is tested by comparing the estimated future undiscounted cash flows of the asset or asset group to its carrying value. Impairment losses, if any, are recognized based on the excess of the assets' carrying amounts over their estimated fair values.
Intangible assets
Included in the Company’s intangible assets are patents that 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. In 2014, the Company purchased several patents for
$290
thousand which are being amortized over their remaining useful life. As of December 31, 2017 and 2016, intangible assets were
$355
thousand less accumulated amortization of
$220
thousand and
$166
thousand, respectively. As of December 31, 2017, the weighted average remaining useful life of the patents was approximately
5.8
years.
Total intangible amortization expense was approximately
$54
thousand for each of the years ended December 31, 2017 and 2016, respectively. Estimated future amortization expense as of December 31, 2017 is as follows (in thousands):
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Fiscal Years Ending December 31,
|
|
Total
Amortization
|
|
|
|
|
|
2018
|
|
$
|
54
|
|
2019
|
|
|
32
|
|
2020
|
|
|
9
|
|
2021
|
|
|
8
|
|
2021
|
|
|
8
|
|
Later years
|
|
|
24
|
|
|
|
$
|
135
|
Advertising
Costs related to advertising and promotion of products are charged to sales and marketing expense as incurred. There was
no
advertising expense for the years ended December 31, 2017 and 2016.
Shipping and handling fees
The Company includes costs related to shipping and handling in cost of goods sold.
Income taxes
The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The effect on deferred tax assets and liabilities of changes in tax rates will be recognized as income or expense in the period that the change occurs. A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. Changes in circumstances, assumptions and clarification of uncertain tax regimes may require changes to any valuation allowances associated with the Company’s deferred tax assets.
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
.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”). This legislation makes broad and complex changes to the U.S. tax code, including, but not limited to, (i) reducing the U.S. federal statutory tax rate from
35%
to
21%
; (ii) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (iii) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017, and (iv) modifying the officer’s compensation limitation. The Company recognizes the effects of changes in tax law, including the TCJA, in the period the law is enacted. Accordingly, the effects of the TCJA have been recognized in the financial statements for the year ended December 31, 2017.
For additional details regarding our accounting for income taxes, see Note 8 in the accompanying consolidated financial statements.
Income (loss) per common share
Basic income (loss) per share (“Basic EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted income (loss) per share (“Diluted EPS”) is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the reporting period while also giving effect to
all potentially dilutive common shares that were outstanding during the reporting period.
In accordance with Accounting Standards Codification (“ASC”) 260, entities that have issued securities other than common stock that participate in dividends with the common stock (“participating securities”) are required to apply the two-class method to compute basic EPS. The two-class method is an earnings allocation method under which EPS is calculated for each class of common stock and participating security as if all such earnings had been distributed during the period. On December 22, 2008, the Company issued Convertible Preferred Stock – Series B which participates in dividends with the Company’s common stock and is therefore considered to be a participating security. The participating convertible preferred stock is not required to absorb any net loss. The Company uses the more dilutive method of calculating the diluted earnings per share, either the two class method or “if-converted” method. Under the “if-converted” method, the convertible preferred stock is assumed to have been converted into common shares at the beginning of the period.
For the years ended December 31, 2017 and 2016, 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 is a table of the potentially dilutive common stock equivalents for the years ended December 31, 201
7
and 201
6
that were not included in diluted EPS as their effect would be anti-dilutive:
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|
|
Twelve Months Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Options
|
|
4,768,838
|
|
5,010,993
|
|
|
Warrants
|
|
5,081,449
|
|
3,331,449
|
|
|
Convertible preferred stock
|
|
7,545,333
|
|
7,545,333
|
|
|
Total potentially dilutive common stock equivalents
|
|
17,395,620
|
|
15,887,775
|
|
Comprehensive income (loss)
Comprehensive income (loss) refers to net income (loss) and other revenue, expenses, gains and losses that, under generally accepted accounting principles, are recorded as an element of shareholders’ equity but are excluded from the calculation of net income (loss).
The Company's operations did not give rise to any material items includable in comprehensive income (loss), which were not already in net income (loss) for the years ended December 31, 2017 and 2016. Accordingly, the Company's comprehensive income (loss) is the same as its net income (loss) for the periods presented.
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 ABL 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 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 discussed in Note 9 is currently the only
financial assets
or liability
recorded at fair value on a recurring basis
, and is considered a Level 3
l
iability.
The fair value of th
e
common stock
warrant liability is included in current liabilities on the accompanying financial statements as of December 31, 2017, 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):
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|
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Estimated Fair Value
|
|
|
|
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|
|
Balance as of January 1, 2017
|
|
|
$
|
-
|
|
Fair value of warrants at issuance (May 24, 2017)
|
|
|
|
1,873
|
|
Change in fair value of warrant liability, net
|
|
|
|
(1,089)
|
|
Balance as of December 31,2017
|
|
|
$
|
784
|
|
|
|
|
|
|
T
he fair value of the liability for common stock purchase warrants
at inception and at December 31, 2017 was
estimated using the Black Scholes option pricing model
based on the market value of the underlying common stock at the measurement date, the
five
year
contractual term of the warrant
s
, risk-free interest rates
ranging from
1.77%
to
2.13%
;
no
expected dividends and expected volatility of the price of the underlying common stock
ranging from
46.9%
to
49.7%
.
Stock-based compensation
The Company uses the fair value method of accounting for share-based compensation arrangements. The fair values of stock options are 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.
Derivative Financial Instruments
We evaluate all of our financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features qualifying as embedded derivatives. For derivative financial instruments accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statement of operations We use the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.
Concentration of credit risk
The majority of eMagin’s products are sold throughout North America, Asia, and Europe. Sales to the Company’s recurring customers are generally made on open account while sales to occasional customers are typically made on a prepaid basis. eMagin performs periodic credit evaluations on its recurring customers and generally does not require collateral. An allowance for doubtful accounts is maintained for credit losses.
Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and short-term investments. The Company’s cash and cash equivalents are deposited with financial institutions which, at times, may exceed federally insured limits. The Company invests surplus cash in a government money market fund that consists of U.S Government obligations and repurchase agreements collateralized by U.S. Government Obligations, which is not insured. To date, the Company has not experienced any loss associated with this risk.
Recently issued accounting standards
In January 2017, 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). Although the Company is still evaluating and quantifying the impact, the new guidance will effect 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 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.
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 analyzed its revenue recognition for sale of products, service revenue and licenses for contracts that started prior to January 1, 2018, continued into 2018, and determined that the adoption of ASU 2014-09 will not have a material impact on revenue recognized through December 31, 2017. The Company has chosen to use the modified retrospective approach for adoption with the cumulative effect of initially applying the guidance recognized at the date of initial application. Further, the Company analyzed its revenue recognition policies under ASC 606 and 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 will not be materially impacted by adopting ASC 606. Accordingly, there will be no modified retrospective adoption adjustment necessary at the date of initial application. The Company also evaluated whether any contracts had any variable component and warranty component that should be separately identified and determined that there was no variable component to contracts as of January 1, 2018 and that the warranties issued were standard warranties for technical performance with no continuing obligation and are not sold separately. The ASU also required expanded disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required for customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.
Note 3 – Accounts Receivable, net
Accounts receivable consisted of the following (in thousands):
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
4,643
|
|
$
|
2,961
|
|
Less allowance for doubtful accounts
|
|
|
(115)
|
|
|
(127)
|
|
Accounts receivable, net
|
|
$
|
4,528
|
|
$
|
2,834
|
Note 4 – Inventories, net
The components of inventories were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
4,054
|
|
$
|
3,619
|
|
Work in process
|
|
|
1,352
|
|
|
1,576
|
|
Finished goods
|
|
|
5,024
|
|
|
3,740
|
|
Total inventories
|
|
|
10,430
|
|
|
8,935
|
|
Less inventory reserve
|
|
|
(1,790)
|
|
|
(1,500)
|
|
Total inventories, net
|
|
$
|
8,640
|
|
$
|
7,435
|
Note 5 – Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Vendor prepayments
|
|
$
|
755
|
|
|
$
|
601
|
|
Other prepaid expenses
|
|
|
573
|
|
|
|
439
|
|
Total prepaid expenses and other current assets
|
|
$
|
1,328
|
|
|
$
|
1,040
|
Note 6 – Equipment, Furniture and Leasehold Improvements
Equipment, furniture and leasehold improvements consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Computer hardware and software
|
|
$
|
693
|
|
|
$
|
1,471
|
|
Lab and factory equipment
|
|
|
15,678
|
|
|
|
16,369
|
|
Furniture, fixtures and office equipment
|
|
|
47
|
|
|
|
344
|
|
Assets under capital leases
|
|
|
66
|
|
|
|
66
|
|
Construction in progress
|
|
|
1,672
|
|
|
|
1,180
|
|
Leasehold improvements
|
|
|
-
|
|
|
|
473
|
|
Total equipment, furniture and leasehold improvements
|
|
|
18,156
|
|
|
|
19,903
|
|
Less: accumulated depreciation
|
|
|
(9,603)
|
|
|
|
(10,923)
|
|
Equipment, furniture and leasehold improvements, net
|
|
$
|
8,553
|
|
|
$
|
8,980
|
Depreciation expense was
$1.8
million and
$1.6
million for the years ended December 31, 2017 and 2016. Assets under capital leases are fully amortized.
Note 7– Debt
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
3,974
|
|
|
$
|
1,852
|
|
Less: unamortized debt issuance costs
|
|
|
(166)
|
|
|
|
(163)
|
|
Revolving credit facility, net
|
|
$
|
3,808
|
|
|
$
|
1,689
|
|
|
|
|
|
|
|
|
|
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 shall 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. As of December 31, 2017, the interest rate on outstanding borrowings was
7.5%
. 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
$242
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 agreement contains certain lenders remedies that upon events of default, give the bank the ability to terminate the facility before the scheduled maturity date. Accordingly, the Company classifies borrowing under the ABL facility as current liabilities on the accompanying
b
alance
s
heets.
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 December 31, 2017, we had unused borrowing availability of
$1.0
million and were in compliance with all
financial
debt covenants.
For the years ended December 31, 2017 and 2016, interest expense includes interest paid, or accrued, and amortization or write-off of debt issuance costs of approximately
$363
thousand and
$30
thousand, respectively, on outstanding debt.
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. 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 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.
Note 8 – Income Taxes
New Tax Legislation
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”). This legislation makes broad and complex changes to the U.S. tax code, including, but not limited to, (i) reducing the U.S. federal statutory tax rate from
35%
to
21%
; (ii) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (iii) modifying the officer’s compensation limitation, and (iv) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. Specifically, the TCJA limits the amount the Company is able to deduct for net operating loss carryforwards generated in taxable years beginning after December 31, 2017 to 80% of taxable income however these net operating loss carryforwards can be carried forward indefinitely. The Company recognizes the effects of changes in tax law, including the TCJA, in the period the law is enacted. Accordingly, the effects of certain provisions of the TCJA have been recognized in the financial statements for the year ended December 31, 2017. As a result of the change in law, the Company recorded a reduction to its deferred tax assets of
$19.0
million and a corresponding reduction to its valuation allowance due to the reduction in the U.S. federal statutory rate from 35% to 21%. In addition, the Company expects to file a claim for a federal tax refund of approximately
$0.2
million for its AMT credit carryforward in tax years
2018
to
2021
pursuant to the applicable provisions of the TCJA.
The Company’s preliminary estimate of the effects of the TCJA, including the remeasurement of deferred tax assets and liabilities and the recognition of an income tax benefit related to AMT tax credit carryforwards, is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA and the filing of the Company’s tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the TCJA may require further adjustments and changes in our estimates. The final determination of the effects of the TCJA will be completed as additional information becomes available, but no later than one year from the enactment of the TCJA. In all cases, we will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we gain a more thorough understanding of the tax law.
Net loss before income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Domestic, current
|
|
$
|
(7,995)
|
|
$
|
(8,048)
|
|
|
Total
|
|
$
|
(7,995)
|
|
$
|
(8,048)
|
|
The tax effects of significant items comprising the Company’s deferred taxes as of December 31 are as follows (numbers are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Federal and state net operating loss carryforwards
|
|
$
|
28,399
|
|
$
|
43,083
|
|
|
Research and development tax credit carryforwards
|
|
|
2,338
|
|
|
2,196
|
|
|
Stock based compensation
|
|
|
3,017
|
|
|
4,438
|
|
|
Other provision and expenses not currently deductible
|
|
|
877
|
|
|
1,335
|
|
|
Total deferred tax assets
|
|
|
34,631
|
|
|
51,052
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(721)
|
|
|
(1,141)
|
|
|
Prepaid expenses
|
|
|
(94)
|
|
|
(95)
|
|
|
Total deferred liabilities
|
|
|
(815)
|
|
|
(1,236)
|
|
|
Less valuation allowance
|
|
|
(33,816)
|
|
|
(49,816)
|
|
|
Net deferred tax asset
|
|
$
|
—
|
|
$
|
—
|
|
The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The effect on deferred tax assets and liabilities of changes in tax rates will be recognized as income or expense in the period that the change occurs. A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. Changes in circumstances, assumptions and clarification of uncertain tax regimes may require changes to any valuation allowances associated with the Company’s deferred tax assets.
As of December 31, 2017, the Company’s deferred tax assets were generated primarily from the federal and state net operating loss, stock based compensation and research and development tax credits. In assessing the realizability of deferred tax assets, management determined that it is more likely than not that none of the deferred tax assets will be realized. Therefore, the Company has provided a full valuation allowance against the deferred tax assets at December 31, 2017 and 2016.
As of December 31, 2017 and 2016, the Company had net deferred tax assets before its valuation allowance of approximately
$
35
million and
$51
million
,
respectively.
During the year ended December 31, 2017, the Company did not utilize its prior years’ net operating loss carryforwards. As of December 31, 2017, eMagin has federal and state net operating loss carryforwards of approximately
$133.5
million and
$8.3
million, respectively. The federal research and development tax credit carryforwards are approximately $2.3 million. The federal net operating losses and tax credit carryforwards will expire as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Research and
|
|
|
|
|
|
Operating
|
|
|
Development
|
|
|
|
|
|
Losses
|
|
|
Tax Credits
|
|
|
|
|
(in thousands)
|
|
|
2018-2020
|
|
$
|
44,639
|
|
$
|
809
|
|
|
2021-2024
|
|
|
42,814
|
|
|
-
|
|
|
2025-2037
|
|
|
46,054
|
|
|
1,529
|
|
|
|
|
$
|
133,507
|
|
$
|
2,338
|
|
The utilization of net operating losses is subject to a limitation due to the change of ownership provisions under Section 382 of the Internal Revenue Code and similar state provisions. Such limitation may result in the expiration of the net operating losses before their utilization. The Company has done an analysis regarding prior year ownership changes, and it has been determined that the Section 382 limitation on the utilization of net operating losses will currently not materially affect the Company's ability to utilize its net operating losses.
The difference between the statutory federal income tax rate on the Company's pre-tax loss and the Company's effective income tax rate is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2017
|
|
2016
|
|
|
U.S. Federal income tax benefit at federal statutory rate
|
|
|
34
|
%
|
|
34
|
%
|
|
Change in valuation allowance as a result of TCJA
|
|
|
(212)
|
|
|
-
|
|
|
Change in valuation allowance
|
|
|
179
|
|
|
(37)
|
|
|
Other, net
|
|
|
(1)
|
|
|
3
|
|
|
Effective tax rate
|
|
|
-
|
%
|
|
-
|
%
|
The Company did
not
have unrecognized tax benefits at December 31, 2017 and 2016. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2017 and 2016, the Company recognized
no
interest and penalties.
The Company files income tax returns in the U.S. federal jurisdiction, California, Florida, New York and Massachusetts. Due to the Company's operating losses, all tax years remain open to examination by major taxing jurisdictions to which the Company is subject.
Note 9 – 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. In conjunction with a registered equity offering in May 2017, the Company issued warrants that were immediately exercisable, to purchase
1,650,000
shares of common stock at an exercise price of
$2.45
all of which remain outstanding as of December 31, 2017.
The warrants have alternative settlement provisions at the option of the holder which 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, the company came to the understanding that in compliance with applicable securities laws, these registered warrants require the issuance of registered securities upon exercise and do not sufficiently preclude an implied right to net cash settlement. Accordingly, as of May 2017, we classified these warrants on the consolidated balance sheet as a current liability, which is 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 the based on our Black Sholes methodology, the liability for the May 2017 common stock warrants had an initial fair value of
$1.9
million and a fair value as of December 31, 2017, of $0.8 million. This $1.1 million change in fair market value during 2017 was reflected as income from change in the fair market value of common stock warrant liability in the consolidated statement of operations.
Note 10 – Shareholders’ Equity
Preferred Stock - Series B Convertible Preferred Stock (“the Preferred Stock – Series B”)
The Company has designated
10,000
shares of the Company’s preferred stock as Preferred Stock – Series B at a stated value of
$1,000
per share. The Preferred Stock – Series B is convertible into common stock at a conversion price of
$0.75
per share. The holders of the Preferred Stock – Series B are not entitled to receive dividends unless the Company’s Board of Directors declare a dividend for holders of the Company’s common stock and then the dividend shall be equal to the amount that such holder would have been entitled to receive if the holder converted its Preferred Stock – Series B into shares of the Company’s common stock. In the event of a liquidation, dissolution, or winding up of the Company, the Preferred Stock – Series B is entitled to receive liquidation preference before the Common Stock. The Company may at its option redeem the Preferred Stock – Series B by providing the required notice to the holders of the Preferred Stock – Series B and paying an amount equal to
$1,000
multiplied by the number of shares for all of such holder’s shares of outstanding Preferred Stock – Series B to be redeemed.
As of December 31, 2017 and 2016, there were
5,659
shares of Preferred Stock – Series B issued and
outstanding
.
Common Stock
During the year ended December 31, 2017, options to purchase
94,007
shares were exercised for proceeds of
$140
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.
9
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.
In August 2011, our Board of Directors approved a stock repurchase plan authorizing us to repurchase our common stock not to exceed
$2.5
million in total value.
No
shares were repurchased subsequent September 2012. As of December 31, 2017, authorization to repurchase
$2.0
million in value of our common stock remained under this plan.
Warrant Transactions
On August 18, 2016, we entered into letter agreements with certain of our warrant holders pursuant to which such warrant holders agreed to exercise warrants to purchase
2,216,500
shares of our common stock, at an exercise price of
$2.05
per share, which they acquired in December 2015.
On August 24, 2016, in consideration for the exercise of the
2,216,500
warrant shares, we issued new common stock purchase warrants (the “New Warrants”) to purchase
2,947,949
shares of our common stock which is equal to
133%
of the 2,216,500 warrant shares exercised. The New Warrants have an exercise price of
$2.60
per share, and are
not exercisable for
six
months from the date of issuance, and have a term of
five
and a half years from the issuance date.
We raised approximately
$4.3
million in net proceeds from the transaction, which was used for general corporate purposes.
At December 31, 2017, there were New Warrants outstanding to purchase
2,947,949
shares of Company’s common stock at an exercise price of
$2.60
, which expire in
February 2023
. Warrants to purchase
383,500
shares remaining from the December 2015
issuance were outstanding at December 31, 2017 at an exercise price of
$2.05
, which expire in June 2021.
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 described in Note 7: Line of Credit, all of which remain outstanding as of December 31, 2017.
On May 24, 2017, as described above, the Company issued warrants 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 December 31, 2017. As described above, in Note 9. Warrant Liability, the Company determined that these warrants are subject to liability accounting.
.
Based on applicable accounting guidance contained in ASC 815 "Derivative s and Hedging - Contracts in Entity's Own Equity", the Company has determined that all of its outstanding warrants qualify as equity instruments, with the exception of the May 2017 Warrants described above.
Note 11 – Stock Compensation
Employee stock purchase plan
In 2005, the shareholders approved the 2005 Employee Stock Purchase Plan (“ESPP”). The ESPP provides the Company’s employees with the opportunity to purchase common stock through payroll deductions. Employees may purchase stock semi-annually at a price that is
85%
of the fair market value at certain plan-defined dates. At December 31, 2016, the number of shares of common stock available for issuance was
300,000
. As of December 31, 2017, the plan had not been implemented.
Incentive compensation plans
The Amended and Restated 2003 Employee Stock Option Plan (the “2003 Plan”) provided for grants of shares of common stock and options to purchase shares of common stock to employees, officers, directors and consultants. The 2003 Plan terminated July 2, 2013.
No
additional options can be granted from the plan though options granted before the 2003 Plan terminated may be exercised until the grant expires.
The 2008 Incentive Stock Plan (the “2008 Plan”) adopted and approved by the Board of Directors on November 5, 2008 provides for grants of common stock and options to purchase shares of common stock to employees, officers, directors and consultants. The 2008 Plan has an aggregate of
2
million shares. In 2017, there were
no
options granted from the 2008 Plan.
The 2011 Incentive Stock Plan (the “2011 Plan”) was approved by the Company’s shareholders on November 3, 2011. The 2011 Plan provides for grants of common stock and options to purchase common stock to employees, officers, directors and consultants. The Board of Directors reserved
1.4
million shares of common stock for issuance under the 2011 Plan. On June 7, 2012, at the Company’s Annual Meeting, the shareholders approved an Amended and Restated 2011 Incentive Stock Plan which eliminated the evergreen provision and prohibits the repricing or exchange of stock options without shareholder approval. In 2017, there were no options granted from the 2011 Plan.
The 2013 Incentive Stock Plan (the “2013 Plan”) adopted and approved by the shareholders on May 17, 2013 provides for grants of common stock and options to purchase shares of common stock to employees, officers, directors and consultants. The 2013 Plan has an aggregate of
1.5
million shares. In 2017, there were
no
options granted from this plan.
The 2017 Incentive Stock Plan (the “2017 Plan”) adopted and approved by the shareholders on May 25, 2017 provides for grants of common stock and options to purchase shares of common stock to employees, officers, directors and consultants. The 2017 Plan has an aggregate of
2.0
million shares. In 2017, there were
498,803
options granted from this plan. Vesting terms of the options range from immediate vesting to a ratable vesting period of
5
years. Option activity for the year ended December 31, 2017 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
498,803
|
|
|
2.25
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(94,007)
|
|
|
1.49
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(192,281)
|
|
|
2.39
|
|
|
|
|
|
|
|
Options cancelled or expired
|
|
|
(499,418)
|
|
|
2.51
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
4,768,838
|
|
$
|
3.02
|
|
|
3.64
|
|
$
|
321,597
|
|
Vested or expected to vest at December 31, 2017 (1)
|
|
|
4,756,470
|
|
$
|
3.02
|
|
|
3.63
|
|
$
|
321,597
|
|
Exercisable at December 31, 2017
|
|
|
4,150,476
|
|
$
|
3.03
|
|
|
3.41
|
|
$
|
321,597
|
(1) The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total unvested options.
At December 31, 2017, there were
1,614,624
shares available for grant under the 2017, 2013, 2011, and 2008 Plans.
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 on December 31, 2017 for the options that were in-the-money. As of December 31, 2017 there were
1,369,286
option
s that were in-the-money. The Company’s closing stock price was
$1.65
as of December 31, 2017. The Company issues new shares of common stock upon exercise of stock options. The intrinsic value of the 2017 options exercised was
$7
thousand.
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 the Company’s expense categories for the years ended December 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
24
|
|
$
|
25
|
|
Research and development
|
|
|
97
|
|
|
164
|
|
Selling, general and administrative
|
|
|
507
|
|
|
582
|
|
Total stock compensation expense
|
|
$
|
628
|
|
$
|
771
|
At December 31, 2017, total unrecognized compensation costs related to stock options was approximately
$[1.0]
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
2.7
years.
The following key assumptions were used in the Black-Scholes option pricing model to determine the fair value of stock options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
Dividend yield
|
|
0
|
%
|
|
0
|
%
|
|
Risk free interest rates
|
|
0.71-1.65
|
%
|
|
0.84-1.56
|
%
|
|
Expected volatility
|
|
45.3
to
59.4
|
%
|
|
51.2
to
63.9
|
%
|
|
Expected term (in years)
|
|
3.5
to
5.0
|
|
|
3.5
to
5.0
|
|
The weighted average fair value per share for options granted in 2017 and 2016 was
$0.86
and
$1.00
, respectively.
There were
no
dividends declared or paid in 2017 or 2016. Though the Company paid a special one-time dividend in 2012, the Company does not expect to pay dividends in the near future; therefore, it used an expected dividend yield of
0%
. The risk-free interest rate used in the Black-Scholes option pricing model is based on the implied yield at the time of grant available 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 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.
Note 12 – Commitments and Contingencies
Operating Leases
The Company leases office facilities and office, lab and factory equipment under operating leases. Certain leases provide for payments of monthly operating expenses. The Company currently has lease commitments for space in Hopewell Junction, New York, and Santa Clara, California.
The Company’s corporate headquarters and manufacturing facilities are located in Hopewell Junction, New York. The Company leases approximately
42,000
square feet to house its equipment for OLED microdisplay fabrication, for research and development, and for administrative offices. The lease expires in
May 20
24
.
The Company leases approximately
2,000
square feet of office space for design and product development in Santa Clara, California and the lease expires in
October 2019
.
Rent expense was approximately
$1.0
million and
$1.0
million for each of the years ended December 31, 2017 and 2016. The future minimum lease payments for the years
2018
through
2024
are
$1.0
million
annually
.
Equipment Purchase Commitments
The Company has committed to equipment purchases of approximately
$5
thousand at
December 31, 2017
.
Employee benefit plans
eMagin has a defined contribution plan (the 401(k) Plan) under Section 401(k) of the Internal Revenue Code, which is available to all employees who meet established eligibility requirements. Employee contributions are generally limited to
15%
of the employee's compensation. Under the provisions of the 401(k) Plan, eMagin may match a portion of the participating employees' contributions. For the years ended December 31, 2017 and 2016, there was no employer match.
Change in Control agreements
On November 8, 2017, the Company entered into change in control agreements with certain of its executive officers, non-executive officers and managers. The change in control agreements provide that if the executive’s employment is terminated within the twelve-month period following a change in control of the Company, each executive officer will be entitled to receive a lump sum cash payment equal to their annual base salary and that the Company will pay the Executive’s monthly COBRA health continuation premiums for up to twelve months subsequent to the termination date. The change in control agreements signed with certain non-executive officers and managers are on similar terms, but upon an event of termination, provide for one-half of annual base salary and payment of monthly Cobra health continuation payment for up to six months.
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 litigation 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 2016, this former employee commenced action against the Company in Superior Court for the State of Washington. In February 2017, the former employee’s counsel sent a discovery request to the Company. In December 2017, the parties reached a settlement, upon signature of a related agreement, the expiration of a revocation period and payment of an amount not material to the Company.
Note 13 – Concentrations
The following is a schedule of revenue by geographic location (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
North and South America
|
|
$
|
11,834
|
|
|
$
|
12,664
|
|
|
Europe, Middle East, and Africa
|
|
|
7,299
|
|
|
|
7,293
|
|
|
Asia Pacific
|
|
|
2,898
|
|
|
|
1,440
|
|
|
Total
|
|
$
|
22,031
|
|
|
$
|
21,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
Domestic
|
|
|
54
|
%
|
|
|
58
|
%
|
|
International
|
|
|
46
|
%
|
|
|
42
|
%
|
The Company purchases principally all of its silicon wafers from
two
suppliers located in Taiwan and Korea, respectively.
In 2017, there was
one
customer that accounted for
11%
of total revenues and
4%
of accounts receivable as of December 31, 2017. In 2016, there was
one
customer that accounted for
11%
of total revenues and
4%
of accounts receivable as of December 31, 2016.
At December 31, 2017 and 2016, there were
ten
customers who comprised
63%
and
65%
, respectively, of accounts receivable. At December 31, 2017, the Company had
two
customers that accounted for
12%
and
9%
of accounts receivable and, at December 31, 2016, the Company had
two
customers that accounted for
17%
and
12%
of accounts receivable
Note 14 – Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for 2017 and 2016 are as follows (in thousands except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2017
|
|
|
2017 (1)
|
|
|
2017 (1)
|
|
|
2017
|
|
Revenues
|
|
$
|
6,069
|
|
$
|
5,260
|
|
$
|
4,280
|
|
$
|
6,422
|
|
Gross profit
|
|
$
|
1,818
|
|
$
|
1,249
|
|
$
|
278
|
|
$
|
1,779
|
|
Net loss before income tax
|
|
$
|
(1,999)
|
|
$
|
(2,322)
|
|
$
|
(2,587)
|
|
$
|
(1,087)
|
|
Net loss
|
|
$
|
(1,999)
|
|
$
|
(2,322)
|
|
$
|
(2,587)
|
|
$
|
(875)
|
|
Net loss per share - basic
|
|
$
|
(0.06)
|
|
$
|
(0.08)
|
|
$
|
(0.09)
|
|
$
|
(0.03)
|
|
Net loss per share - diluted
|
|
$
|
(0.06)
|
|
$
|
(0.08)
|
|
$
|
(0.09)
|
|
$
|
(0.03)
|
|
Weighted average number of shares outstanding - basic
|
|
|
31,628,997
|
|
|
33,019,478
|
|
|
34,972,589
|
|
|
34,989,530
|
|
Weighted average number of shares outstanding - diluted
|
|
|
31,628,997
|
|
|
33,019,478
|
|
|
34,972,589
|
|
|
34,989,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
Revenues
|
|
$
|
7,001
|
|
$
|
5,533
|
|
$
|
4,305
|
|
$
|
4,558
|
|
Gross profit
|
|
$
|
3,335
|
|
$
|
1,335
|
|
$
|
1,282
|
|
$
|
490
|
|
Net (loss) income before income tax
|
|
$
|
14
|
|
$
|
(2,164)
|
|
$
|
(2,430)
|
|
$
|
(3,468)
|
|
Net (loss) income
|
|
$
|
14
|
|
$
|
(2,164)
|
|
$
|
(2,431)
|
|
$
|
(3,468)
|
|
Net loss per share - basic
|
|
$
|
-
|
|
$
|
(0.07)
|
|
$
|
(0.08)
|
|
$
|
(0.11)
|
|
Net loss per share - diluted
|
|
$
|
-
|
|
$
|
(0.07)
|
|
$
|
(0.08)
|
|
$
|
(0.11)
|
|
Weighted average number of shares outstanding - basic
|
|
|
29,388,104
|
|
|
29,388,104
|
|
|
30,292,166
|
|
|
31,623,334
|
|
Weighted average number of shares outstanding - diluted
|
|
|
29,637,804
|
|
|
29,388,104
|
|
|
30,292,166
|
|
|
31,623,334
|
|
|
(1)
|
|
During preparation of its 2017 audited financial statements, the Company determined that common stock purchase warrants issued in May 2017, which were originally classified as equity instruments, should have been accounted for as a liability with subsequent changes in fair value reflected in the consolidated statement of operations. The unaudited results for the quarters ended June 30, and September 30, 2017 presented above, reflect an expense of $51 thousand and income of $405 thousand, respectively, related to changes in the fair value of this liability. Accordingly, the second and third quarter 2017 results presented above differ from the unaudited results originally filed for these periods.
|
Note 15 – Subsequent Events
On January 25, 2018 we entered into an underwriting agreement to issue and sell
9,807,105
shares of Company Common Stock, together with warrants to purchase
3,922,842
shares of Common Stock with an initial exercise price of
$1.55
per share (at a public offering price of
$1.35
per fixed combination consisting of one share of Common Stock and associated warrant to purchase
four
tenths of one share of Common Stock). These share and warrant amounts include the exercise of an overallotment option by the underwriter to purchase
1,279,187
additional shares of Common Stock and additional warrants to purchase
511,674
shares of Common Stock. The Common Stock and Warrants were registered on a Form S-1. The offering closed on
January 29, 2018
and the Company received net proceeds after underwriting discounts and expenses of
$11.9
million.
In a concurrent private placement,
certain of our directors and officers purchased an aggregate of
203,708
shares of Common Stock, together with warrants to purchase up to
81,487
shares of Common Stock at the public offering price per fixed combination. The sale of these shares of common stock and warrants was not registered under the Securities Act and is subject to a 180-day lock-up. The private placement closed on
February 15, 2018
, and the Company received net proceeds of
$0.3
million