Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-15751

eMAGIN CORPORATION

(Exact name of registrant as specified in its charter)


Delaware	56-1764501
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

700 South Drive, Suite 201, Hopewell Junction, NY 12533

(Address of principal executive offices) (Zip Code)

(845) 838-7900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.001 Par Value Per Share	EMAN	NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ¨		Smaller Reporting Company þ
Accelerated filer ¨		Emerging growth company ¨
Non-accelerated Filer þ

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No þ

As of April 30, 2022 there were 73,421,142 common shares at $0.001 par value per share of the registrant outstanding.

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		Page
PART I - FINANCIAL INFORMATION
Item 1	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021	5
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021 (unaudited)	6
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2022 and 2021 (unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4	Controls and Procedures	28

PART II - OTHER INFORMATION
Item 1	Legal Proceedings	29
Item 1A	Risk Factors	29
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3	Defaults Upon Senior Securities	29
Item 4	Mine Safety Disclosures	29
Item 5	Other Information	29
Item 6	Exhibits	30
SIGNATURES		30

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STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q, or Report, contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect our results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed in the section entitled “Risk Factors” in this Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Report and the documents that we reference in this Report and have filed with the Securities and Exchange Commission, or the SEC, as exhibits to this Report, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

In particular, forward-looking statements in this Report include statements about:

our ability to generate sufficient cash flows and obtain the additional financing we need in order to continue as a going concern;

our ability to generate additional revenue or secure additional financing when required, in order to continue our current operations;

our ability to manufacture our products on a timely basis and at a competitive cost;

our ability to successfully remediate manufacturing issues that have resulted in production delays and successfully integrate new equipment on our manufacturing line;

our ability to achieve our yield improvement initiatives;

our ability to meet our obligations as they become due over the next twelve months;

our needs for additional financing, as well as our ability to obtain such additional financing on reasonable terms and the interest rate and expense we incur on any debt financing;

our ability to maintain our operations as a result of potential employee, customer and supplier disruptions caused by the COVID-19 pandemic or any resurgences and quarantine restrictions;

our anticipated cash needs and our estimates regarding our capital requirements;

our ability to repay our indebtedness pursuant to the asset based lending, or ABL, facility;

our ability to maintain our relationships with customers and vendors;

our ability to protect our intellectual property;

our ability to successfully develop and market our products to customers;

our ability to generate customer demand for our products in our target markets;

the development of our target markets and market opportunities, including the consumer market;

technological developments in our target markets and the development of alternate, competing technologies in them;

the rate of acceptance of augmented reality/virtual reality, or AR/VR, systems and products in the consumer and commercial marketplace;

our potential exposure to product liability claims;

our ability to meet customers’ delivery schedules;

market pricing for our products and for competing products;

the impact of the majority holder of our Series B convertible stock, being able to prevent us from entering into significant corporate transactions, including certain capital raising transactions;

changes in demand by original equipment manufacturer, or OEM, customers for advanced microdisplays, limited availability of suppliers and foundries, high costs of raw materials, pricing pressure brought by the marketplace or governmental customers and other factors that impact the commercial, military and consumer markets in which we operate;

increasing competition;

our ability to comply with the terms of government awards; and

provisions in certain of our organizational documents, commercial agreements, government awards, and our military contracts that may prevent or delay an acquisition of, partnership with, or investment in us and our ability to develop original equipment manufacturer and mass production partnerships.

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The forward-looking statements in this Report represent our views as of the date of this Report. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. Therefore, these forward-looking statements do not represent our views as of any date other than the date of this Report.

In this Report, references to “eMagin Corporation,” “eMagin,”, “we,” “us,” and “our company” refer to eMagin Corporation and our wholly owned subsidiary, Virtual Vision, Inc.

eMagin® is a registered trademark of eMagin Corporation. dPd^TM is an unregistered trademark of eMagin. All other trademarks used in this Annual Report are the property of their respective owners.

‎

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ITEM 1. Financial Statements

eMAGIN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(unaudited)


	March 31,		December 31,
	2022		2021
ASSETS
Current assets:
Cash and cash equivalents	$	3,857	$	5,724
Restricted cash		875		806
Accounts receivable, net		4,340		4,488
Account receivable-due from government awards		1,660		292
Unbilled accounts receivable		1,391		1,102
Inventories		8,167		7,632
Prepaid expenses and other current assets		943		691
Total current assets		21,233		20,735
Property, plant and equipment, net		36,905		30,483
Operating lease right - of - use assets		99		113
Intangibles and other assets		35		37
Total assets	$	58,272	$	51,368

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,964	$	1,348
Accrued compensation		1,913		1,664
Revolving credit facility, net		1,506		1,974
Common stock warrant liability		228		1,374
Other accrued expenses		490		722
Deferred revenue		12		54
Operating lease liability - current		61		60
Finance lease liability - current		1,129		1,133
Other current liabilities		510		608
Total current liabilities		9,813		8,937
Other liability - long term		28		28
Deferred income - government awards - long term		18,014		12,458
Operating lease liability - long term		38		54
Finance lease liability - long term		11,647		11,647
Total liabilities		39,540		33,124

Commitments and contingencies (Note 8)

Shareholders’ equity:
Preferred stock, $0.001 par value: authorized 10,000,000 shares:
Series B Convertible Preferred stock, (liquidation preference of $5,659) stated value $1,000 per share, $0.001 par value: 10,000 shares designated and 5,659 issued and outstanding as of March 31, 2022 and December 31, 2021.		—		—
Common stock, $0.001 par value: authorized 200,000,000 shares, issued 73,336,576 shares, outstanding 73,174,510 shares as of March 31, 2022 and issued 72,931,490 shares, outstanding 72,769,424 shares as of December 31, 2021.		72		72
Additional paid-in capital		276,561		275,936
Accumulated deficit		(257,401)		(257,264)
Treasury stock, 162,066 shares as of March 31, 2022 and December 31, 2021.		(500)		(500)
Total shareholders’ equity		18,732		18,244
Total liabilities and shareholders’ equity	$	58,272	$	51,368

See notes to Condensed Consolidated Financial Statements.

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eMAGIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(unaudited)


	Three Months Ended
	March 31,
	2022		2021
Revenues:
Product	$	7,027	$	6,105
Contract		331		668
Total revenues, net		7,358		6,773

Cost of revenues:
Product		4,787		4,707
Contract		82		358
Total cost of revenues		4,869		5,065

Gross profit		2,489		1,708

Operating expenses:
Research and development		1,484		1,842
Selling, general and administrative		2,170		1,824
Total operating expenses		3,654		3,666

Loss from operations		(1,165)		(1,958)

Other (expense) income:
Change in fair value of common stock warrant liability		1,146		(7,208)
Interest expense, net		(214)		(210)
Gain on forgiveness of debt		—		1,963
Other income, net		96		35
Total other income (expense)		1,028		(5,420)
Loss before provision for income taxes		(137)		(7,378)
Income taxes		—		—

Net loss	$	(137)	$	(7,378)

Loss per share, basic and diluted	$	—	$	(0.10)

Weighted average number of shares outstanding:
Basic and Diluted		72,835,629		70,272,302

See notes to Condensed Consolidated Financial Statements.

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eMAGIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

(In thousands, except share data)

(unaudited)


	Preferred Shares		Preferred Stock		Common Shares		Common Stock		Additional Paid-in Capital		Accumulated Deficit		Treasury Stock		Total Shareholders’ Equity
Balance, December 31, 2021		5,659	$	—		72,931,490	$	72	$	275,936	$	(257,264)	$	(500)	$	18,244
Stock based compensation		—		—		—		—		165		—		—		165
Public offering of common shares, net of offering costs		—		—		405,086		—		460		—		—		460
Net loss		—		—		—		—		—		(137)		—		(137)
Balance, March 31, 2022		5,659	$	—		73,336,576	$	72	$	276,561	$	(257,401)	$	(500)	$	18,732


	Preferred Shares		Preferred Stock		Common Shares		Common Stock		Additional Paid-in Capital		Accumulated Deficit		Treasury Stock		Total Shareholders’ Equity
Balance, December 31, 2020		5,659	$	—		68,890,819	$	69	$	268,729	$	(252,058)	$	(500)	$	16,240
Exercising of options		—		—		227,792		—		364		—		—		364
Stock based compensation		—		—		—		—		13						13
Exercise of common stock warrants		—		—		3,019,247		3		5,059		—		—		5,062
Net loss		—		—		—		—		—		(7,378)		—		(7,378)
Balance, March 31, 2021		5,659	$	—		72,137,858	$	72	$	274,165	$	(259,436)	$	(500)	$	14,301

See notes to Condensed Consolidated Financial Statements.

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eMAGIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Three Months Ended
	March 31,
	2022		2021
Cash flows from operating activities:
Net loss	$	(137)	$	(7,378)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		722		733
Change in fair value of common stock warrant liability		(1,146)		7,208
Gain on forgiveness of debt		—		(1,963)
Stock-based compensation		165		13
Amortization of operating lease right-of-use assets		14		15
Changes in operating assets and liabilities:
Accounts receivable		(1,220)		893
Unbilled accounts receivable		(289)		(121)
Inventories		(535)		(34)
Prepaid expenses and other current assets		(252)		(152)
Deferred revenues		(42)		(301)
Operating lease liabilities		(15)		(15)
Accounts payable, accrued expenses, and other current liabilities		2,607		(52)
Net cash used in operating activities		(128)		(1,154)
Cash flows from investing activities:
Purchase of equipment		(474)		(127)
Purchase of equipment, government grant		(6,599)		(1,582)
Net cash used in investing activities		(7,073)		(1,709)
Cash flows from financing activities:
Repayments under revolving line of credit, net		(468)		(1,676)
Proceeds from public offering, net		460		—
Change in finance lease liabilities		(74)		(57)
Proceeds from government grant		5,485		1,120
Proceeds from warrant exercise		—		5,062
Proceeds from exercise of stock options		—		364
Net cash provided by financing activities		5,403		4,813
Net (decrease) increase in cash, cash equivalents, and restricted cash		(1,798)		1,950
Cash, cash equivalents, and restricted cash, beginning of period		6,530		10,426
Cash, cash equivalents, and restricted cash, end of period	$	4,732	$	12,376
Cash, cash equivalents, end of period		3,857		10,705
Restricted cash, end of period		875		1,671

Supplementary Cash Flow Information
Cash paid for interest	$	214	$	210
Cash paid for income taxes	$	—	$	—

Non-cash activities:
Right-of-use assets obtained in exchange for finance lease liabilities	$	69	$	8

See notes to Condensed Consolidated Financial Statements.

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eMAGIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Description of the Business and Summary of Significant Accounting Policies

The Business

eMagin Corporation, or the Company, designs, develops, manufactures and markets Active Matrix organic light emitting diode, or OLED, -on-silicon microdisplays used in military and commercial AR/VR devices and other near-eye imaging products which utilize OLED microdisplays. The Company’s products are sold mainly in North America, Asia, and Europe.

Basis of Presentation

In the opinion of management, the accompanying unaudited interim Condensed Consolidated Financial Statements of eMagin Corporation and its subsidiary reflect all adjustments, including normal recurring accruals, necessary for a fair presentation. All significant intercompany balances and transactions have been eliminated in consolidation. 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. Certain information and footnote disclosure normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the SEC. These unaudited Condensed Consolidated Financial Statements, and related disclosures, should be 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, 2021. The results of operations for the periods ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year. The Consolidated Financial Statements as of December 31, 2021 are derived from audited financial statements included in the Company’s 2021 Form 10-K.

Use of estimates

In accordance with GAAP, management utilizes certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments related to, among others, allowance for doubtful accounts, warranty reserves, inventory reserves, stock-based compensation expense, liability classified warrants, percentage of completion of contracts, deferred tax asset valuation allowances, litigation and other loss contingencies. Management bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Intangible Assets – Patents

Acquired patents are recorded at purchase price as of the date acquired and amortized over the expected useful life which is generally the remaining life of the patent.

The total intangible amortization expense was approximately $2 thousand for both the three months ended March 31, 2022 and 2021.

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.

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The following table provides a summary of the activity related to the Company's warranty liability included in other current liabilities, during the three months ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended
	March 31,
	2022		2021
Beginning balance	$	519	$	615
Warranty accruals and adjustments		(100)		(142)
Warranty claims		(3)		(8)
Ending balance	$	416	$	465

Earnings per Common Share

Basic earnings 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, restricted stock units and convertible preferred stock. Diluted earnings 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, or 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 earnings per share. Diluted earnings per share must be calculated under both the treasury stock and two-class method, and the calculation that results in the most dilutive earnings per share amount for the common stock is reported. 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. In accordance with the Preferred Stock – Series B agreements, the conversion price was adjusted to $0.3033 per share in December 2019, and the resultant, if converted common shares are reflected in the table of anti-dilutive common stock equivalents below.

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 months ended March 31, 2022 and 2021:


	Three Months Ended
	March 31,
	2022		2021
Net income (loss)	$	(137)	$	(7,378)
Income allocated to participating securities		—		—
Income (loss) allocated to common shares	$	(137)	$	(7,378)

Change in fair value of warrant liability⁽¹⁾	$	—	$	—
Income (loss) allocated to common shares ‎ - Diluted	$	(137)	$	(7,378)

Weighted average common shares outstanding ‎ - Basic		72,835,629		70,272,302
Dilutive effect of liability classified warrants		—		—
Weighted average common shares outstanding - Diluted⁽¹⁾		72,835,629		70,272,302

Net income (loss) per share:
Basic	$	-	$	(0.10)
Diluted	$	-	$	(0.10)

(1)For the three months ended March 31, 2022 and 2021, income (loss) allocated to common shares, and the weighted average shares used for calculating basic and diluted earnings per share exclude the assumed impact of exercise liability classified warrants, because it would be anti-dilutive to the earnings per share calculation.

In calculating net income (loss) per share amounts, all shares underlying the potentially dilutive common stock equivalents were excluded from the calculation of diluted net income (loss) per common share in both periods, because their effect was anti-dilutive.

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The following table sets forth the potentially dilutive common stock equivalents for the three months ended March 31, 2022 and 2021 that were not included in diluted earnings per share, or EPS, as their effect would be anti-dilutive:


	Three Months Ended
	March 31,
	2022		2021
Restricted Stock Units		454,956		—
Options		3,360,426		4,098,256
Warrants		3,100,000		9,701,474
Convertible preferred stock		18,726,009		18,726,009
Total potentially dilutive common stock equivalents		25,641,391		32,525,739

Government Funding

The Company accounts for awards received from the U.S. Government for procurement of capital equipment after reviewing the terms of the underlying award contract, and in accordance with contract and equipment purchase milestones and accounting principles for grant accounting. For awards in which the Company will hold title to the underlying equipment, the Company initially records amounts invoiced to the U.S. Government for equipment progress payments on the accompanying Condensed Consolidated Balance Sheets as Deferred Income – Government Awards – long term and Accounts Receivable – due from Government Awards. The Company records such progress payments made to capital equipment vendors in Property, plant and equipment. Amounts recorded in Deferred Income – Government Awards – long term are recognized as Other Income on the accompanying Condensed Consolidated Statement of Operations on a systematic basis as depreciation and other expenses are incurred over the useful life of the capital equipment.

Restricted Cash

The Company accounts for cash received pursuant to U.S. Government funding, that is legally restricted for procurement of capital equipment, as Restricted Cash on the accompanying Condensed Consolidated Balance Sheets. Restricted Cash amounts are received from the U.S. Government in advance of progress payments required for various program related capital equipment purchases and are disbursed by the Company to related equipment vendors.

Fair Value of Financial Instruments

Cash, cash equivalents, accounts receivable, short-term investments and accounts payable are stated at cost, which approximates fair value, due to the short-term nature of these instruments. The asset based lending facility, or the ABL Facility, is also stated at cost, which approximates fair value because the interest rate is based on a market based rate plus a margin.

The Company has categorized its assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy in accordance with GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3).

Assets and liabilities recorded in the Condensed Consolidated Balance Sheets at fair value are categorized based on a hierarchy of inputs as follows:

Level 1 – Unadjusted quoted prices in active markets of identical assets or liabilities.

Level 2 – Quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

Level 3 – Unobservable inputs for the asset or liability.

The common stock warrant liability is currently the only financial asset or liability recorded at fair value on a recurring basis and is considered a Level 3 liability. The fair value of the common stock warrant liability is included in current liabilities on the Condensed Consolidated Balance Sheets, as the warrants are currently exercisable.

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The following table shows the reconciliation of the Level 3 warrant liability measured and recorded at fair value on a recurring basis, using significant unobservable inputs (in thousands):


	Estimated Fair Value
Balance as of January 1, 2022	$	1,374
Change in fair value of warrant liability, net		(1,146)
Balance as of March 31, 2022	$	228

The fair value of the liability for common stock purchase warrants at issuance and at March 31, 2022 was 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. Inputs to the model at March 31, 2022 included remaining contractual terms of the warrants ranging from 0.17 to 0.83 years, at risk-free interest rates ranging from 0.45% to 1.78% with no expected dividends, and expected volatility of the price of the underlying common stock ranging from 36.68% to 45.86%.

Concentrations

The Company purchases principally all of its silicon wafers, which are a key ingredient in its OLED production process, from two suppliers located in Taiwan and Korea.

For the three months ended March 31, 2022, one customer of 23.7% accounted for over 10% of net revenues. As of March 31, 2022, the Company had accounts receivable from that one customer that accounted for 29.9% of all accounts receivable. For the three months ended March 31, 2021, there were two customers of 13.7% and 12.0%, who accounted for over 10% of the Company’s net revenues.

Liquidity and Going Concern

The accompanying Condensed Consolidated Financial Statements have been prepared on a going concern basis, which assumes that the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. For the three months ended March 31, 2022, the Company incurred a net loss of $0.1 million and used cash in operating activities of $0.1 million. As of March 31, 2022, the Company had $3.9 million of cash, $1.5 million of outstanding indebtedness and borrowing availability of $1.4 million under its ABL Facility.

The Company’s ABL Facility expires on December 31, 2022, and renews automatically for another year unless terminated pursuant to its terms. The ABL Facility agreement contains certain lenders remedies that give the bank the ability to impose discretionary reserves against our borrowing availability or terminate the facility upon events of default. Although our relationship with the lender is positive, there is no assurance the lender will renew or extend this facility or continue to make funds available during 2022 and beyond at present availability levels, or at all.

Due to continuing losses, the Company’s financial position, and uncertainty regarding the Company’s ability to borrow under its ABL Facility, or continue to raise funds under its ATM facility, the Company may not be able to meet its financial obligations as they become due without additional financing or sources of capital. In addition, the COVID-19 pandemic has significantly increased economic and demand uncertainty across the globe and contributed to supply chain shortages and disruptions. Although demand for the Company’s products has remained steady, the Company’s ability to obtain components and other materials or services on a timely basis has resulted in manufacturing delays, and increased costs. If these trends worsen as a result of COVID-19 or other semiconductor supply chain issues or result in lost orders it could materially and adversely affect its business, financial condition, and results of operations. Management is prepared to reduce expenses and raise additional capital, but there can be no assurance that the Company will be successful in sufficiently reducing expenses or raising capital to meet its operating needs.

The Company has taken actions to increase revenues and to reduce expenses and is considering financing alternatives. The Company’s plans with regard to these matters include the following actions: 1) focus production and engineering resources on improving manufacturing yields and increasing production volumes, 2) continue a Work Status Reduction program that began in October 2019 wherein senior management work status was reduced by approximately 20%, 3) continue to utilize government grants for purchase of capital equipment and funding manufacturing personnel, 4) reduce discretionary and other expenses, 5) seek to enter new markets, 6) sell shares under it’s At the Market or ATM equity facility entered into in November 2021, and 7) consider additional financing and/or strategic alternatives.

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The Company is reassessing its business plans and forecasts over the next two years. Based on its known cash needs as of May 2022, and the anticipated availability of its ABL facility, the Company has developed plans to extend its liquidity to support its working capital requirements through the first quarter of 2023.

However, there can be no assurance the Company’s plans will be achieved and the Company will be able to meet its financial obligations as they become due without obtaining additional financing or sources of capital. Therefore, in accordance with applicable accounting guidance, and based on the Company’s current financial condition and availability of funds, there is substantial doubt about the Company’s ability to continue as a going concern through twelve months from the date these financial statements were issued.

Recently adopted accounting pronouncements

The Company's accounting policies are the same as those described in Note 1 to the Company's Consolidated Financial Statements in its 2021 Form 10-K.

Recently issued accounting pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) and subsequently issued amendments. The guidance affects the Company's accounts receivable, and it requires the measurement of expected credit losses to be based on relevant information from past events, including historical experiences, current conditions and reasonable and supportable forecasts that affect collectability. This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Based on the composition of the Company's receivables, current market conditions and historical credit loss activity, the Company is currently evaluating the impact of this ASU on the Condensed Consolidated Financial Statements.

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This guidance changes how entities account for convertible instruments and contracts in an entity's own equity and simplifies the accounting for convertible instruments by removing certain separation models for convertible instruments. This guidance also modifies the guidance on diluted earnings per share calculations. This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company is currently evaluating the impact of this ASU on the Condensed Consolidated Financial Statements.

Note 2 – Revenue Recognition

All of the Company’s revenues are earned from contracts with customers and are classified as either Product or Contract revenues. Contract revenues include R&D activities performed pursuant to written agreements and purchase orders, as well as arrangements that are implied by customary practices or law.

Product revenue is generated primarily from contracts to produce, ship and deliver OLED microdisplays. The Company’s performance obligations are satisfied, control of our products is transferred, and revenue is recognized at a single point in time when control transfers to our customer for product shipped. The Company’s customary terms are FOB our factory and control is deemed to transfer upon shipment. The Company has elected to treat shipping and other transportation costs charged to customers as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. As customers are invoiced at the time control transfers and the right to consideration is unconditional at that time, the Company does not maintain contract asset balances for product revenue. Additionally, the Company does not maintain contract liability balances for product revenues, as performance obligations are satisfied prior to customer payment for product. The Company generally offers a one year product warranty, for replacement of product only, and does not allow returns. The Company offers industry standard payment terms that typically require payment from our customers from 30 to 60 days after title transfers.

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The Company also recognizes revenues under the over time method from certain research and development, or R&D, activities (contract revenues) under both firm fixed-price contracts and cost-type contracts. Progress and revenues from research and development activities relating to firm fixed-price contracts and cost-type contracts are generally recognized on an input method of accounting as costs are incurred. Under the input method, revenue is recognized based on efforts expended to date (e.g., the costs of resources consumed or labor hours worked, or machine hours used) relative to total efforts intended to be expended. Contract costs include all direct material, labor and subcontractor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates. These rates are subject to audit by the other party. Any changes in estimate related to contract accounting are accounted for prospectively over the remaining life of the contract. Under the over time method, billings may not correlate directly to the revenue recognized. Based upon the terms of the specific contract, billings may be in excess of the revenue recognized, in which case the amounts are included in deferred revenues as a liability on the Condensed Consolidated Balance Sheets. Likewise, revenue recognized may exceed customer billings in which case the amounts are reported as unbilled receivables. Unbilled revenues are expected to be billed and collected within one year.

Costs to Obtain and Fulfill a Contract

The incidental costs related to obtaining product sales contracts are non-recoverable from customer and, accordingly, are expenses as incurred. The Company capitalizes costs incurred to fulfil its R&D contracts that i) relate directly to a contract or anticipated contract, ii) are expected to satisfy the Company’s performance obligation under the contract, and iii) are expected to be recovered through revenue generated under the contract. Contact fulfillment costs are expensed to cost of revenue as the related performance obligations are satisfied.

Disaggregation of Revenue

The Company sells products directly to military contractors and OEM’s who use the Company’s displays in a diverse range of applications encompassing the military and commercial, including medical and industrial, market sectors. Revenues are classified as either military, commercial, consumer or multiple based on management’s knowledge of the customer’s products and markets served by displays or the R&D contract work. Revenues classified as multiple are for sales to customers that incorporate the Company’s displays in products that could be used for either military or commercial applications. R&D activities are performed for both military customers and U.S. Government defense related agencies and consumer companies. Product and contract revenues are disclosed on the Condensed Consolidated Statements of Operations.

Additional disaggregated revenue information for the three months ended March 31, 2022 and 2021 were as follows (in thousands):


	Three Months Ended
	March 31,
	2022		2021
North and South America	$	4,326	$	3,303
Europe, Middle East, and Africa		2,920		2,531
Asia Pacific		112		939
Total	$	7,358	$	6,773


	Three Months Ended
	March 31,
		2022		2021
Military	$	5,360	$	3,875
Commercial, including industrial and medical		977		980
Consumer		289		650
Multiple		732		1,268
Total	$	7,358	$	6,773

Accounts Receivable from Customers

Accounts receivable, net of allowances, were $4.3 million and $4.5 million as of March 31, 2022 and December 31, 2021.

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Contract Assets and Liabilities

Unbilled Accounts Receivables (Contract Assets) - Pursuant to the over time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled accounts receivable is recorded to reflect revenue that is recognized when the cost based input method is applied and such revenue exceeds the amount invoiced to the customer. Unbilled receivables are disclosed on the Condensed Consolidated Balance Sheets.

Customer Advances and Deposits (Contract Liabilities) - The Company recognizes a contract liability when it has billed and received consideration from the customer pursuant to the terms of a contract but has not yet recognized the related revenue. These billings in excess of revenue are classified as deferred revenue on the Condensed Consolidated Statements of Operations.

Total contract assets and liabilities consisted of the following amounts (in thousands):


	March 31,		December 31,
	2022		2021

Unbilled Receivables (contract assets)	$	1,391	$	1,102

Deferred Revenue (contract liabilities)	$	12	$	54

For the three months ended March 31, 2022 the Company recognized $42 thousand of revenue related to its contract liabilities that existed at December 31, 2021. For the three months ended March 31, 2021 the Company recognized $286 thousand of revenue related to its contract liabilities that existed at December 31, 2020.

Remaining Performance Obligations

The Company has elected the practical expedient, which allows disclosure of remaining performance obligations only for contracts with an original duration of greater than one year. Such remaining performance obligations primarily relate to engineering and design services. As of March 31, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $0.3 million. The Company expects to recognize revenue on all of its remaining performance obligations over the next 12 months.

Note 3 – Accounts Receivable

The majority of the Company’s commercial accounts receivable are due from OEM’s. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required.

Accounts receivable consisted of the following (in thousands):


	March 31,		December 31,
	2022		2021
Accounts receivable	$	4,479	$	4,627
Less allowance for doubtful accounts		(139)		(139)
Accounts receivable, net	$	4,340	$	4,488

Note 4 – Inventories, net

The components of inventories are as follows (in thousands):


	March 31,		December 31,
	2022		2021
Raw materials	$	3,402	$	3,517
Work in process		2,506		2,149
Finished goods		2,627		2,363
Total inventories		8,535		8,029
Less inventory reserve		(368)		(397)
Total inventories, net	$	8,167	$	7,632

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Note 5 – Line of Credit / Loan Payable

Revolving Credit Facility


	March 31,		December 31,
(in thousands)	2022		2021
Revolving credit facility	$	1,506	$	1,974

On December 21, 2016, the Company entered into the ABL Facility with a lender that provides for up to a maximum amount of $5 million based on a borrowing base equivalent to 85% of eligible accounts receivable plus the lesser of $2 million or 50% of eligible inventory. The interest on the ABL Facility is equal to the Prime Rate plus 3% but may not be less than 6.5% with a minimum monthly interest payment of $2 thousand. The Company is also obligated to pay the lender a monthly administrative fee of $1 thousand and an annual facility fee equal to 1% of the maximum amount borrowable under the facility.

The ABL Facility renewed on December 31, 2021 and will automatically renew on December 31, 2022 for a one year term unless written notice to terminate the agreement is provided by either party. 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 Consolidated Balance Sheet.

The ABL Facility contains customary representations and warranties, affirmative and negative covenants and events of default. The Company is required to maintain a minimum tangible net worth of $13 million and a minimum working capital balance of $4 million at all times. As of March 31, 2022 the Company had $1.5 million in borrowings outstanding under the ABL Facility, had unused borrowing availability of $1.4 million under the ABL Facility and was in compliance with all financial debt covenants under the ABL Facility.

Promissory Note under the Paycheck Protection Program

On June 8, 2020, the Company received a loan under the U.S. Small Business Administration’s, or SBA, Paycheck Protection Program, or PPP, from KeyBank National Association related to the COVID-19 pandemic in the amount of $1.9 million at an interest rate of 1% per annum. The Company used the proceeds to pay qualified payroll costs, in accordance with loan requirements and applied for forgiveness of the entire loan in the fourth quarter of 2020. During the first quarter of 2021 the entire loan amount was forgiven and recorded in the Condensed Consolidated Statements of Operations as gain on forgiveness of debt.

Note 6 – Stock Compensation

The Company uses the fair value method of accounting for share-based compensation arrangements. The fair value of stock options is estimated at the date of grant using the Black-Scholes option valuation model. Stock-based compensation expense is reduced for estimated forfeitures and is amortized over the vesting period using the straight-line method.

The fair value of Restricted Stock Units, or RSU’s is established by the market price of the Company’s common stock at the date of grant and for time based grants, is amortized over the vesting period using the straight line method. Performance-based RSUs are typically granted such that they vest upon the achievement of EBITDA targets, during a specified performance period, subject to the satisfaction of certain time-based service criteria. Compensation expense from these awards is equal to the fair market value of the Company’s ordinary shares on the date of grant and is recognized over the remaining service period based on the probable outcome of achievement of the financial metrics used in the specific grant’s performance criteria. Management’s estimate of the number of shares expected to vest is based on the anticipated achievement of the specified non-market performance criteria, which are assessed at each reporting period.

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The following table summarizes the allocation of non-cash stock-based compensation to our expense categories for the three months ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended
	March 31,
	2022		2021
Cost of revenues	$	28	$	—
Research and development		36		4
Selling, general and administrative		101		9
Total stock compensation expense	$	165	$	13

The following table summarizes the Company’s stock-based compensation expense by each award type:


	Three Months Ended
	March 31,
	2022		2021
Stock options	$	70	$	13
Restricted Share Units		95		—
Total stock compensation expense	$	165	$	13

At March 31, 2022, total unrecognized compensation costs related to stock options and RSUs was approximately $48 thousand and $1.0 million, respectively, net of estimated forfeitures. Total unrecognized compensation cost for stock options and RSUs will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of approximately 0.2 years and approximately 2.3 years, respectively.

Stock Option Summary

The following key assumptions were used in the Black-Scholes option pricing model to determine the fair value of stock options granted:


	Three Months Ended
	March 31,
	2022				2021
Dividend yield			0	%			0	%
Risk free interest rates	0.89	-	0.95	%	1.77	-	2.48	%
Expected volatility	75.9	to	79.0	%	41.7	to	49.2	%
Expected term (in years)	5.0	to	5.5		3.5	to	4.0

The Company does not expect to pay dividends in the near future. Therefore, the Company used an expected dividend yield of 0%. The risk-free interest rate used in the Black-Scholes option pricing model is based on applicable yield available at the date of the option grant on U.S. Treasury securities with an equivalent term. Expected volatility is based on the weighted average historical volatility of the Company’s common stock for the equivalent term. The expected term of the options represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience and vesting schedules of similar awards.

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A summary of the Company’s stock option activity for the three months ended March 31, 2022 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, 2021		3,712,867	$	1.81
Options granted		—		—
Options exercised		—		—
Options forfeited		(5,000)		0.40
Options cancelled or expired		(347,441)		3.64
Outstanding at March 31, 2022		3,360,426	$	1.62	3.40	$	689,569
Vested or expected to vest at March, 31 2022 ⁽¹⁾		3,360,005	$	1.62	3.40	$	689,569
Exercisable at March 31, 2022		3,254,426	$	1.56	3.21	$	689,569

(1)The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total unvested options.

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock. The Company issues new shares of common stock upon exercise of stock options. There were no options were exercised in the three months ended March 31, 2022.

Restricted Stock Units (“RSU”) Summary

The following table summarized the activity in respect of RSUs issued under the Company for the three months ended March 31, 2022:


						Weighted Average Grant Date
		Number of Awards				Fair Value Per Share

	Service		Performance		Service		Performance
	based		based		based		based
RSUs outstanding, beginning of period		405,453		103,047	$	3.52	$	3.60
Granted		73,481		—		1.17		—
Vested and settled		—		—		—		—
Forfeited		(23,978)		—		3.60		—
RSUs outstanding, end of period		454,956		103,047	$	3.13	$	3.60

Note 7 – Income Taxes

The Company’s effective tax rate is calculated quarterly based upon current assumptions relating to the full year’s estimated operating results and various tax-related items. The Company’s effective tax rate was 0% for the three months ended March 31, 2022 and 2021. The difference between the effective tax rate of 0% and the U.S. federal statutory rate of 21% for three months ended March 31, 2022 and 2021 was primarily due to recognizing a full valuation allowance on deferred tax assets.

The Company determined that, based on all available evidence, both positive and negative, including the Company’s latest forecasts and cumulative losses in recent years, it was more likely than not that none of its deferred tax assets would be realized and therefore it continued to record a full valuation allowance as of March 31, 2022.

The Company’s 2017 and prior net operating loss carry-forward amounts expire through 2037 and are subject to certain limitations that may occur due to a change in the ownership provisions under Section 382 of the Internal Revenue Code and similar state provisions. Pursuant to provisions of the Tax Cuts and Jobs Act, the net operating losses originating in years subsequent to 2017 can be carried forward indefinitely.

Due to the Company’s operating loss carry-forwards, all tax years remain open to examination to the extent of the operating loss carry-forward 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.

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On March 27, 2020, the President of the United States signed the CARES Act. The CARES Act provides several provisions that effect businesses from an income tax perspective. Due to the history of the tax losses, most of the CARES Act provisions have no current benefit to the Company. The Company can, however, benefit from one provision, which allows for the immediate refund of the Alternative Minimum Tax Credit, or AMT Credit, previously recognized as deferred tax asset. The Company has filed an amendment to claim the AMT Credit and is anticipating a refund of $212 thousand. This tax receivable was recorded during 2017, and is reflected in Prepaid Expenses and Other Current Assets on the Condensed Consolidated Balance Sheets.

Note 8 – Commitments and Contingencies

Equipment Purchase Commitments

The Company has committed to equipment purchases of approximately $18.2 million at March 31, 2022.

In addition, through March 31, 2022, the Company has committed to equipment to be purchased under government awards of $1.4 million.

Litigation

From time to time, the Company may become subject to various legal proceedings that are incidental to the ordinary conduct of our business. In the ordinary course of business, the Company may be subject from time to time to various proceedings, lawsuits, disputes, or claims. The Company investigates these claims as they arise. Although claims are inherently unpredictable, the Company is currently not aware of any matters that, if determined adversely to the Company, would individually or taken together, have a material adverse effect on its business, financial position, results of operations, or cash flows.

As disclosed in the financial statements in Company’s Annual Report on Form 10-K for the year ended December 31, 2018, the Company made a decision to exit the consumer night vision business and accrued approximately $1.0 million related to invoices received for inventory purchased by Suga Electronics Limited, or Suga, a contract manufacturer in anticipation of future production. As a result of settlement of the arbitration with Suga related to those costs in the second quarter of 2021, the Company removed the $1.0 million accrual from its balance sheet, wrote off $0.3 million in prepayments and recorded a gain of $0.1 million in Other Income/Expense during the second quarter of 2021.

Note 9 – Warrants

The Company accounts for common stock warrants pursuant to applicable accounting guidance contained in ASC 815, "Derivatives and Hedging - Contracts in Entity's Own Equity" and makes a determination as to their treatment as either equity instruments or a warrant liability based on an analysis of the underlying warrant agreements.

The following table sets forth the Company’s outstanding common stock warrants as of March 31, 2022:


	Issued		Outstanding		Exercise Price		Expiration
2017 Warrant Issuance ⁽¹⁾		100,000		100,000		2.25		Sep 2022
2017 Warrant Issuance ⁽²⁾		1,650,000		1,650,000		2.45		Nov 2022
2018 Warrant Issuance ⁽²⁾		4,004,329		2,909,374		1.55		Jul 2023
2019 Warrant Issuance ⁽³⁾		6,000,000		3,000,000		0.78		Oct 2024
				7,659,374

(1)Issued in conjunction with an unsecured line of credit.

(2)Warrants are subject to liability accounting.

(3)Private Placement unregistered warrants exercisable six months following issuance.

Equity classified warrants

The 2019 warrants share similar terms, and the exercise price of the Warrant Shares are subject to adjustment in the event of any stock dividends and splits, reverse stock splits, stock dividends, recapitalizations, reorganizations or similar transactions. The Warrants will be exercisable on a “cashless” basis in certain circumstances, including in the event a registration statement is not in effect at time of exercise. The warrant agreements contain a clause specifying that in the event there is no effective registration in effect for the underlying warrant shares to be issued at time of exercise, in no circumstance will the Company be required to net cash settle the warrants.

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Based on the Company’s analysis of the terms and conditions of the warrants, the Company has concluded that they meet the conditions outlined in applicable accounting guidance to be classified as equity instruments. As a result, the Company has accounted for the exercise price paid by investors for purchase of the pre-funded warrants as additional paid in capital on the accompanying Condensed Consolidated Balance Sheets.

Liability classified warrants

The 2017 and 2018 warrants have alternative settlement provisions that, at the option of the holder, provide for physical settlement or if, at the time of settlement there is no effective registration statement, a cashless exercise as defined in the warrant agreement.

Based on analysis of the underlying warrant agreement and applicable accounting guidance, the Company concluded that these registered warrants require the issuance of registered securities upon exercise and do not sufficiently preclude an implied right to net cash settlement. Accordingly, these warrants were classified in the accompanying Condensed Consolidated Balance Sheets as a current liability upon issuance and will be revalued at each subsequent balance sheet date.

The fair value of the liability for common stock purchase warrants is estimated using the Black Scholes option pricing model based on the market value of the underlying common stock at the measurement date, the contractual term of the warrant, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common stock.

Based on the Black Sholes method the fair value of the Company’s warrants are as follows (in thousands):


	March 31,		December 31,
	2022		2021
2018 January and February Issuance
Fair Value	$	228	$	1,355

2017 May Issuance
Fair Value		—		19
	$	228	$	1,374


	Three Months Ended
	March 31,
	2022		2021
Change in Fair Value of common stock warrant liability ⁽¹⁾	$	1,146	$	(7,208)

(1)The combined changes in fair value are reflected as income (loss) from change in the fair market value of common stock warrant liability.

During the quarter ended March 31, 2022, there were no warrant exercises. During the three months ended March 31, 2021, 1,002,963 warrants were exercised on a cashless basis in exchange for 667,911 shares of the Company’s common stock. In addition, during the quarter ended March 31, 2021, the Company received $5.1 million in payment of the exercise price for warrants to purchase 2,351,336 shares of common stock.

Note 10 – Leases

The Company leases office and manufacturing facilities in Hopewell Junction, New York under a non-cancelable lease agreement, which, as amended, expire in 2031, and includes two, five year options to extend. The lease agreement did not contain any residual value guarantees, or material restrictive covenants. Upon signing a 12^th amendment in November 2020, the Company reassessed the lease from operating to a finance lease.

The Company also leases an office facility for its design group in Santa Clara, California. During the fourth quarter of 2019, the Company signed a two year extension of this lease that expired in October 2021. The lease agreement did not contain any residual value guarantees, material restrictive covenants or a renewal option. This lease was classified as an operating lease. In October 2021, the Company signed an additional two year extension of the lease for the Santa Clara design group facility, and is evaluating the accounting treatment and has classified this as an operating lease. On May 2, 2019, the Company entered into a three year finance lease commitment for phone equipment.

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The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring lease liabilities. The Company estimates its incremental borrowing rate based on a yield curve analysis, utilizing the interest rate derived from the fair value analysis of the Company’s credit facility and adjusting it for factors that appropriately reflect the profile of secured borrowing over the expected term of the lease.

The components of lease expense were as follows (in thousands):


	Three Months Ended
	March 31,
	2022		2021
Finance Lease Cost:
Amortization of right-of-use assets	$	163	$	157
Interest on lease liabilities		198		199
Operating lease cost		-		15
Total Lease Cost	$	361	$	371


Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	15	$	16
Financing cash flows from finance leases	$	267	$	255
Right-of-use assets obtained in exchange for new finance lease liabilities	$	69	$	8
Right-of-use assets obtained in exchange for new operating lease liabilities	$	-	$	-


	March 31, 2022		December 31, 2021
Finance lease right-of-use assets	$	13,037	$	12,318
Operating lease right-of-use assets	$	99	$	113
Finance lease liability, current	$	1,129	$	1,133
Finance lease liability, non-current	$	11,647	$	11,647
Operating lease liabilities, current	$	61	$	60
Operating lease liabilities, non-current	$	38	$	54
Weighted average remaining lease terms - finance leases		20.34 years		20.58 years
Weighted average remaining lease terms - operating leases		1.28 years		1.83 years
Weighted average discount rate - finance leases		6.42%		6.42%
Weighted average discount rate - operating leases		6.48%		7.75%

Future annual minimum lease payments and finance lease commitments as of March 31, 2022 were as follows (in thousands):


	Operating Leases		Finance Leases
2022	$	46	$	819
2023		58		1,229
2024		-		1,229
2025		-		1,229
2026		-		1,229
Thereafter		-		22,410
Total undiscounted future minimum lease payments		104		28,145
Less imputed interest		5		(15,369)
Lease liability	$	99	$	12,776

Note 11 – Shareholders’ Equity

Equity Raises

On November 18, 2021, the Company entered into an ATM offering agreement with H.C. Wainwright & Co., LLC, or Wainwright, relating to sales of shares of its common stock under an ATM facility. On November 18, 2021, the Company also filed a prospectus supplement to allow the sale of shares of its common stock having an aggregate offering price of up to $10.0 million under the ATM facility.

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During the three months ended March 31, 2022, the Company raised $0.5 million, net of offering expenses, through the sale of shares under the ATM facility. The Company used and intends to use the net proceeds from sales made under the ATM facility for working capital and other general corporate purposes.

Note 12 – Government Funding

On July 28, 2020, the Company announced that it had been awarded a $33.6 million contract over the next 33 months from the U.S. Department of Defense, or the DoD, to sustain and enhance U.S. domestic capability for high resolution, high brightness OLED microdisplays that will be based on the Company’s proprietary direct patterning technology dPd. This investment is in addition to the $5.5 million award announced on June 11, 2020, under the U.S. Department of Defense Industrial Base Analysis, or IBAS, Program for OLED Supply Chain Assurance and will be used to increase capacity and sustain operations at the Company’s Hopewell Junction, New York, headquarters. These funds will be used to procure key equipment and tooling, and reimburse the Company for certain labor and material costs, which the Company believes will improve all aspects of its OLED microdisplay production, including increased throughput and capacity.

Pursuant to the preliminary Technology Investment Agreement the U.S. government provided when the award was announced, the Company expects that the U.S. government will own the related equipment purchases until the end of the 33 month contract period, at which point the Company can apply to take title. The Company began making payments to related equipment vendors during the fourth quarter of 2020. For accounting purposes, the Company considers that it is probable that title will pass to the Company and accordingly will treat this award in a similar fashion as the IBAS award.

The Company recognizes the government awards as deferred income – government awards as program milestones are invoiced, and will recognize other income as depreciation and other expenditures are incurred over the useful life of the capital equipment. As of March 31, 2022, the Company has received $16.8 million in total, for initial deposits required by capital equipment vendors. Amounts received, pending payment of deposits to vendors as of March 31, 2022, of $0.9 million are reflected in restricted cash on the accompanying Condensed Consolidated Balance Sheets. Amounts due from the U.S. DoD pursuant to invoices for capital equipment are presented on the Condensed Consolidated Balance Sheets as accounts receivable – due from government awards. The total amount invoiced on these programs of $16.8 million is reflected less depreciation in deferred revenue government awards – long term, and other current liabilities. Additional amounts remaining under the awards will be recorded in a similar fashion and will coincide with the progress payments required under the various capital equipment purchase terms. For the three months ended March 31, 2022, the Company recognized deferred income related to certain overhead expenses, not capitalized, of $50 thousand.

The terms of various government agreements provide among other items that the Company must achieve certain yield targets, give priority to military orders and continue to maintain the productive capacity of equipment purchased for up to five years past the completion of the programs.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our financial statements and notes thereto. Our fiscal year ends December 31. This Report contains certain forward-looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Please see "Statement Regarding Forward-Looking Information" and Part II, Item 1A, "Risk Factors" of this Report. Actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include changes in external factors or in our internal budgeting process which might impact trends in our results of operations, unanticipated working capital or other cash requirements, changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate, and various competitive market factors that may prevent us from competing successfully in the marketplace. Forward-looking statements do not represent our views as of any date other than the date of this Report.

Business

We design, develop, manufacture and market organic light emitting diode, or OLED, miniature displays, which we refer to as OLED-on-silicon microdisplays, virtual imaging products that utilize OLED microdisplays, and related products. We also perform research in the OLED field. Our virtual imaging products integrate OLED technology with silicon chips to produce high-resolution microdisplays which, when viewed through a magnifying headset, create virtual images that appear comparable in size to that of a computer monitor or a large‑screen television. Our products enable our original equipment manufacturer, or OEM, customers in the military and commercial markets to develop and market improved or new electronic products.

We believe that our OLED microdisplays offer a number of significant advantages over comparable liquid crystal microdisplays, including higher contrast, greater power efficiency, less weight, more compact size, and negligible image smearing. Using our active matrix OLED technology, many computer and electronic system functions can be built directly into the OLED microdisplays silicon backplane, resulting in compact, high resolution and power efficient systems. Already proven in military and commercial systems, our product portfolio of OLED microdisplays deliver high‑resolution, virtual images that perform effectively even in extreme temperatures and high‑vibration conditions.

During the first quarter of 2022 our revenue was $7.4 million marked by diversified sales and contract revenue and reflected the contributions of new engineering talent that joined eMagin in late 2021. In addition to higher yields, we saw a 27% increase in display production from the first quarter of last year. Our first quarter 2022 display revenues of $7.0 million was up 15% year over year while our quarterly display revenue gross margin improved to 32%. Our first-quarter results included continued display revenue growth in our ENVG-B program and growth in shipments to customers in North American Treaty Organization, or NATO countries and international distributors. As of the end of the first quarter, our sales backlog remained strong at $13.6 million, reflecting demand for our displays for use in thermal weapon sights, military night vision goggles, and medical applications.

Operating expenses for the first quarter of 2022, including R&D expenses were $3.7 million, compared with $3.7 million in the prior-year period. Operating expenses as a percentage of sales were 50% in the first quarter of 2022, with 54% in the prior-year period.

We have implemented employee health and safety measures as required by the Centers for Disease Control and Prevention, or CDC, guidelines, and monitor, Federal, State, and local governmental regulations to respond to the latest health and safety guidelines. As a result of the COVID-19 pandemic, we experienced disruptions in supply, had several employees test positive for the COVID-19 virus and had to close our facilities for cleaning purposes. There is no assurance that our operations will not be disrupted in the future by additional impacts of the COVID-19 pandemic, its variants, or other resurgences of the virus, on either our internal operations or those of our suppliers or customers, including the possible impact of disruptions in the supply of silicon wafers or other raw materials that could harm our ability to meet demand for our products in a timely manner, or within budget.

We received a validation of our products and technology during fiscal 2020 from the U.S. government. In 2020, we received two U.S. Department of Defense, or DoD, awards totaling $39.1 million. We believe we are the only commercial U.S. manufacturer of OLED microdisplays and our displays are used in many U.S. Military programs. The Company has committed the funds and ordered all equipment to be purchased under these programs. As of the end of the first quarter of 2022, the Company has qualified and added four pieces of equipment to its production line and received three additional pieces of equipment that are currently in qualification stages. We expended $18.2 million of grant money towards progress payments to equipment vendors and has five more major pieces of equipment on order, including an advanced, production-capable dPd organic deposition tool that is expected to improve yield and throughput of this innovative technology for the benefit of AR/VR customers. Overall, the Company remains on track and on budget with the requirements of these important government grants.

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As of March 31, 2022, all equipment awarded by these grants had been ordered, including a production-capable dPd organic deposition tool that is expected to improve yield and throughput of this innovative technology. We have taken delivery of four pieces of production equipment and received $18.1 million of the total $39.1 million in government granted awards for initial deposits required by capital equipment vendors.

We are continually making improvements in production processes and beginning to add the Government funded equipment to our production line however, most of our equipment is older. Malfunctions in single point of failure equipment have the potential to delay our production until repairs can be made. We experienced equipment issues leading to late order shipments during 2020 and 2021, and had delays in getting vendor support personnel due to COVID-19 travel restrictions, resulting in occasional production disruptions. Additional equipment to be purchased and added to our line during fiscal 2022 and 2023 under our government awards programs are expected to reduce our single point of failure risk and continue to improve manufacturing yields and throughput. As part of our ongoing efforts to improve our throughput, yield, and quality practices, we are working with an industrial engineering firm to develop an operations excellence strategy and to obtain the AS9100 quality certification by the fourth quarter of 2022. Our backlog on March 31, 2022, was $13.6 million compared to backlog of $10.7 million at March 31, 2021. Backlog is comprised of orders believed to be firm with scheduled delivery dates over the next twelve months and does not include contract revenues.

We believe that our U.S.-based design and manufacturing, combined with in-house advanced backplane design, and our dPd technology give us a competitive advantage. Our direct patterning equipment is operational. We have fabricated full color displays using the newly upgraded and installed dPd tool during 2021 including our 4kX4k and WUXGA displays. In July 2021, using our dPd technology we created full color WUXGA displays with a brightness of over 10,000 cd/m2 and displayed these to industry analysts. We continue our development work for a tier one consumer customer and are targeting similar levels of brightness on proof-of-concept displays using our full color dPd process.

Consumer, commercial (in which we include the medical and industrial sectors), and military customers are increasingly turning to us because of our technological leadership in display brightness and resolution. This leadership in brightness is further demonstrated by our proprietary dPd capability. Unlike traditional OLEDs that produce colors by using a white source with filters that eliminate about 80% of the emitted light, with dPd we make full color displays by directly depositing each of the primary color materials on respective sub-pixels, without the use of filters. This advanced technology gives us an increase in brightness of over 10X versus the competition. In July 2021, we achieved full color brightness levels of over 10,000 cd/m2 and expect to achieve a brightness level of over 28,000 cd/m2 ready for mass production of full color displays by 2023. We achieved the highest monochrome brightness levels in the market years ago and are continuing our leadership with color displays. Display brightness is critical for AR/VR devices because of optics inefficiency and the need to eliminate motion artifacts. This is especially important for heads up displays used in bright, daylight environments. Our high resolution and low pixel pitch are also important to eliminate the “screen door” effect that comes with expanding lower resolution displays over wide fields of view.

Critical Accounting Policies

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. which require that management make numerous estimates and assumptions.

Please refer to the information provided under the heading "Critical Accounting Policies and Estimates" included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 10, 2022, or 2021 Form 10-K for a discussion of our critical accounting policies. There were no material changes to such policies in the three months ended March 31, 2022.

Results of Operations

Comparative results of operations for the three months ended March 31, 2022 and 2021 (in thousands):

Revenues


	Three Months Ended
	March 31,
	2022		2021		Change
Product	$	7,027	$	6,105	$	922
Contract		331		668		(337)
Total revenue, net	$	7,358	$	6,773	$	585

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Total revenue for the three months ended March 31, 2022 were $7.4 million, as compared to revenues of $6.8 million, for the three months ended March 31, 2021.

Product revenue is comprised primarily of sales of displays as well as sales of other hardware. For the three months ended March 31, 2022 product revenue increased by $0.9 million primarily due to increased shipments to customers in NATO countries, and shipments of displays used for the ENVG-B program.

Contract revenue primarily reflected development associated with a proof of concept display for a tier one consumer company. For the three months ended March 31, 2022 contract revenue decreased by $0.3 million, as compared to the prior period, reflecting the timing of phases and milestones of this contract. We are continuing to work on our proof of concept for this customer and expect ongoing contract revenue under this program.

Cost of Revenues


	Three Months Ended
	March 31,
	2022		2021		Change
Product	$	4,787	$	4,707	$	80
Contract		82		358		(276)
Total cost of revenues	$	4,869	$	5,065	$	(196)

Total cost of revenues is comprised of costs of product and contract revenues. Cost of product revenue includes materials, labor and manufacturing overhead, warranty costs and depreciation related to our products. Cost of contract revenue includes direct and allocated indirect costs associated with performance on the contracts, primarily engineering resources and materials. Total cost of revenues for the three months ended March 31, 2022 decreased by $0.2 million from the comparable prior year period.

Product cost of revenues for the quarter ended March 31, 2022, was comparable to the prior year period, despite the increase in revenue. This was due to the favorable impact of an over 25% increase in displays produced and improvements in yields as compared to the quarter ended March 31, 2021.

Contract cost of revenues for the three months ended March 31, 2022 decreased $0.3 million compared to the prior year period, reflecting decreased contract revenue.

The following table outlines product and contract gross profit and related gross margins for the three months ended March 31, 2022 and 2021 (dollars in thousands):


	Three Months Ended
	March 31,
	2022			2021
Product revenues gross profit	$	2,240		$	1,398
Product revenues gross margin		32	%		23	%
Contract revenues gross profit	$	249		$	310
Contract revenues gross margin		75	%		46	%
Total gross profit	$	2,489		$	1,708
Total gross margin		34	%		25	%

Total gross profit is a function of revenues less cost of revenues. Gross profit for the three months ended March 31, 2022 of $2.5 million increased $0.8 million, from the comparable prior year period reflecting increased product revenues and the impact of higher average selling prices in the current year’s periods due to price increases and a favorable sales mix. Total gross margin was 34% for the three months ended March 31, 2022 compared to 25% for the comparable 2021 period.

The product gross profit of $2.2 million for the three months ended March 31, 2022, increased from the $1.4 million in the comparable prior year due to increased shipments of displays in the three months ended March 31, 2022 combined with the favorable impact of price increases, a 27% increase in manufacturing volumes and increases period costs capitalized into inventory due to increased production volumes.

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Contract gross margin is dependent upon the mix of internal versus external third-party costs and materials, with the external third-party costs and materials causing a lower gross margin and reducing the contract gross profit. For the three months ended March 31, 2022, contract revenue gross profit was $0.2 million compared to $0.3 million, for the prior year period. The changes in contract gross profit for the three months ended March 31, 2022 versus the comparable prior year periods primarily reflects the changes in contract revenues.

Operating Expenses


	Three Months Ended
	March 31,
	2022			2021			Change
Research and development expense	$	1,484		$	1,842		$	(358)
Percentage of net revenue		20	%		27	%
Selling, general and administrative expense	$	2,170		$	1,824		$	346
Percentage of net revenue		29	%		27	%
Total operating expenses	$	3,654		$	3,666		$	(12)
Percentage of net revenue		50	%		54	%

Research and Development Expense

R&D expenses are Company funded and are primarily compromised of salaries and related benefits, development materials and other costs specifically allocated to the development of new technologies, microdisplay products, OLED technologies and production processes. R&D related costs associated with fulfilling contracts are categorized as contract cost of revenues. R&D expense was $1.5 million for the three months ended March 31, 2022, compared to $1.8 million in the prior year period. R&D costs for the first three months of 2022 primarily reflect lower allocations of production costs to R&D due to the completion of prior quarter development work on the XLE process.

Selling, General and Administrative Expense

SG&A expenses consist primarily of personnel expenses, professional services fees, as well as other marketing, general corporate and administrative expenses. The increase in SG&A expenses for the three months ended March 31, 2022, of $0.3 million primarily reflects changes in non-cash stock compensation of $0.1 million, and increases in legal and recruiting fees.

Other Income (Expense)

Other income (expense), net consists of changes in the fair value of warrant liability as well as interest income earned on cash balances. Other income related to the change in fair value of warrant liability was $1.1 million for the three months ended March 31, 2022, compared to other expense of $5.4 million for the three months ended March 31, 2021. This non-cash income or expense is associated with changes in the liability related to registered warrants issued in May 2017 and January 2018. We are required to revalue warrants classified on our Condensed Consolidated Balance Sheets as a liability at the end of each reporting period and reflect a gain or loss from the change in fair value in the period in which the change occurred. We calculate the fair value of the warrants outstanding using the Black-Scholes model. Other income for the three months ended March 31, 2022, also includes a $0.1 million in reimbursement of labor overhead charges under government grant programs.

Gain on forgiveness of debt

Gain on forgiveness of debt of $1.9 million reflects indebtedness payable to the Small Business Administration that was forgiven on March 31, 2021, pursuant to the terms of the Paycheck Protection Program and the CARES Act.

Liquidity and Capital Resources

As of March 31, 2022, we had $3.9 million in cash and cash equivalents, working capital of $11.4 million and borrowings outstanding and borrowing availability under the ABL Facility of $1.5 million and $1.4 million, respectively. The Company had $5.7 million in cash, working capital of $11.8 million and borrowings outstanding and borrowing availability under the ABL Facility of $2.0 million and $2.3 million, respectively, at December 31, 2021.

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On July 28, 2020, we announced that we have been awarded a $33.6 million contract over the next 33 months from the DoD to sustain and enhance U.S. domestic capability for high resolution, high brightness OLED microdisplays that will be based on our proprietary direct dPd technology. This investment is in addition to the $5.5 million award announced on June 11, 2020, under the IBAS Program for OLED Supply Chain Assurance and will be used to increase capacity and sustain operations at our Hopewell Junction, New York headquarters. In August 2020, these funds began to be released to us and will continue to be released over the life of the programs in accordance with the down payment and progress payment schedules of the various capital equipment vendors.

As of March 31, 2022, we have ordered all equipment awarded by these grants, including a production-capable dPd organic deposition tool that is expected to improve yield and throughput of this innovative technology. The Company has taken delivery of seven pieces of production equipment and received $18.2 million of the total $39.1 million in government granted awards for initial deposits required by capital equipment vendors.

For the three months ended March 31, 2022 cash used in operating activities, were $0.1 million, which was attributable to a net loss of $0.1 million and changes in operating assets and liabilities of $0.3 million and non-cash income and expenses of $0.2 million. Cash used in operating activities for the three months ended March 31, 2021 was $1.2 million.

For the three months ended March 31, 2022 cash used in investing activities was $7.1 million related to equipment purchases primarily to improve manufacturing yields and production capacity and to advance our dPd technology including grant proceeds for capital expenditures of $6.6 million.

As of March 31, 2022, we had outstanding commitments to purchase approximately $18.2 thousand in capital expenditures, and expect to make additional capital expenditures during 2022 to improve our manufacturing and R&D capabilities. These commitments exclude $1.4 million expected to be purchased and funded by the DoD, as described above. Cash used in investing activities during the three months ended March 31, 2021 was $1.7 million for equipment purchases.

For the three months ended March 31, 2022, cash provided by financing activities was $5.4 million, and proceeds from government grants of $5.5 million offset by net repayments of $0.5 million under our ABL Facility. Net cash provided by financing activities during the three months ended March 31, 2021 was $4.8 million.

Going concern

The accompanying Condensed Consolidated Financial Statements have been prepared on a going concern basis, which assumes that we will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. For the three months ended March 31, 2022, a net loss of $0.1 million was incurred and cash used in operating activities of $0.1 million. As of March 31, 2022, we had $3.9 million of cash, $1.5 million of outstanding indebtedness and borrowing availability of $1.4 million under our ABL Facility.

Our ABL Facility expires on December 31, 2022, and renews automatically for another year unless terminated pursuant to its terms. The ABL Facility agreement contains certain lenders remedies that give the bank the ability to impose discretionary reserves against our borrowing availability or terminate the facility upon events of default. Although our relationship with the lender is positive, there is no assurance the lender will renew or extend this facility or continue to make funds available during 2022 and beyond at present availability levels, or at all.

Due to continuing losses, our financial position, and uncertainty regarding our ability to borrow under our ABL Facility, or continue to raise funds under our ATM facility, we may not be able to meet our financial obligations as they become due without additional financing or sources of capital. In addition, the COVID-19 pandemic has significantly increased economic and demand uncertainty across the globe and contributed to supply chain shortages and disruptions. Although demand for our products has remained steady, our ability to obtain components and other materials or services on a timely basis has resulted in manufacturing delays, and increased costs. If these trends worsen as a result of COVID-19 or other semiconductor supply chain issues or result in lost orders it could materially and adversely affect our business, financial condition, and results of operations. Management is prepared to reduce expenses and raise additional capital, but there can be no assurance that we will be successful in sufficiently reducing expenses or raising capital to meet its operating needs.

We have taken actions to increase revenues and to reduce expenses and are considering financing alternatives. Our plans with regard to these matters include the following actions: 1) focus production and engineering resources on improving manufacturing yields and increasing production volumes, 2) continue a Work Status Reduction program that began in October 2019 wherein senior management work status was reduced by approximately 20%, 3) continue to utilize government grants for purchase of capital equipment and funding manufacturing personnel, 4) reduce discretionary and other expenses, 5) seek to enter new markets, 6) sell shares under our At the Market or ATM equity facility entered into in November 2021, and 7) consider additional financing and/or strategic alternatives.

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We are reassessing our business plans and forecasts over the next two years. Based on our known cash needs as of May 2022, and the anticipated availability of our ABL facility, we have developed plans to extend our liquidity to support working capital requirements through the first quarter of 2023.

However, there can be no assurance our plans will be achieved and we will be able to meet our financial obligations as they become due without obtaining additional financing or sources of capital. Therefore, in accordance with applicable accounting guidance, and based on our current financial condition and availability of funds, there is substantial doubt about our ability to continue as a going concern through twelve months from the date these financial statements were issued.

Equity Raises

On November 18, 2021, we entered into an ATM offering agreement with H.C. Wainwright & Co., LLC, or Wainwright, relating to sales of shares of our common stock under an ATM facility. On November 18, 2021, we also filed a prospectus supplement to allow the sale of shares of our common stock having an aggregate offering price of up to $10.0 million under the ATM facility.

During 2021, we raised $0.2 million, net of offering expenses, through the sale of shares under the ATM facility. For the three months ended March 31, 2022, an additional amount of $0.5 million was raised. We used and intend to use the net proceeds from sales made under the ATM facility for working capital and other general corporate purposes.

ABL Facility

On December 21, 2016, we entered into an asset based 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 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 $2,000. We are obligated to pay the lender a monthly administrative fee of $1,000 and an annual facility fee equal to 1% of the maximum amount borrowable under the facility. The ABL Facility automatically renewed on December 31, 2021 for a one-year term.

Our ABL Facility expires on December 31, 2022 and renews automatically for another year unless terminated pursuant to its terms. Our ABL Facility agreement contains certain lenders remedies that give the bank the ability to impose discretionary reserves against our borrowing availability or terminate the facility upon events of default.

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. The ABL Facility contains customary representations and warranties, affirmative and negative covenants and events of default, including a provision that we maintain a minimum tangible net worth of $13 million and a minimum working capital balance of $4 million. As of March 31, 2022, we had $1.5 million in borrowings, had unused borrowing availability of $1.4 million and were in compliance with all financial debt covenants.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered by this Report.

Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were effective.

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Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2022, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

From time to time, we may become subject to various legal proceedings that are incidental to the ordinary conduct of our business. In the ordinary course of business, we may be subject from time to time to various proceedings, lawsuits, disputes, or claims. We investigate these claims as they arise. Although claims are inherently unpredictable, we are currently not aware of any matters that, if determined adversely to us, would individually or taken together, reasonably be expected to have a material adverse effect on our business, financial position, results of operations, or cash flows.

ITEM 1A. Risk Factors

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2021 Form 10-K. In addition, refer to our discussion in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other sections of this report, which address effects of the COVID-19 pandemic and possible impacts on our ability to continue as a going concern. The COVID-19 pandemic can also exacerbate other risks discussed in the “Risk Factors” sections of our 2021 Form 10-K and this Report, which could in turn have a material adverse effect on us. The “Risk Factors” section in our 2021 Form 10-K otherwise remains current in all material respects. The risks discussed in the “Risk Factors” section in our 2021 Form do not identify all risks that we face. Our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

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ITEM 6. Exhibits

3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to an appendix to the Registrant's Definitive Proxy Statement filed on September 21, 2006).
3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation (incorporated by reference to an appendix to the Registrant's Definitive Proxy Statement filed on October 26, 2010).
3.3	By laws of the Company (incorporated by reference to exhibit 99.3 to the Registrant's Definitive Proxy Statement filed on June 14, 2001).
3.4	Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 filed on May 13, 2021).
4.1	Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 of the Registrant’s report on Form 8-K filed on December 23, 2008).
4.2	Form of Letter Agreement (incorporated by reference to Exhibit 4.1 to the Registrant's report on Form 8-K filed on August 24, 2016).
4.3	Form of common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s report on Form 8-K filed on December 18, 2015).
4.4	Form of Common Stock Purchase Warrant issued to the Warrant Holders in the Transaction (incorporated by reference to Exhibit 4.2 to the Registrant's report on Form 8-K filed on August 24, 2016).
4.5	Common Stock Purchase Warrant issued on March 24, 2017 to the holder of an unsecured line of credit (incorporated by reference to exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed on November 9, 2017).
4.6	Form of Common Stock Purchase Warrant issued to the Warrant Holders in conjunction with an issuance of common shares on May 19, 2017 (incorporated by reference to Exhibit 4.1 to the Registrant's report on Form 8-K filed on May 24, 2017).
4.8	Description of Registrants Securities (incorporated by reference to Exhibit 4.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2020 filed on March 19, 2021).
31.1	Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
31.2	Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
32.1	Certification by Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
32.2	Certification by Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
101.INS	XBRL Instance Document (1)
101.SCH	XBRL Taxonomy Extension Schema Document (1)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (1)
104.	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) (1)


(1) Filed herewith.
(2) Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 12, 2022