The following discussion should be read in conjunction with our financial
statements and notes thereto. Our fiscal year ends
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 largescreen 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 highresolution, virtual images that perform effectively even in extreme temperatures and highvibration conditions.
We have been deemed to be an essential business in the
Operating expenses for the three and nine months ended
We are continually making improvements in production processes; however, the
majority of our equipment is older and malfunctions in single point of failure
equipment has the potential to delay our production until repairs can be made.
We experienced equipment issues in 2019, experienced some equipment issues
during 2020 and 2021, and also had delays in getting vendor support personnel
due to COVID-19 travel restrictions. Equipment to be purchased during fiscal
2021 and 2022 under our government awards programs is expected to reduce our
single point of failure risk and 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.
Our backlog at
We believe that our
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process.
We received a validation of our products and technology during fiscal 2020 from
the
Consumer, medical, 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
Liquidity and Going Concern
The accompanying Condensed Consolidated Financial Statements have been prepared on the going concern basis, which assumes 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. However, due to continuing losses, uncertainty regarding the COVID-19 pandemic, our financial position, and uncertainty regarding our ability to borrow under the ABL Facility, we may not be able to meet our financial obligations as they become due without additional financing or sources of capital.
The COVID-19 pandemic has significantly increased economic and demand uncertainty across the globe. It is possible that the current outbreak and continued spread of COVID-19, and any resurgence related to the Delta variant, or other vaccine resistant strains will cause the economic slowdown to continue, and it is possible that it could cause a global recession. Although vaccines are becoming more widely available, there is a significant degree of uncertainty and lack of visibility as to the extent and duration of the COVID-19 pandemic and related slowdowns or economic trends. If either were prolonged, demand for the Company's products and the Company's ability to obtain components and other materials or services on a timely basis could result in manufacturing delays, increased costs, and ultimately, in reduced or delayed sales or lost orders which could materially and adversely affect our business, financial condition, and results of operations. Although many jurisdictions are now open with social distancing measures implemented to curtail the spread of COVID-19, we cannot predict the length of time that it will take for our supply chains to be restored and any meaningful economic recovery to take place. We also cannot predict whether the Delta variant or other vaccine resistant strains will lead to additional surges in new cases of COVID-19, or the severity of such surges if/when they occur, such that governmental authorities decide to reimpose quarantines, lockdowns or travel restrictions, which could further materially and adversely affect the Company's results and financial condition. It is also not possible to predict with certainty the impact executive orders providing for mandatory COVID-19 vaccinations will have on our workforce. Our implementation of these requirements may result in attrition, including attrition of critically skilled labor, and difficulty securing future labor needs, which could have a material adverse effect on our business, financial condition, and results of operations.
Our common stock is listed on the NYSE American, and we are subject to its continued listing requirements, including maintaining certain share prices and a minimum amount of shareholder's equity. If we are unable to comply with the NYSE American continued listing requirements, including its trading price requirements, our common stock may be suspended from trading on and/or delisted from the NYSE American.
Critical Accounting Policies
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
Inventory - Inventories are stated on a standard cost basis adjusted to approximate the lower of cost (as determined by the first-in, first-out method) or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the production of OLED displays. The standard cost for our products is subject to fluctuation from quarter to quarter, depending primarily on the number of displays produced, fluctuations in manufacturing overhead, labor hours incurred, and the yields experienced in the
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manufacturing process. Under the principles of full absorption costing, these costs are allocated to each unit of production in work in process and finished goods inventory based on actual use of the production facilities. However, in applying this principle, the requirements of Accounting Standards Codification, or ASC, 330-10-30-4, "Inventory" require that a company determine the range of normal capacity, or production expected to be achieved over a number of periods or seasons, and limits the amount of fixed production overheads allocated to inventory in periods of abnormally low production.
Beginning in 2014, we defined normal capacity in terms of the number of displays produced per quarter. The amount of displays produced in any given period, is determined in part by the relative sizes of displays produced, and the resultant number of die that can be drawn on the surface of the silicon wafers used in our manufacturing process. Before production yield considerations, the maximum potential die per wafer amounts range from 42 for our larger newer displays through 177 for our more established displays. In 2015 and in periods subsequent, we produced fewer displays than a baseline level established during 2014, and accordingly limited the amount of fixed overheads allocated to inventory.
During the first quarter of 2021, in recognition of a shift in product demand
toward larger, more complex displays yielding fewer die per wafer, we concluded
that measuring output by the number of displays produced per quarter was no
longer an accurate measure of productive capacity. Management determined that
measuring output based on the number of wafers produced per quarter was a more
appropriate measure of production volume. We reviewed the number of wafers
produced through the nine months ended
Under this change in estimate for allocating overhead adopted in the first
quarter of 2021, overhead is fully allocated to products, resulting in an
increase in standard costs and inventory values. The impact of this change for
the nine months ended
During the three months ended
Results of Operations
Comparative results of operations for the three and nine months ended
Revenues Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 Change 2021 2020 Change Product$ 5,313 $ 6,978 $ (1,665) $ 17,160 $ 18,872 $ (1,712) Contract 469$ 333 136 1,674 2,870 (1,196)
Total revenue, net
Total revenue for the three and nine months ended
Product revenue is comprised primarily of sales of displays as well as sales of
other hardware. For the three and nine months ended
Contract revenue primarily reflected development associated with a proof of
concept display for our
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Table of Contents Cost of Revenues Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 Change 2021 2020 Change Product$ 4,962 $ 5,385 $ (423) $ 15,135 $ 15,153 $ (18) Contract 261 234 27 861$ 1,487 (626)
Total cost of revenues
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. Total cost of
revenues for the three and nine months ended
During the three months ended
Product costs of goods sold for the three and nine months ended
The following table outlines product and contract total gross profit and related
gross margins for the three and nine months ended
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020
Product revenues gross profit
7 % 23 % 12 % 20 %
Contract revenues gross profit
30 % 49 % 48 % Total gross profit$ 559 $ 1,692 $ 2,838 $ 5,102 Total gross margin 10 % 23 % 15 % 23 %
Total gross profit is a function of revenues less cost of revenues. Gross profit
for the three months ended
The product gross profit of
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 and nine months ended
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Table of Contents Operating Expenses Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 Change 2021 2020 Change Research and development expense$ 1,669 $ 1,734 $ (65) $ 5,299 $ 4,313 $ 986 Percentage of net revenue 29 % 24 % 28 % 20 % Selling, general and administrative expense$ 2,203 $ 1,824 $ 379 $ 5,717 $ 5,334 $ 383 Percentage of net revenue 38 % 25 % 30 % 25 % Total operating expenses$ 3,872 $ 3,558 $ 314 $ 11,016 $ 9,647 $ 1,369 Percentage of net revenue 67 % 49 % 58 % 44 % Research and Development
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 expenses were
Selling, General and Administrative
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 and nine months ended
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. Income related to
the change in fair value of warrant liability was
Gain on forgiveness of debt
Gain on forgiveness of debt of
Liquidity and Capital Resources
As of
On
months. During 2020, we used the proceeds to pay qualified payroll costs, in accordance with PPP and Section 1106 of the CARES Act
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requirements. We applied for forgiveness of the entire loan in the fourth
quarter. In April, 2021 the Company received a forgiveness notice from the SBA
and received a related acknowledgement letter from its lender stating that they
received payment in full from the SBA effective
On
For the nine months ended
For the nine months ended
As of
For the nine months ended
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.
The COVID-19 pandemic has significantly increased economic and demand uncertainty across the globe. It is possible that the current outbreak and continued spread of COVID-19, and any resurgence related to the Delta variant, or other vaccine resistant strains will cause the economic slowdown to continue, and it is possible that it could cause a global recession. Although vaccines are becoming more widely available, there is a significant degree of uncertainty and lack of visibility as to the extent and duration of the COVID-19 pandemic and related slowdowns or economic trends. If either were prolonged, demand for the Company's products and the Company's ability to obtain components and other materials or services on a timely basis could result in manufacturing delays, increased costs, and ultimately, in reduced or delayed sales or lost orders which could materially and adversely affect our business, financial condition, and results of operations. Although many jurisdictions are now open with social distancing measures implemented to curtail the spread of COVID-19, we cannot predict the length of time that it will take for our supply chains to be restored and any meaningful economic recovery to take place. We also cannot predict whether the Delta variant or other vaccine resistant strains will lead to additional surges in new cases of COVID-19, or the severity of such surges if/when they occur, such that governmental authorities decide to reimpose quarantines, lockdowns or travel restrictions, which could further materially and adversely affect the Company's results and financial condition. It is also not possible to predict with certainty the impact executive orders providing for mandatory COVID-19 vaccinations will have on our workforce. Our implementation of these requirements may result in attrition, including attrition of critically skilled labor, and difficulty securing future labor needs, which could have a material adverse effect on our business, financial condition, and results of operations.
Due to continuing losses, the COVID-19 pandemic, uncertainty regarding our need or ability to borrow under our ABL Facility, we may not be able to meet our financial obligations as they become due without 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.
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We have taken actions to increase revenues and to reduce expenses and is considering financing alternatives. Our plans with regard to these matters include the following actions:
?focus production and engineering resources on improving manufacturing yields and increasing production volumes;
?continue the Work Status Reduction program that began in
?continue to utilize government grants for purchase of capital equipment and funding manufacturing personnel;
? reduce discretionary and other expenses;
?seek to enter new markets; and
?consider additional financing and/or strategic alternatives.
We are reassessing our business plan and forecasts over the next two years.
Based on our known cash needs as of
In addition, even if we successfully generate additional funds through the sale of additional equity securities, borrowings or alternative financing, there can be no assurances that the revenue or capital infusion will be sufficient to enable us to develop our business to a level where it will be profitable or generate positive cash flow. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we incur additional debt, a substantial portion of its operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our operational business activities. The terms of any debt securities issued could also impose significant restrictions on our operations. In addition, broad market and industry factors may seriously harm the market price of our common stock, regardless of its operating performance, and may adversely impact its ability to raise additional funds.
Equity Raises
On
During 2020, we raised
ABL Facility
On
The ABL Facility renewed on
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
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Off-Balance Sheet Arrangements
We have no off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
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