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
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.
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.
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EMAGIN CORPORATION 
