EMAGIN CORP (Form: 10-Q, Received: 05/13/2021 16:18:23)

Three Months Ended

Change in Fair Value of common stock warrant liability (1)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2021

☐ 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 ☑ 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 ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☑
Accelerated filer ☐		Emerging growth company ☐
Non-accelerated filer ☑

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 ☑

As of April 30, 2021, there were 72,270,927 common shares at $0.001 par value per share of the registrant outstanding.

Table of Contents


		Page
PART I - FINANCIAL INFORMATION
Item 1	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020	5
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020 (unaudited)	6
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2021 and 2020 (unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (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	29
Item 4	Controls and Procedures	29

PART II - OTHER INFORMATION
Item 1	Legal Proceedings	31
Item 1A	Risk Factors	31
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3	Defaults Upon Senior Securities	31
Item 4	Mine Safety Disclosures	31
Item 5	Other Information	31
Item 6	Exhibits	31
SIGNATURES		33

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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 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;

the impact of the COVID-19 pandemic on our business;

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 concentration of a significant ownership percentage in a relatively small number of stockholders and the ability of one or more of such stockholders to exert substantial control over our affairs;

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;

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;

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; and

successful resolution and documentation of our agreement in principle to settle purchase commitments remaining from our consumer night vision business for a total of $0.6 million.

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. References to “Consumer Night Vision Business” refers to our consumer night vision products business.

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

ITEM 1. Financial Statements

eMAGIN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(unaudited)


	March 31,		December 31,
	2021		2020
ASSETS
Current assets:
Cash and cash equivalents	$	10,705	$	8,315
Restricted cash		1,671		2,111
Accounts receivable, net		4,423		5,314
Account receivable-due from government awards		97		1,013
Unbilled accounts receivable		374		253
Inventories		8,413		8,379
Prepaid expenses and other current assets		1,095		943
Total current assets		26,778		26,328
Property, plant and equipment, net		22,118		21,132
Operating lease right - of - use assets		35		50
Intangibles and other assets		124		126
Total assets	$	49,055	$	47,636

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,266	$	1,206
Accrued compensation		1,929		1,628
Paycheck Protection Program loan - current		—		982
Revolving credit facility, net		198		1,875
Common stock warrant liability		11,830		4,622
Other accrued expenses		1,474		1,693
Deferred revenue		124		425
Operating lease liability - current		36		51
Finance lease liability - current		1,028		1,027
Other current liabilities		621		757
Total current liabilities		18,506		14,266
Other liability - long term		42		56
Paycheck Protection Program loan - long term		—		982
Deferred Income - government awards - long term		4,473		4,309
Finance lease liability - long term		11,733		11,783
Total liabilities		34,754		31,396

Shareholders’ equity:
Preferred stock, $.001 par value: authorized 10,000,000 shares:
Series B Convertible Preferred stock, (liquidation preference of $5,659) stated value $1,000 per share, $.001 par value: 10,000 shares designated and 5,659 issued and outstanding as of March 31, 2021 and December 31, 2020.		—		—
Common stock, $.001 par value: authorized 200,000,000 shares, issued 72,137,858 shares, outstanding 71,975,792 shares as of March 31, 2021 and issued 68,890,819 shares, outstanding 68,728,753 shares as of December 31, 2020.		72		69
Additional paid-in capital		274,165		268,729
Accumulated deficit		(259,436)		(252,058)
Treasury stock, 162,066 shares as of March 31, 2021 and December 31, 2020.		(500)		(500)
Total shareholders’ equity		14,301		16,240
Total liabilities and shareholders’ equity	$	49,055	$	47,636

See notes to Condensed Consolidated Financial Statements.

eMAGIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(unaudited)


	Three Months Ended
	March 31,
	2021		2020
Revenues:

Product	$	6,105	$	5,634
Contract		668		1,097
Total revenues, net		6,773		6,731

Cost of revenues:

Product		4,707		4,790
Contract		358		507
Total cost of revenues		5,065		5,297

Gross profit		1,708		1,434

Operating expenses:

Research and development		1,842		980
Selling, general and administrative		1,824		1,798
Total operating expenses		3,666		2,778

Loss from operations		(1,958)		(1,344)

Other (expense) income:
Change in fair value of common stock warrant liability		(7,208)		(20)
Interest expense, net		(210)		(17)
Gain on forgiveness of debt		1,963		—
Other income, net		35		12
Total other (expense)		(5,420)		(25)
Loss before provision for income taxes		(7,378)		(1,369)
Income taxes		—		—
Net loss	$	(7,378)	$	(1,369)

Loss per share, basic and diluted	$	(0.10)	$	(0.03)

Weighted average number of shares outstanding:

Basic and Diluted		70,272,302		51,638,598

See notes to Condensed Consolidated Financial Statements.

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, 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



	Preferred Shares		Preferred Stock			Common Shares		Common Stock		Additional Paid-in Capital		Accumulated Deficit		Treasury Stock		Total Shareholders’ Equity
Balance, December 31, 2019		5,659	$	—			50,250,378	$	50	$	258,767	$	(240,610)	$	(500)	$	17,707
Stock based compensation		—		—			—		—		43		—		—		43
Public offering of common shares, net of offering costs		—		—			3,730,540		4		1,548		—		—		1,552
Net loss		—		—			—		—		—		(1,369)		—		(1,369)
Balance, March 31, 2020		5,659	$	—	_		53,980,918	$	54	$	260,358	$	(241,979)	$	(500)	$	17,933

See notes to Condensed Consolidated Financial Statements.

eMAGIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Three Months Ended
	March 31,
	2021		2020
Cash flows from operating activities:
Net loss	$	(7,378)	$	(1,369)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		733		482
Change in fair value of common stock warrant liability		7,208		20
Gain on forgiveness of debt		(1,963)		—
Stock-based compensation		13		43
Amortization of operating lease right-of-use assets		15		184
Changes in operating assets and liabilities:
Accounts receivable		893		229
Unbilled accounts receivable		(121)		(315)
Inventories		(34)		11
Prepaid expenses and other current assets		(152)		(214)
Deferred revenues		(301)		17
Operating lease liabilities		(15)		(192)
Accounts payable, accrued expenses, and other current liabilities		(52)		181
Net cash used in operating activities		(1,154)		(923)
Cash flows from investing activities:
Purchase of equipment		(127)		(306)
Purchase of equipment, government grant		(1,582)		—
Net cash used in investing activities		(1,709)		(306)
Cash flows from financing activities:
Repayments under revolving line of credit, net		(1,676)		(700)
Proceeds from public offering, net		—		1,552
Change in finance lease liabilities		(57)		—
Proceeds from government grant		1,120		—
Proceeds from warrant exercise, net		5,062		—
Proceeds from exercise of stock options		364		—
Net cash provided by financing activities		4,813		852
Net increase (decrease) in cash, cash equivalents, and restricted cash		1,950		(377)
Cash, cash equivalents, and restricted cash, beginning of period		10,426		3,515
Cash, cash equivalents, and restricted cash, end of period	$	12,376	$	3,138
Cash, cash equivalents, end of period		10,705		3,138
Restricted cash, end of period		1,671		—

Supplementary Cash Flow Information
Cash paid for interest	$	210	$	22
Cash paid for income taxes	$	—	$	—

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

See notes to Condensed Consolidated Financial Statements.

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. 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 Condensed Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The results of operations for the periods ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year. The Condensed Consolidated Financial Statements as of December 31, 2020 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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 $2 thousand for the three months ended March 31, 2021 and 2020 respectively.

Product warranty

The Company generally offers a one-year product replacement warranty. The standard policy is to repair or replace the defective products. The Company accrues for estimated returns of defective products at the time revenue is recognized based on historical activity as well as for specific known product issues. The determination of these accruals requires the Company to make estimates of the frequency and extent of warranty activity and estimate future costs to replace the products under warranty. If the actual warranty activity and/or repair and replacement costs differ significantly from these estimates, adjustments to cost of revenue may be required in future periods.

The following table provides a summary of the activity related to the Company's warranty liability included in other current liabilities, (in thousands):


	Three Months Ended
	March 31,
	2021		2020
Beginning balance	$	615	$	300
Warranty accruals and adjustments		(142)		38
Warranty claims		(8)		(7)
Ending balance	$	465	$	331

Inventories

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 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, 330-10-34 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, the Company 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, the Company 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, the Company concluded that measuring output by the number of displays produced per quarter was no longer an accurate measure of productive capacity. The Company determined that measuring output based on the number of wafers produced per quarter was a more appropriate measure of production volume. The Company reviewed the number of wafers produced for the quarter ended March 31, 2021, and the prior two calendar years, and determined the first quarter 2021 level was within the range of normal capacity. The Company also believes that fully allocating the overhead to work in process and finished goods inventories, results in more accurate inventory valuation and computation of costs of goods sold, in addition to providing better information to management in making pricing decisions.

In accordance with 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 in the first quarter of 2021 was an increase of approximately $0.9 million in the carrying value of the Company’s work in process and finished goods inventory as of March 31, 2021, and a corresponding decrease in product costs of goods sold. This decreased the Company’s net loss by $0.9 million and the Company’s loss per share by $0.01.

Net Loss per Common Share

Basic loss per share is computed using the weighted average number of common shares outstanding during the period, and excludes any dilutive effects of common stock equivalent shares such as stock options, warrants, and convertible preferred stock. Diluted loss per share is computed using the weighted average number of common shares outstanding and potentially dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.

The Company’s Series B Convertible Preferred stock, 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 and diluted earnings per share. The Preferred Stock – Series B is not required to absorb any net loss. Although the Company paid a one-time special dividend in 2012, the Company does not expect to pay dividends on its common or preferred stock in the near future. 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.

For the three months ended March 31, 2021 and 2020, the Company reported a net loss and as a result, basic and diluted loss per common share are the same. Therefore, in calculating net loss per share amounts, shares underlying the potentially dilutive common stock equivalents were excluded from the calculation of diluted net income per common share because their effect was anti-dilutive.

The following table sets forth the potentially dilutive common stock equivalents for the three months ended March 31, 2021 and 2020 that were not included in diluted earnings per share, or EPS, as their effect would be anti-dilutive:


	Three Months Ended
	March 31,
	2021	2020
Options	4,098,256	5,183,360
Warrants	9,701,474	19,295,773
Preferred Stock- Series B	18,726,009	7,545,333
Total potentially dilutive common stock equivalents	32,525,739	32,024,466

The above table reflects a revision in the potentially dilutive common stock equivalents that were not included in diluted EPS associated with the Company’s Preferred Stock- Series B for the quarter ended March 31, 2020, compared to what was previously reported. The Company increased such potentially dilutive common stock equivalents from 7,545,333 to 18,726,009 as a result of previously excluding certain common stock equivalents that would be issued as a result of the Company conducting an equity offering priced below the Preferred Stock- Series B’s conversion price. This correction had no impact on the Company’s financial statements or EPS.

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. The Company records such progress payments made to capital equipment vendors in Equipment, Furniture and Leasehold improvements. 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. There was no government receivable in accounts receivable for the three months ended March 31, 2021.

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 PPP loan is presented on the Condensed Consolidated Balance Sheet, at cost which equals fair market value due to the loan’s short–term maturity, as the current portion of long-term debt, and long-term payables based upon the schedule of repayments and excluding any possible forgiveness of the loans.

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.

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, 2021	$	4,622
Fair value of warrants issuance during period		-
Change in fair value of warrant liability, net		7,208
Balance as of March 31, 2021	$	11,830

The fair value of the liability for common stock purchase warrants at issuance and at March 31, 2021 was estimated using the Black Scholes option pricing model based on the market value of the underlying common stock at the measurement date. Inputs to the model at March 31, 2021 included remaining contractual terms of the warrants ranging from 1.2 to 1.83, at risk-free interest rates of 0.16% to 2.87%, with no expected dividends, and expected volatility of the price of the underlying common stock of 40.28% to 116.91%.

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, 2021, two customers accounted for 13.7%, and 12.0% of net revenues. For the three months ended March 31, 2020, there were three customers who accounted for over 19.5%, 14.9%, and 10.2% of net revenues. As of March 31, 2021, the Company had accounts receivable balances from those two customers who had balances of 15.4% and 24.9%.

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 first quarter ended March 31, 2021, the Company incurred a net loss of $7.4 million and used cash in operating activities of $1.2 million. As of March 31, 2021, the Company had $10.7 million of cash, $0.2 million of outstanding indebtedness and borrowing availability of $2.5 million under its ABL Facility.

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, including any vaccine resistant strains, or any resurgence 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 could be significantly harmed. 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 any meaningful economic recovery to take place. We also cannot predict whether 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.

Due to continuing losses, the COVID-19 pandemic, and uncertainty regarding the Company’s need or ability to borrow under its ABL Facility, the Company may not be able to meet its financial obligations as they become due without obtaining additional financing or sources of capital at acceptable terms to the Company. 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.

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) continuing a Work Status Reduction program that began in October 2019 wherein senior management work status was reduced by approximately 20%, 3) reduce headcount and not replace departed employees, 4) reduce discretionary and other expenses, 5) seek to enter new markets, and 6) considering additional financing and/or strategic alternatives.

The Company is reassessing its business plans and forecasts over the next two years. Based on its known cash needs as of April 30, 2021, the Company has developed plans to extend its liquidity to support its working capital requirements through the second quarter of 2022. However, there can be no assurance the Company’s plans will be achieved, or that the Company will be able to continue to borrow under its ABL Facility, mitigate the impacts of COVID-19, secure additional financing, and/or pursue strategic alternatives on terms acceptable to the Company, or at all.

Recently adopted accounting pronouncements

The Company's accounting policies are the same as those described in Note 1 to the Company's Condensed Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2020.

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. Contracts 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.

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, 2021 and 2020 were as follows (in thousands):


	Three Months Ended
	March 31,
	2021		2020
North and South America	$	3,303	$	3,540
Europe, Middle East, and Africa		2,531		2,701
Asia Pacific		939		490
Total	$	6,773	$	6,731


	Three Months Ended
	March 31,
		2021		2020
Military	$	3,875	$	5,180
Commercial, including industrial and medical		980		313
Consumer		650		688
Multiple		1,268		550
Total	$	6,773	$	6,731

Accounts Receivable from Customers

Accounts receivable, net of allowances, were $4.4 million and $5.3 million as of March 31, 2021 and December 31, 2020.

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 Sheet.

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):


	21	March 31,		December 31,
		2021		2020

Unbilled Receivables (contract assets)		$	374	$	253

Deferred Revenue (contract liabilities)		$	(124)	$	(425)

For the three months ended March 31, 2021 and 2020, the Company recognized $286 thousand and $30 thousand of revenue related to its contract liabilities that existed as of December 31, 2020 and 2019, respectively.

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, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $1 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,
	2021		2020
Accounts receivable	$	4,562	$	5,453
Less allowance for doubtful accounts		(139)		(139)
Accounts receivable, net	$	4,423	$	5,314

Note 4 – Inventories, net

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


	March 31,		December 31,
	2021		2020
Raw materials	$	3,826	$	3,995
Work in process		1,884		1,263
Finished goods		3,292		3,918
Total inventories		9,002		9,176
Less inventory reserve		(589)		(797)
Total inventories, net	$	8,413	$	8,379

As described in Note 1, during the period ended March 31, 2021, the Company changed its method of estimating the allocation of overhead.

Note 5 – Line of Credit / Loan Payable

Revolving Credit Facility


	March 31,		December 31,
(in thousands)	2021		2020
Revolving credit facility	$	198	$	1,875

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 will automatically renew on December 31, 2021 for a one-year term unless written notice to terminate the agreement is provided by either party.

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. During the three months ended March 31, 2021, the Company had $0.2 million in borrowings outstanding, had unused borrowing availability of $2.5 million and was in compliance with all financial debt covenants.

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. Under the PPP loan, the loan has a fixed interest rate of 1% per annum, a maturity date two years from the date of the funding of the loan, and deferral of payments for six months. During 2020, the Company used the proceeds to pay qualified payroll costs, in accordance with PPP and Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, requirements. The Company applied for forgiveness of the entire loan in the fourth quarter of 2020. 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 March 31, 2021. This amount was recorded in the Condensed Consolidated Statements of Operations as gain on forgiveness of debt in the first quarter of 2021.

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 following table summarizes the allocation of non-cash stock-based compensation to our expense categories for the three months ended March 31, 2021 and 2020 (in thousands):


	Three Months Ended
	March 31,
	2021		2020
Cost of revenues	$	—	$	6
Research and development		4		17
Selling, general and administrative		9		20
Total stock compensation expense	$	13	$	43

At March 31, 2021, total unrecognized compensation costs related to stock options was approximately $11.9 thousand, net of estimated forfeitures. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of approximately 2.5 years.

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,
	2021			2020
Dividend yield		0	%	0	%
Risk free interest rates		1.77 - 2.48	%	1.77 - 2.48	%
Expected volatility		41.7 to 49.2	%	41.7 to 49.2	%
Expected term (in years)		3.5 to 4.0		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.

A summary of the Company’s stock option activity for three months ended March 31, 2021 is presented in the following table:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2020		4,797,834	$	2.36
Options granted		20,000		0.69
Options exercised		(244,651)		1.59
Options forfeited		—		—
Options cancelled or expired		(474,927)		4.57
Outstanding at March 31, 2021		4,098,256	$	1.91		2.51	$	7,701,657
Vested or expected to vest at March 31, 2021 (1)		4,097,595	$	1.91		2.54	$	7,699,837
Exercisable at March 31, 2021		4,065,255	$	1.92		2.54	$	7,610,687

(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 aggregate intrinsic value of options exercised was $587 thousand for the three months ended March 31, 2021. The Company issues new shares of common stock upon exercise of stock options.

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, 2021 and 2020. The difference between the effective tax rate of 0% and the U.S. federal statutory rate of 21% for the three months ended March 31, 2021 and 2020 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, 2021.

The Company’s 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.

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 Sheet.

Note 8 – Commitments and Contingencies

Equipment Purchase Commitments

The Company has committed to equipment purchases of approximately $854 thousand at March 31, 2021.

In addition, through March 31, 2021, the Company has committed to equipment to be purchased under government awards of $2.2 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 March 2019, the Company received a demand letter seeking payment of $0.9 million of outstanding invoices relating to purchased inventory from Suga Electronics Limited, or Suga, a contract manufacturer located in China, which manufactured product sold by our consumer night vision business. The Company has responded to the demand letter, and requested that Suga provide substantiation of purchased inventory. On August 1, 2019, the Company was notified by Suga that they intend to pursue arbitration. During September and October 2019, the Company held preliminary discussions with Suga to attempt to reach a settlement, however in November 2019 a formal request for arbitration was received, which Suga filed with the International Chamber of Commerce or ICC. The Company retained local counsel in Hong Kong to represent it before the ICC and in December 2019 filed an answer to Suga’s request for arbitration including a counterclaim seeking repayment of amounts previously paid to Suga. An arbitrator has been appointed and arbitral proceedings for the consideration of the claims and counterclaims are expected to run through the second quarter of 2021. The parties are permitted to settle at any point during the arbitration proceedings.

As disclosed in the financial statements in our 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 in anticipation of future production. While the Company believes that it has adequately accrued for the losses and are in discussions to resolve related claims by the contract manufacturers, there is the risk that additional losses or litigation related expenses may be incurred above the amounts accrued for as of March 31, 2021, if the Company fails to resolve these claims in a timely and/or favorable manner.

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.


	Issued		Outstanding		Exercise Price
2015 Warrant Issuance		383,500		210,578		2.05	Jun 2021
2016 Warrant Issuance		2,947,949		1,680,447		2.60	Feb 2022
2017 Warrant Issuance(1)		100,000		100,000		2.25	Mar 2022
2017 Warrant Issuance(2)		1,650,000		1,650,000		2.45	Nov 2022
2018 Warrant Issuance(2)		4,004,324		3,060,449		1.55	Jul 2023
2019 Warrant Issuance(3)		6,000,000		3,000,000		0.78	Oct 2024
				9,701,474

(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 2015, 2016, and 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.

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 Sheet 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,
	2021		2020
2018 January and February Issuance
Fair Value	$	8,234	$	3,577

2017 May Issuance
Fair Value		3,596		1,045
	$	11,830	$	4,622

(1)

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

During the quarter 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, the Company received $5.1 million during the quarter ended March 31, 2021 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, NY under a non-cancelable operating lease agreement. The lease for these facilities, as amended, was to expire in May 2024 and did not contain a renewal option. The lease agreement did not contain any residual value guarantees, or material restrictive covenants. In November 2020, we entered into the 12th amendment, which will expand the current footprint to approximately 63,000 square feet in 2021 and includes two five-year options to extend. Under ASU 842, the Company reassessed the lease from operating to a finance lease for the 12th amendment.

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 expires in October 2021. The lease agreement does not contain any residual value guarantees, material restrictive covenants or a renewal option. This lease is classified as an operating lease.

On May 2, 2019, the Company entered into a three-year finance lease commitment for phone equipment.

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,
	2021		2020
Finance Lease Cost:
Amortization of right-of-use assets	$	157	$	4
Interest on lease liabilities		199		1
Operating lease cost		15		246
Short-term lease cost		-		15
Total Lease Cost	$	371	$	266


Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	16	$	266
Financing cash flows from finance leases	$	255	$	5
Right-of-use assets obtained in exchange for new finance lease liabilities	$	8	$	-
Right-of-use assets obtained in exchange for new operating lease liabilities	$	-	$	-


	March 31, 2021		December 31, 2020
Finance lease right-of-use assets	$	12,528	$	12,677
Operating lease right-of-use assets	$	35	$	50
Finance lease liability, current	$	1,028	$	1,027
Finance lease liability, non-current	$	11,733	$	11,783
Operating lease liabilities, current	$	36	$	51
Operating lease liabilities, non-current	$	-	$	-
Weighted average remaining lease terms - finance leases		20.58 years		20.67 years
Weighted average remaining lease terms - operating leases		0.58 years		0.84 years
Weighted average discount rate - finance leases		6.42%		6.43%
Weighted average discount rate - operating leases		7.75%		7.75%

Future annual minimum lease payments and finance lease commitments as of March 31, 2021 were as follows (in thousands):


	Operating Leases		Finance Leases
2021	$	37	$	773
2022		-		1,019
2023		-		1,011
2024		-		1,011
2025		-		1,011
Thereafter		-		18,392
Total undiscounted future minimum lease payments		37		23,217
Less imputed interest		(1)		(10,456)
Lease liability	$	36	$	12,761

(1)

Total future lease payments exclude approximately $4.9 million of lease payments related to the Expansion Space portion of the NY Lease that was signed but has not yet commenced as of March 31, 2021.

Note 11 – Shareholders’ Equity

Equity Raises

On June 10, 2020, the Company filed a prospectus supplement to update and amend the aggregate amount of shares it could sell pursuant to its At Market Offering Agreement, dated November 22, 2019, as amended from time to time, between the Company and H.C. Wainwright & Co., LLC. This amendment allowed for additional shares to be sold up to an additional dollar amount of $7.29 million.

During 2020, the Company raised $9.8 million, net of offering expenses, through the sale of shares under the At The Market facility, or the ATM Facility, which represented the remaining amount available under the facility. The Company used and intended 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, 2021, the Company has received $4.6 million in total, for initial deposits required by capital equipment vendors. Amounts received, pending payment of deposits to vendors as of March 31, 2021, of $1.7 million are reflected in restricted cash on the accompanying Condensed Consolidated Balance Sheet. Amounts due from the U.S. DoD pursuant to invoices for capital equipment are presented on the Condensed Consolidated Balance Sheet as accounts receivable – due from government awards. The total amount invoiced on these programs of $4.6 million is reflected 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, 2021, the Company recognized deferred income related to certain overhead expenses, not capitalized, of $77 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.

Note 13 – Subsequent Events

During the year ended December 31, 2018, the Company decided to exit the consumer night vision business and accrued approximately $1.0 million related to invoices received for inventory purchased by Suga in anticipation of future production. In November of 2019, we entered into arbitration related to claims by Suga. Based on a ruling on a procedural matter reached by the arbitrator in April 2021, the Company was able to reach an agreement in principle with Suga to resolve these claims. The agreement, which is subject to final documentation, provides for settlement and release of all claims in return for a cash payment by the Company to Suga in the amount of $0.6 million.

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.

We have been deemed to be an essential business in the State of New York and have continued to produce and ship products during the COVID-19 pandemic. We have implemented employee health and safety measures per Centers for Disease Control and Prevention, or CDC, guidelines, including mandating use of personal protective equipment, employee temperature checking, daily location tracking and employee surveys, observing social distancing guidelines and enhanced facility cleaning. We continue to supply products to our customers as well as maintain continuity in our supply chain and expect to continue our operations throughout the duration of the pandemic and beyond. As of the date of this Report, we have experienced disruptions in supply, had several employees test positive for the COVID-19 pandemic 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 or resurgences of the virus, on either our internal operations or those of our suppliers or customers, including the possible impact on state or international quarantine requirements on shipments or vendor support personnel.

Operating expenses for the three months ended March 31, 2021, including R&D expenses, increased approximately $0.9 million as compared to the three months ended March 31, 2020. The majority of the increase was due to investments in R&D expenses for company-funded work related to our high-brightness dPd product and XLE process development, along with resources expended on improving manufacturing processes.

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 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. We are in the process of implementing some of the processes from our yield improvement efforts and we have initiated an effort to explore an overall productivity improvement in the operations area that we believe has the potential to improve our results of operations. Our backlog at March 31, 2021 was $10.7 million compared to backlog of $13.3 million at March 31, 2020.

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 in the second quarter of 2020 and shipped small quantities to customers in the second half of 2020.

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 U.S. manufacturer of OLED microdisplays and our displays are used in many U.S. Military programs.

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 and we are close to achieving 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.

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, including any vaccine resistant strains, or any resurgence 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, here is a significant degree of uncertainty and lack of visibility as to the extent and duration of the pandemic and related slowdowns or economic trends. If either were prolonged, demand for our products will be significantly harmed. Although many jurisdictions are now open with social distancing measures implemented to curtail the spread of COVID-19, but we cannot predict the length of time that it will take for any meaningful economic recovery to take place. We also cannot predict whether 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 our results and financial condition.

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 December 31, 2020, filed with the SEC on March 19, 2021, for a discussion of our critical accounting policies. There were no material changes to such policies in the first three months of March 31, 2021. New accounting policies adopted during the quarter, including accounting for Government funding are described in Note 1, "Summary of Significant Accounting Policies," to our unaudited Condensed Consolidated Financial Statements included in this Report.

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 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, 330-10-34 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 for the during quarter ended March 31, 2021, and the prior two calendar years, and determined the first quarter 2021 level was within the range of normal capacity. We believe that fully allocating the overhead to work in process and finished goods inventories, results in more accurate inventory valuation and computation of costs of goods sold, in addition to providing better information to management in making pricing decisions.

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 in the first quarter of 2021, was an increase of approximately $0.9 million in the carrying value of our work in process and finished goods inventory as of March 31, 2021, and a corresponding decrease in product costs of goods sold. This decreased our net loss by $0.9 million and our loss per share by $0.01.

Results of Operations

Comparative results of operations for the three months ended March 31, 2021 and 2020 (in thousands):

Revenues


	Three Months Ended
	March 31,
	2021		2020		Change
Product	$	6,105	$	5,634	$	471
Contract		668		1,097		(429)
Total revenue, net	$	6,773	$	6,731	$	42

Total revenue for the three months ended March 31, 2021 and 2020 were $6.8 million and $6.7 million, respectively.

Product revenue is comprised primarily of sales of displays as well as sales of other hardware. For the three months ended March 31, 2021 product revenue increased by $0.5 million, primarily reflecting increased shipments of $0.6 million to medical and veterinary customers as compared to the prior year period.

For the three months ended March 31, 2021 contract revenue primarily reflected proof of concept revenue for our Tier One Consumer Company. Contract revenue decreased by $0.4 million, as compared to the prior year period, reflecting the completion of several government contracts during 2020.

Cost of Revenues


	Three Months Ended
	March 31,
	2021		2020		Change
Product	$	4,707	$	4,790	$	(83)
Contract		358	$	507		(149)
Total cost of revenues	$	5,065	$	5,297	$	(232)

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 months ended March 31, 2021 decreased by $0.2 million in comparable prior year period due to the impact of lower yields and increased revenues for the three months ended March 31, 2021. As discussed in Critical Accounting Policies above, during the first quarter of 2021 we changed our method of allocating overhead to inventory and recorded an increase of approximately $0.9 million in the carrying value of our work in process and finished goods inventory and a corresponding decrease in product costs of goods sold.

The following table outlines product and contract total gross profit and related gross margins for the three months ended March 31, 2021 and 2020 (dollars in thousands):


	Three Months Ended
	March 31,
	2021			2020
Product revenues gross profit	$	1,398		$	844
Product revenues gross margin		23	%		15	%
Contract revenues gross profit	$	310		$	590
Contract revenues gross margin		46	%		54	%
Total gross profit	$	1,708		$	1,434
Total gross margin		25	%		21	%

Total gross profit is a function of revenues less cost of revenues. Gross profit for the three months ended March 31, 2021 was $1.7 million an increase of $0.3 million from the comparable prior year period reflecting increased product revenues and the impact of the change in overhead allocation, partially offset by lower contract revenue gross profits, as compared to the prior year period. Total gross margin was 25% and 21% for the three months ended March 31, 2021 and 2020, respectively.

The product gross profit was $1.4 million and $0.8 million for the three months ended March 31, 2021 and 2020, respectively. Product gross profit of $1.4 million for the three months ended March 31, 2021 increased from the comparable prior year period, primarily due to increased shipments of displays, improvements in yields and the impact of the change in overhead allocation. Product revenue gross margin was 23% and 15% for the three months ended March 31, 2021 and 2020, respectively.

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, 2021, contract revenue gross profit was $0.3 million compared to $0.6 million for the prior year period. The decrease in contract revenue for the three months ended March 31, 2021 reflects lower margins on contract revenues for the consumer market, and the completion of certain government contracts during 2020.

Operating Expenses


	Three Months Ended
	March 31,
	2021			2020			Change
Research and development expense	$	1,842		$	980		$	862
Percentage of net revenue		27	%		15	%
Selling, general and administrative expense	$	1,824		$	1,798		$	26
Percentage of net revenue		27	%		27	%
Total operating expenses	$	3,666		$	2,778		$	888
Percentage of net revenue		54	%		41	%

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 $1.8 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively. The increase in R&D costs in the first quarter of 2021 reflects materials and other overhead costs related to development and qualification of our higher brightness XLE and dPd displays.

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. SG&A expenses for the three months ended March 31, 2021 of $1.8 million were comparable to the prior year period.

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 or expenses related to the change in fair value of warrant liability were $7.2 million and $20 thousand for the three months ended March 31, 2021 and 2020, respectively. 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 Sheet 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 also includes $0.1 million we received in settlement of a claim related to intellectual property.

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

At three months ended March 31, 2021, we had $10.7 million in cash and cash equivalents, working capital of $8.3 million and borrowings outstanding and borrowing availability under the ABL Facility of $0.2 million and $2.5 million, respectively. The Company had $8.3 million in cash, working capital $12.1 million and borrowings outstanding and borrowing availability under the ABL Facility of $2.1 million at December 31, 2020.

On June 11, 2020, we were granted a $5.5 million award from the IBAS and Sustainment program for OLED Supply Chain Assurance. We received these funds for procurement and installation of capital equipment in our NY-based manufacturing facility. This IBAS award will be managed under the Cornerstone Other Transaction Authority, or Cornerstone OTA, and fully funds Phase I of a three-phase agreement. The IBAS Cornerstone OTA was created to focus on strengthening the U.S. Manufacturing and Defense Industrial Base. The funds were [partially] released to us beginning in August 2020 in accordance with down payments and progress payment schedules of the various capital equipment vendors.

On June 8, 2020, we 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 for $1.9 million. Under the PPP loan, the loan has a fixed interest rate of 1% per annum, a maturity date two years from the date of the funding of the loan, and deferral of payments for six months. During 2020, we used the proceeds to pay qualified payroll costs, in accordance with PPP and Section 1106 of the CARES Act 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 March 31, 2021. We recorded this amount in the Condensed Consolidated Statements of Operations as gain on forgiveness of debt in the first quarter of 2021.

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.

For the three months ended March 31, 2021, cash used in operating activities, were $1.2 million, which was attributable to a net loss of $7.4 million and changes in operating assets and liabilities of $0.2 million and non-cash income and expenses of $6.0 million. Cash used in operating activities for the three months ended March 31, 2020 was $0.9 million.

For the three months ended March 31, 2021, cash used in investing activities was $1.7 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 $1.6 million.

As of March 31, 2021, we had outstanding commitments to purchase approximately $854 thousand in capital expenditures, and expect to make additional capital expenditures during 2021 to improve our manufacturing and R&D capabilities. These commitments exclude $2.8 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, 2020 was $0.3 million for equipment purchases.

For the three months ended March 31, 2021, cash provided by financing activities was $4.8 million, including $5.4 million in proceeds from the exercise of warrants and employee stock options, and proceeds from government grants of $1.1 million offset by net repayments of $1.7 million under our ABL Facility. Net cash provided by financing activities during the three months ended March 31, 2020 was $0.8 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.

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, including any vaccine resistant strains, or any resurgence 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, here is a significant degree of uncertainty and lack of visibility as to the extent and duration of the pandemic and related slowdowns or economic trends. If either were prolonged, demand for our products will be significantly harmed. Although many jurisdictions are now open with social distancing measures implemented to curtail the spread of COVID-19, but we cannot predict the length of time that it will take for any meaningful economic recovery to take place. We also cannot predict whether 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 our results and financial condition.

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.

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 October 2019 wherein senior management work status was reduced by approximately 20%;

reduce headcount and not replace departed employees;

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 April 2021, and the anticipated availability of our ABL facility, we have developed plans to extend our liquidity to support its working capital requirements through the first quarter of 2022. However, there can be no assurance our plans will be achieved, or that we will be able to continue to borrow under its ABL Facility, mitigate the impacts of the COVID-19 pandemic, secure additional financing, and/or pursue strategic alternatives on terms acceptable to us, or at all.

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 November 22, 2019, we entered into an ATM offering agreement, or the ATM Agreement, with H.C. Wainwright & Co., LLC, or Wainwright, relating to sales of shares of our common stock. On June 10, 2020, we filed a prospectus supplement to update and amend the aggregate amount of shares we could sell pursuant to the ATM Agreement.

During 2020, we raised $9.8 million, net of offering expenses, through the sale of shares under the ATM Agreement which represented the remaining amount available under the facility. We used and intend to use the net proceeds from sales made under the ATM Agreement 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 will automatically renew on December 31, 2021 for a one-year term unless written notice to terminate the Financing Agreement is provided by either party.

The ABL Facility renewed on December 31, 2020 and will automatically renew on December 31, 2021 for a one-year term unless written notice to terminate the Financing Agreement is provided by either party.

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, 2021, we had $0.2 million in borrowings, had unused borrowing availability of $2.5 million and were in compliance with all financial debt covenants.

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.

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.

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2021, 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. Despite the impact of the COVID-19 pandemic, due to our classification as an essential business in the State of New York, our finance and administrative workforce worked onsite during the quarter ended March 31, 2021. Although the workforce occasionally works form home on isolated days, these changes to the working environment did not have a material effect on our internal controls over financial reporting during the most recent quarter. We are continually monitoring and assessing the impact of the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.

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 March 2019, we received a demand letter seeking payment of $0.9 million of outstanding invoices relating to purchased inventory from Suga Electronics Limited, or Suga, a contract manufacturer located in China, which manufactured product sold by our consumer night vision business. We have responded to the demand letter, and requested that Suga provide substantiation of purchased inventory. On August 1, 2019 we were notified by Suga that they intend to pursue arbitration. During September and October 2019, we held preliminary discussions with Suga to attempt to reach a settlement, however in November 2019 we received a formal request for arbitration which Suga filed with the International Chamber of Commerce, or ICC. We retained local counsel in Hong Kong to represent it before the ICC and in December 2019 filed an answer to Suga’s request for arbitration including a counterclaim seeking repayment of amounts previously paid to Suga. An arbitrator has been appointed and arbitral proceedings for the consideration of the claims and counterclaims are expected to run through the second quarter of 2021. The parties are permitted to settle at any point during the arbitration proceedings.

As disclosed in the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018, we decided to exit the consumer night vision business and accrued approximately $1.0 million related to invoices received for inventory purchased by Suga in anticipation of future production. While we believe that we have adequately accrued for the losses and are in discussions to resolve related claims by the contract manufacturers, there is the risk that additional losses or litigation related expenses may be incurred above the amounts accrued for as of March 31, 2021, if we fail to resolve these claims in a timely and/or favorable manner.

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 2020 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 2020 Form 10-K and this Report, which could in turn have a material adverse effect on us. The “Risk Factors” section in our 2020 Form 10-K otherwise remains current in all material respects. The risks discussed in the “Risk Factors” section in our 2020 Form 10-K 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.

ITEM 6. Exhibits

3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to an appendix to the Company’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 Company’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 Company’s Definitive Proxy Statement filed on June 14, 2001).
3.4	Amended and Restated By-Laws of the Company. (1)
4.1	Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 of the Registrant’s current 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 Company’s Current 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 current 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 Company’s Current 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 Company’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 Company’s Current Report on Form 8-K filed on May 24, 2017).
4.8	Description of Registrants Securities.
10.2	Department of Defense Production Act Title III award (incorporated by reference to exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on July 28, 2020).
10.3	12th Lease Amendment between IPark East Fishkill and eMagin Corporation, effective as of November 20, 2020. (1)
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)

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

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 13, 2021


	eMAGIN CORPORATION

	By:	/s/ Andrew G. Sculley
		Andrew G. Sculley
		Chief Executive Officer
		Principal Executive Officer

AMENDED AND RESTATED

BY-LAWS

EMAGIN CORPORATION

a Delaware corporation (the "Corporation")

ARTICLE I

OFFICES

Section 1.1. Registered Office. The registered office of the

Corporation in the State of Delaware is located at the Corporation Trust

Company, 1209 Orange Street, City of Wilmington, County of Newcastle.

Section 1.2. Principal Office. The principal office of the Corporation

will be: eMagin Corporation, 700 South Drive, Suite 201, Hopewell Junction, NY 12533 or at

such other place as the Board of Directors may from time to time determine.

Section 1.3. Other Offices. The Company may also have offices at such

other places as the Board of Directors may from time to time determine or the

business of the Company may require.

ARTICLE II

MEETINGS OF STOCKHOLDERS

Section 2.1. Annual Meeting. The annual meeting of the stockholders of

the Corporation shall be held within or without the State of Delaware or by

means of remote communication within or without the State of Delaware, at such

place and time as the Board of Directors may designate in the call or in a

waiver of notice thereof for the purpose of electing Directors and for the

transaction of such other business as may properly be brought before the meeting

in accordance with applicable law and the Amended and Restated Certificate of

Incorporation.

Section 2.2. Special Meetings. Special Meetings of the stockholders may

be called as set out in Article NINE of the Amended and Restated Certificate of

Incorporation and at such times and at such place either within or without the

State of Delaware as may be stated in the call or in a waiver of notice thereof.

Section 2.3. Notice of Meetings. Notice of the time, place and purpose

of every meeting of stockholders shall be delivered personally or mailed not

less than ten (10) days nor more than sixty (60) days previous thereto to each

stockholder of record entitled to vote, at such stockholder's post office

address appearing upon the records of the Corporation or at such other address

as shall be furnished in writing by him or her to the Corporation for such

purpose. If a stockholder has provided his or her electronic address to the

Corporation, notice may be given in accordance with Section 232 of the Delaware

General Corporation Law. Such further notice shall be given as may be required

by law or by these By-Laws or by the Amended and Restated Certificate of

Incorporation. Business transacted at any Special Meeting shall be expressly

limited to the purposes stated in the notice calling such meeting.

If a meeting of stockholders is adjourned for more than 120 days after

the date fixed for the original meeting, or if a new record date is fixed for

the adjourned meeting, or if the date, time and place for the adjourned meeting

is not announced prior to adjournment, then notice of the adjourned meeting of

stockholders shall be given as in the case of any original meeting; otherwise,

it is not necessary to give any notice of the adjourned meeting of stockholders

other than by announcement at the meeting at which the adjournment is taken.

A stockholder's attendance at a meeting constitutes a waiver by such

stockholder of (a) objection to lack of notice or defective notice of the

meeting, unless the stockholder at the beginning of the meeting objects to

holding the meeting or transacting business at the meeting, and (b) objection to

consideration of a particular matter at the meeting that is not within the

purpose or purposes described in the notice of the meeting, unless the

stockholder objects to considering the matter before it is voted upon.

Section 2.4. Quorum. The holders of record of at least a majority of

the shares of the stock of the Corporation, issued and outstanding and entitled

to vote, present in person or by proxy, shall, except as otherwise provided by

law or by these By-Laws, constitute a quorum at all meetings of the

stockholders; if there be no such quorum, the holders of a majority of such

shares so present or represented may adjourn the meeting from time to time until

a quorum shall have been obtained.

Section 2.5. Organization of Meetings. Meetings of the stockholders

shall be presided over by the Chairman of the Board, if there be one, or if the

Chairman of the Board is not present by such Officer or Director of the

Corporation as may be designated in writing or by electronic means by the

Chairman of the Board, or the Chief Executive Officer, or if the Chief Executive

Officer is not present, by a chairman to be chosen at the meeting. The Secretary

of the Corporation, or in the Secretary of the Corporation's absence, an

Assistant Secretary, shall act as Secretary of the meeting, if present.

Section 2.6. Conduct of Meetings. The date and time of the opening and

the closing of the polls for each matter upon which the stockholders will vote

at a meeting shall be announced at the meeting by the person presiding over the

meeting pursuant to Section 2.5 of this Article II (the "Presiding Person"). The

Board of Directors may, to the extent not prohibited by law, adopt by resolution

such rules and regulations for the conduct of the meeting of stockholders as it

shall deem appropriate. Except to the extent inconsistent with such rules and

regulations as adopted by the Board of Directors, the Presiding Person over any

meeting of stockholders shall have the right and authority to prescribe such

rules, regulations and procedures and to do all such acts as, in the judgment of

such person, are appropriate for the proper conduct of the meeting. Such rules,

regulations or procedures, whether adopted by the Board of Directors or

prescribed by the Presiding Person, may to the extent not prohibited by law

include, without limitation, the following: (i) the establishment of an agenda

or order of business for the meeting; (ii) rules and procedures for maintaining

order at the meeting and the safety of those present; (iii) limitations on

attendance at or participation in the meeting to stockholders of record of the

Corporation, their duly authorized and constituted proxies or such other persons

as the Presiding Person shall determine; (iv) restrictions on entry to the

meeting after the time fixed for the commencement thereof; and (v) limitations

on the time allotted to questions or comments by participants.

Section 2.7. Voting. At each meeting of stockholders, except as

otherwise provided by statute or the Amended and Restated Certificate of

Incorporation, every holder of record of stock entitled to vote shall be

entitled to one vote in person or by proxy for each share of such stock standing

in his or her name on the records of the Corporation. Elections of Directors

shall be determined by a plurality of the votes cast and, except as otherwise

provided by statute, the Certificate of Incorporation, or these By-Laws, all

other action shall be determined by a majority of the votes cast at such

meeting. Each proxy to vote shall be in writing and signed by the stockholder or

by such stockholder's duly authorized attorney. The Corporation shall have the

right, but not the obligation, to request evidence of the authority of any

person purporting to execute any proxy on behalf of any stockholder, such

evidence to be reasonably satisfactory to the Corporation or the Inspectors of

Election, if any are appointed pursuant to this Article.

At all elections of Directors, the voting shall be by ballot or in such

other manner as may be determined by the stockholders present in person or by

proxy entitled to vote at such election. With respect to any other matter

presented to the stockholders for their consideration at a meeting, stockholders

entitled to vote and representing twenty-five percent (25%) or more of the votes

entitled to be cast at such meeting may, on any question, demand a vote by

ballot.

Section 2.8. Stockholder's List. A complete list of the stockholders

entitled to vote at each such meeting, arranged in alphabetical order, with the

postal address of each, and the number of shares registered in the name of each

stockholder, shall be prepared by the Secretary and shall be open to the

examination of any stockholder, for any purpose germane to the meeting, during

ordinary business hours, for a period of at least ten days prior to the meeting,

at the principal office of the Corporation. The list shall also be produced and

kept at the time and place of the meeting during the whole time thereof, and may

be inspected by any stockholder who is present.

Section 2.9. Inspectors of Election. The Board of Directors in advance

of any meeting of stockholders may appoint one or more Inspectors of Election to

act at the meeting or any adjournment thereof. If Inspectors of Election are not

so appointed, the Presiding Person may, and on the request of any stockholder

entitled to vote shall, appoint one or more Inspectors of Election. Each

Inspector of Election, before entering upon the discharge of his or her duties,

shall take and sign an oath or affirmation faithfully to execute the duties of

Inspector of Election at such meeting with strict impartiality and according to

the best of his or her ability. If appointed, Inspectors of Election shall take

charge of the polls and, when the vote is completed, shall make a certificate of

the result of the vote taken and of such other facts as may be required by law.

ARTICLE III

DIRECTORS

Section 3.1. General Powers. All corporate powers shall be exercised by

or under the authority of, and the business and affairs of the Corporation shall

be managed under the direction of the Board of Directors. The Board of Directors

shall be constituted as set out in the Amended and Restated Certificate of

Incorporation.

Section 3.2. Time and Place of Meetings; Notice. Meetings of the Board

of Directors shall be held at such place either within or without the State of

Delaware, as may from time to time be fixed by resolution of the Board, or as

may be specified in the call or in a waiver of notice thereof. Meetings of the

Board of Directors may also be effectuated by means of a conference telephone or

similar communications equipment by means of which all persons participating in

the meeting can hear each other during the meeting. Participation by such means

shall constitute presence in person at such meeting. Special meetings may be

held at any time upon the call of the Chairman of the Board, if one be elected,

or the Chief Executive Officer. Written notice may be by mail (in which case it

shall be deemed received within five days after its deposit in the U.S. mail if

mailed with first class postage), private carrier, personal delivery, telegraph,

facsimile, or electronic mail or other electronic means and shall be effective

when served not less than two business days before such meeting. A meeting of

the Board may be held without notice immediately after the annual meeting of

stockholders at the same place at which such meeting was held. Any meeting may

be held without notice, if all Directors are present, or if notice is waived in

writing, either before or after the meeting, by those not present. For all

purposes of these By-Laws a business day shall be any day other than a Saturday,

Sunday or any day when banks in the States of New York are permitted or required

to be closed.

Section 3.3. Quorum; Majority Vote. Not less than majority of the

members of the Board of Directors then holding office shall constitute a quorum

for the transaction of business, but if at any meeting of the Board there shall

be less than a quorum present, a majority of those present may adjourn the

meeting from time to time until a quorum shall have been obtained. A majority of

the Directors present, even if less than a quorum, may adjourn a meeting and

continue it at a later time. Notice of the adjourned meeting or the business to

be transacted shall not be necessary. At any adjourned meeting at which a quorum

is present, any business may be transacted which could have been transacted at

the meeting as originally called.

Section 3.4. Committees. The Board of Directors, by resolution adopted

by a majority of the full Board of Directors, may designate from among its

members an Executive Committee, an Audit Committee, a Compensation Committee and

one or more other committees, each of which must have two (2) or more members

and must be governed by the same rules regarding meetings, action without

meetings, notice, waiver of notice, quorum and voting requirements as applied to

the Board of Directors; provided, that to the extent that the Board of Directors

is appointing a special committee to consider an extraordinary transaction, such

committee may be comprised of less than two (2) members if fewer than two (2)

members are available or willing to serve on such committee. Each such

Committee, to the extent provided in such resolution, shall have and may

exercise all the authority of the Board of Directors in the management of the

Corporation, except no such committee shall have the authority to: (a) authorize

or approve a distribution except according to a general formula or method

prescribed by the Board of Directors; (b) approve or propose to stockholders

action which the Delaware General Corporation Law requires to be approved by

stockholders; (c) fill vacancies on the Board of Directors or any of its

committees; (d) amend the Amended and Restated Certificate of Incorporation; (e)

adopt, amend or repeal the By-Laws; (f) approve a plan of merger not requiring

stockholder approval; or (g) authorize or approve the issuance or sale or

contract for the sale of shares of the Corporation, or determine the designation

and relative rights, preferences and limitation on a class or series of shares,

except that the Board of Directors may authorize a committee, or a senior

executive officer of the Corporation to do so within limits specifically

prescribed by the Board of Directors.

A majority of the full Board shall have power at any time to change the

membership of any such committee, to fill vacancies in it, or to dissolve it.

Section 3.5. Action by Consent. Any action required or permitted to be

taken at any meeting of the Board of Directors, or of any committee thereof, may

be taken without a meeting, if prior to such action a written consent or

consents thereto is signed by all members of the Board, or of such committee as

the case may be, and such written consent or consents is filed with the minutes

of proceedings of the Board or committee. Signed consent by facsimile shall

constitute prima facie evidence of written consent.

Section 3.6. Compensation. The Board of Directors may determine, from

time to time, the amount of compensation which shall be paid to its members. The

Board of Directors shall also have power, in its discretion, to allow a fixed

sum and to pay expenses, if any, for attendance at each regular or special

meeting of the Board, or of any committee of the Board. In addition, the Board

of Directors shall also have power, in its discretion, to provide for and pay to

Directors rendering services to the Corporation not ordinarily rendered by

Directors, as such, special compensation appropriate to the value of such

services, as determined by the Board from time to time.

Section 3.7. Resignation. Any director of the Corporation may resign at

any time by giving written notice to the Board of Directors, the Chairman of the

Board or the Secretary.

ARTICLE IV

OFFICERS

Section 4.1. Titles and Election. The officers of the Corporation

chosen by the Board shall be a Chief Executive Officer (who shall either be the

Chairman of the Board or the President), a Treasurer and a Secretary. The Board

of Directors may elect a Chairman of the Board from among its members who, when

present, shall preside at all meetings of the Board of Directors and who shall

have such other powers as the Board may determine. Officers may also include a

President, one or more Vice Presidents, Assistant Secretaries, Assistant

Treasurers and such other officers and agents as the Board of Directors shall

deem necessary, and may define their powers and duties. Any number of offices

may be held by the same person.

Section 4.2. Terms of Office. Officers shall hold office until their

successors are chosen and qualify or until such officer's earlier death,

incapacity, resignation or removal. Officers of the Corporation shall be

appointed by the Board of Directors provided that the Board of Directors may

authorize a duly appointed officer to appoint one or more other officers and

assistant officers, other than appointment of the Chief Executive Officer, the

Chairman of the Board or the President.

Section 4.3. Removal. Any officer may be removed, either with or

without cause, at any time, by a written resolution adopted by a two-thirds

majority of the full Board of Directors. Such removal shall be without prejudice

to the contract rights, if any, of the person so removed.

Section 4.4. Resignations. Any officer may resign at any time by giving

written notice to the Board of Directors, the Chairman of the Board, the Chief

Executive Officer or to the Secretary. Such resignation shall be without

prejudice to the contract rights, if any of the person resigning, shall take

effect at the time specified therein, and, unless otherwise specified therein,

the acceptance of such resignation shall not be necessary to make it effective.

Section 4.5. Vacancies. If the office of any officer or agent becomes

vacant by reason of death, resignation, retirement, disqualification, removal

from office or otherwise, the Directors may choose a successor, who shall hold

office for the unexpired term in respect of which such vacancy occurred.

Section 4.6. Chairman of the Board. The Chairman of the Board of

Directors, if one be elected, shall preside at all meetings of the Board of

Directors and of the stockholders, and the Chairman shall have and perform such

other duties as from time to time may be assigned to the Chairman by the Board

of Directors.

Section 4.7. Chief Executive Officer. If there is a Chairman of the

Board and the Board of Directors designates the Chairman of the Board as the

Chief Executive Officer, then the Chairman of the Board shall be the Chief

Executive Officer of the Corporation. Otherwise, the President shall be the

Chief Executive Officer of the Corporation. Subject to the direction and control

of the Board of Directors the Chief Executive Officer shall supervise and

control the management of the Corporation, shall appoint and discharge employees

and agents of the Corporation, fix their compensation and shall have the duties

and authority normally incident to the position of chief executive officer of a

corporation and such other duties and authority as may be prescribed by the

Board of Directors or as provided for elsewhere in the By-Laws.

Section 4.8. President. Unless there is appointed a Chairman of the

Board who is also designated the Chief Executive Officer, the President shall be

the Chief Executive Officer of the Corporation and shall have all of the duties

and authority of that office. If the President is not the Chief Executive

Officer, then the President shall have the duties and authority as authorized by

the Board of Directors.

Section 4.9. Vice Presidents. The Vice President, and if there be more

than one, the Executive Vice President or other Vice President designated by the

Board of Directors shall, in the absence or disability of the President, have

the authority and perform the duties of said office. In addition, each Vice

President shall perform such other duties and have such other powers as are

normally incident to the office of Vice President or shall be prescribed by the

Chief Executive Officer or the Board of Directors.

Section 4.10. Secretary. The Secretary shall have the responsibility

and authority to maintain and authenticate the records of the Corporation and

shall keep, or cause to be kept, accurate records of the acts and proceedings of

all meeting of stockholders, directors and Committees. The Secretary shall give,

or cause to be given, notice of all meetings of the stockholders and of the

Board of Directors and Committees thereof.. The Secretary shall affix the

corporate seal to any instrument requiring it, and when so affixed, it shall be

attested by the signature of the Secretary, or an Assistant Secretary who may

affix the seal to any such instrument in the event of the absence or disability

of the Secretary. The Secretary shall have and be the custodian of the stock

records and all other books, records and papers of the Corporation (other than

financial), shall see that all books, reports, statements, certificates and

other documents and records required by law are properly kept and filed and

shall perform such other duties as may be prescribed by the Board of Directors.

Section 4.11. Treasurer. The Treasurer shall have the custody of the

corporate funds and securities and shall keep full and accurate accounts of

receipts and disbursements in books belonging to the Corporation and shall

deposit all moneys, and other valuable effects in the name and to the credit of

the Corporation, in such depositories as may be designated by the Board of

Directors. The Treasurer shall disburse the funds of the Corporation as may be

ordered by the Board, taking proper vouchers for such disbursements, and shall

render to the Directors whenever they may require it, an account of all his or

her transactions as Treasurer and of the financial condition of the Corporation.

Section 4.12. Assistant Secretaries and Assistant Treasurers. The

Assistant Secretaries and Assistant Treasurers, if any, shall, in the absence or

disability of the Secretary or Treasurer, respectively, have all the powers and

perform all of the duties of those offices, and they shall in general perform

such other duties as shall be assigned to them by the Secretary or the

Treasurer, respectively, or by the Chief Executive Officer, the Chief Financial

Officer, the Treasurer or the Board of Directors.

Section 4.13. Delegation of Duties. In case of the absence or

disability of any officer of the Corporation, or for any other reason that the

Board may deem sufficient, the Board may delegate, for the time being, the

powers or duties, or any of them, of such officer to any other officer, or to

any Director.

ARTICLE V

INDEMNIFICATION

Section 5.1. Actions by Others. The Corporation (1) shall indemnify any

person who was or is a party or is threatened to be made a party to any

threatened, pending or completed action, suit or proceeding, whether civil,

criminal, administrative or investigative (other than an action by or in the

right of the Corporation) by reason of the fact that he or she is or was a

Director or an officer of the Corporation and (2) except as otherwise required

by Section 5.3 of this Article, may indemnify any person who was or is a party

or is threatened to be made a party to any threatened, pending or completed

action, suit or proceeding, whether civil, criminal, administrative or

investigative (other than an action by or in the right of the Corporation) by

reason of the fact that he or she is or was an employee or agent of the

Corporation, or is or was serving at the request of the Corporation as a

Director, officer, employee, agent of or participant in another corporation,

partnership, joint venture, trust or other enterprise, against expenses

(including attorneys' fees), judgments, fines and amounts actually and

reasonably incurred by such person in connection with such action, suit or

proceeding if he or she acted in good faith and in a manner he or she reasonably

believed to be in or not opposed to the best interests of the Corporation, and

with respect to any criminal action or proceeding, had no reasonable cause to

believe his or her conduct was unlawful. The termination of any action, suit or

proceeding by judgment, order, settlement, conviction, or upon a plea of nolo

contendere or its equivalent, shall not, of itself, create a presumption that

the person did not act in good faith and in a manner which such person

reasonably believed to be in or not opposed to the best interests of the

Corporation, and, with respect to any criminal action or proceeding, had

reasonable cause to believe that his or her conduct was unlawful.

Section 5.2. Actions by or in the Right of the Corporation. The

Corporation shall indemnify any person who was or is a party or is threatened to

be made a party to any threatened, pending or completed action or suit by or in

the right of the Corporation to procure a judgment in its favor by reason of the

fact that he or she is or was a Director, officer, employee or agent of the

Corporation, or is or was serving at the request of the Corporation as a

Director, officer, employee, agent of or participant in another corporation,

partnership, joint venture, trust or other enterprise against expenses

(including attorneys' fees) actually and reasonably incurred by such person in

connection with the defense or settlement of such action or suit if he or she

acted in good faith and in a manner he or she reasonably believed to be in or

not opposed to the best interests of the Corporation and except that no

indemnification shall be made in respect of any claim, issue or matter as to

which such person shall have been adjudged to be liable for gross negligence or

misconduct in the performance of his or her duty to the Corporation unless and

only to the extent that the Delaware Court of Chancery or the court in which

such action or suit was brought shall determine upon application that, despite

the adjudication of liability but in view of all the circumstances of the case,

such person is fairly and reasonably entitled to indemnity for such expenses

which the Delaware Court of Chancery or such other court shall deem proper.

Section 5.3. Successful Defense. To the extent that it is determined by

a final judicial determination that a person who is or was a Director, officer,

employee or agent of the Corporation has been successful on the merits or

otherwise in defense of any action, suit or proceeding referred to in Section

5.1 or Section 5.2 of this Article, or in defense of any claim, issue or matter

therein, such person shall be indemnified against expenses (including attorneys'

fees) actually and reasonably incurred by him or her in connection therewith.

Section 5.4. Specific Authorization. Any indemnification under Section

5.1 or Section 5.2 of this Article (unless ordered by a court) shall be made by

the Corporation only as authorized in the specific case upon a determination

that indemnification of the Director, officer, employee or agent is proper in

the circumstances because such person has met the applicable standard of conduct

set forth in said Sections 5.1 and 5.2. Such determination shall be made (1) by

the Board of Directors by a majority vote of a quorum consisting of Directors

who were not parties to such action, suit or proceeding, or (2) if such a quorum

is not obtainable, or, even if obtainable a quorum of disinterested Directors so

directs, by independent legal counsel in a written opinion, or (3) by the

stockholders.

Section 5.5. Advance of Expenses. Expenses incurred by any person who

may have a right of indemnification under this Article in defending a civil or

criminal action, suit or proceeding may be paid by the Corporation in advance of

the final disposition of such action, suit or proceeding as authorized by the

Board of Directors in the specific case upon receipt of an undertaking by or on

behalf of the Director, officer, employee or agent to repay such amount if it

shall ultimately be finally judicially determined that he or she is not entitled

to be indemnified by the Corporation pursuant to this Article.

Section 5.6. Right of Indemnity Not Exclusive. The indemnification

provided by this Article shall not be deemed exclusive of any other rights to

which those seeking indemnification may be entitled under any by-law, agreement,

vote of stockholders or disinterested Directors or otherwise, both as to action

in his or her official capacity and as to action in another capacity while

holding such office, and shall continue as to a person who has ceased to be a

Director, officer, employee or agent and shall inure to the benefit of the

heirs, executors and administrators of such a person.

Section 5.7. Insurance. The Corporation may purchase and maintain

insurance on behalf of any person who is or was a Director, officer, employee or

agent of the Corporation, or is or was serving at the request of the Corporation

as a Director, officer, employee or agent of or participant in another

corporation, partnership, joint venture, trust or other enterprise against any

liability asserted against him or her and incurred by him or her in any such

capacity, or arising out of such person's status as such, whether or not the

Corporation would have the power to indemnify him or her against such liability

under the provisions of this Article, Section 145 of the General Corporation Law

of the State of Delaware or otherwise.

Section 5.8. Invalidity of Any Provisions of This Article. The

invalidity or unenforceability of any provision of this Article shall not affect

the validity or enforceability of the remaining provisions of this Article.

ARTICLE VI

SHARE CERTIFICATES; RECORD DATE

Section 6.1. Certificates for Shares. Certificates representing shares

of the Corporation shall be issued and evidenced by certificates for shares of

stock in such form as the Board of Directors shall determine to every

stockholder for the fully paid shares owned by him or her. The certificates

shall be signed by the Chief Executive Officer, President or a Vice President

and by the Secretary, or the Treasurer, or an Assistant Secretary, or an

Assistant Treasurer, sealed with the seal of the Corporation or a facsimile

thereof, and countersigned and registered in such manner, if any, as the Board

of Directors may by resolution prescribe. Where any such certificate is

countersigned by a transfer agent other than the Corporation or its employee, or

registered by a registrar other than the Corporation or its employee, the

signature of any such officer may be a facsimile signature. In case any officer

or officers who shall have signed, or whose facsimile signature or signatures

shall have been used on, any such certificate or certificates shall cease to be

such officer or officers of the Corporation, whether because of death,

resignation or otherwise, before such certificate or certificates shall have

been delivered by the Corporation, such certificate or certificates may

nevertheless be adopted by the Corporation and be issued and delivered as though

the person or persons who signed such certificate or certificates or whose

facsimile signature or signatures shall have been used thereon had not ceased to

be such officer or officers of the Corporation.

Section 6.2. Transfer of Shares. The shares of stock of the Corporation

shall be transferred only upon the books of the Corporation by the holder

thereof in person or by his or her attorney, upon surrender for cancellation of

certificates for the same number of shares, with an assignment and power of

transfer endorsed thereon or attached thereto, duly executed, with such proof of

the authenticity of the signature as the Corporation or its agents may

reasonably require.

Section 6.3. Record Dates. The Board of Directors may fix in advance a

date, not less than ten nor more than sixty days preceding the date of any

meeting of stockholders, or the date for the payment of any dividend, or the

date for the distribution or allotment of any rights, or the date when any

change, conversion or exchange of capital stock shall go into effect, as a

record date for the determination of the stockholders entitled to notice of, and

to vote at, any such meeting, or entitled to receive payment of any such

dividend, or to receive any distribution or allotment of such rights, or to

exercise the rights in respect of any such change, conversion or exchange of

capital stock, and in such case only such stockholders as shall be stockholders

of record on the date so fixed shall be entitled to such notice of, and to vote

at, such meeting, or to receive payment of such dividend, or to receive such

distribution or allotment or rights or to exercise such rights, as the case may

be, notwithstanding any transfer of any stock on the books of the Corporation

after any such record date fixed as aforesaid.

A determination of stockholders entitled to notice of or to vote at a

stockholders' meeting is effective for any adjournment of the meeting unless the

Board of Directors fixes a new record date for the adjourned meeting, which it

must do if the meeting is adjourned to a date more than 120 days after the date

fixed for the original meeting.

Section 6.4. Lost Certificates. In the event that any certificate of

stock is lost, stolen, destroyed or mutilated, the Board of Directors may

authorize the issuance of a new certificate of the same tenor and for the same

number of shares in lieu thereof. The Board may in its discretion, before the

issuance of such new certificate, require the owner of the lost, stolen,

destroyed or mutilated certificate, or the legal representative of the owner to

make an affidavit or affirmation setting forth such facts as to the loss,

destruction or mutilation as it deems necessary, and at its discretion may

require said owner to give the Corporation a bond in such reasonable sum as it

directs to indemnify the Corporation.

ARTICLE VII

CHECKS AND DEPOSITS

Section 7.1. Checks, Notes, Other Financial Instruments. All checks and

drafts on the Corporation's bank accounts and all bills of exchange and

promissory notes, and all acceptances, obligations and other instruments for the

payment of money, may be signed by the Chief Executive Officer, Chief Financial

Officer or Treasurer and may also be signed by such other officer or officers,

agent or agents, as shall be authorized from time to time by the Chief Executive

Officer or the Board of Directors.

Section 7.2. Deposits. All funds of the Corporation not otherwise

employed or invested shall be deposited to the credit of the Corporation in such

depositories as the Board of Directors may direct.

ARTICLE VIII

RECORDS AND REPORTS

Section 8.1. General. The Corporation shall keep all records and submit

and file all reports and filings as are required by applicable law. Unless the

Board of Directors or the Chief Executive Officer otherwise directs, the

Treasurer or, if named, the Chief Financial Officer shall be responsible for

keeping, or causing to be kept, all financial and accounting records of the

Corporation and for submitting or filing, or causing to be submitted or filed,

all reports and filings of a financial or accounting nature, and the Secretary

shall be responsible for keeping, or causing to be kept all other records and

for submitting or filing, or causing to be submitted or filed, all other reports

or filings.

Section 8.2. Financial Statements. There shall be kept at such place of

office of the Corporation as the Board of Directors shall determine, within or

without the State of Delaware, in electronic or written form, correct books and

records of account of all its business and transactions, minutes of the

proceedings of its stockholders, Board of Directors and committees. There shall

also be kept the stock book, containing the names and addresses of the

stockholders, the number of shares held by them, respectively, and the dates

when they respectively became the owners of record thereof, and in which the

transfer of stock shall be registered, and such other books and records as the

Board of Directors may from time to time determine.

ARTICLE IX

MISCELLANEOUS PROVISIONS

Section 9.1 Fiscal Year. The fiscal year of the Corporation shall be

the calendar year unless otherwise determined by the Board of Directors.

Section 9.2 Corporate Seal. The seal of the Corporation shall be

circular in form and contain the name of the Corporation, and the year and state

of its incorporation. Such seal may be altered from time to time at the

discretion of the Board of Directors.

Section 9.3 Voting of Stock. Unless otherwise specifically authorized

by the Board of Directors, all stock owned by the Corporation, other than stock

of the Corporation, shall be voted, in person or by proxy, by the Chief

Executive Officer, President or any Vice President of the Corporation on behalf

of the Corporation.

Section 9.4 Copies of Resolutions. Any person dealing with the

Corporation may rely upon a copy of any of the records, of the proceedings,

resolution or votes of the Board of Directors or stockholders when certified by

the Chief Executive Officer, President or Secretary.

Section 9.5 Rules of Order. The rules contained in the most recent

edition of Robert's Rules of Order shall govern all meetings of stockholders and

directors where those rules are not inconsistent with the Amended and Restated

Certificate of Incorporation, By-Laws or other rules of order of the

Corporation.

Section 9.6 Exclusive Jurisdiction. Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for any state law claims for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of, or a claim based on, a breach of a fiduciary duty owed by any current or former director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law or the Certificate or Bylaws (including the interpretation, validity or enforceability thereof), or (iv) any action asserting a claim governed by the internal affairs doctrine. Unless the Corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act of 1933, as amended. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Section 9.6.

ARTICLE X

AMENDMENTS

Section 10.1 Amendments of By-Laws. The vote of the holders of at least

two-thirds of the shares of stock of the Corporation, issued and outstanding and

entitled to vote, shall be necessary at any meeting of stockholders to amend or

repeal these By-Laws or to adopt new by-laws. These By-Laws may also be amended

or repealed, or new By-Laws adopted, at any meeting of the Board of Directors by

the vote of at least two-thirds of the entire Board; provided that any by-law

adopted by the Board may be amended or repealed by the stockholders in the

manner set forth above.

Any proposal to amend or repeal these By-Laws or to adopt new by-laws

shall be stated in the notice of the meeting of the Board of Directors or the

stockholders, or in the waiver of notice thereof, as the case may be, unless all

of the Directors or the holders of record of all of the shares of stock of the

Corporation, issued and outstanding and entitled to vote, are present at such

meeting.


	LANDLORD:

	PARK EAST FISHKILL LLC

	By:

	Name:

	Its:

	TENANT:

	EMAGIN CORPORATION

	By:	/s/ Mark A Koch

	Name:

	Its:	acting CFO


	By:	/s/ Mark A. Koch
		Mark A. Koch
		Acting Chief Financial Officer
		(Principal Accounting and Financial Officer)



	By:	/s/ Mark A. Koch
		Mark A. Koch
		Acting Chief Financial Officer
		(Principal Accounting and Financial Officer)




(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.