form10q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
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þ
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the quarterly period ended September 30, 2007
or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from
to
Commission
File Number 1-12031
UNIVERSAL
DISPLAY CORPORATION
(Exact
name of registrant as specified in its charter)
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Pennsylvania
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23-2372688
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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375
Phillips Boulevard
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Ewing,
New Jersey
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08618
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (609) 671-0980
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer o
Accelerated filer
þ
Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
As
of November 1, 2007, the registrant had outstanding 35,267,456 shares of
common stock.
TABLE
OF CONTENTS
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PART
I – FINANCIAL INFORMATION
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Item 1.
Financial Statements (unaudited)
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Consolidated
Balance Sheets – September 30, 2007 and December 31,
2006
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3
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Consolidated
Statements of Operations – Three months ended September 30, 2007 and
2006
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4
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Consolidated
Statements of Operations – Nine months ended September 30, 2007 and
2006
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5
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Consolidated
Statements of Cash Flows – Nine months ended September 30, 2007 and
2006
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6
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Notes
to Consolidated Financial Statements
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7
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
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14
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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
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18
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Item 4.
Controls and Procedures
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18
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PART
II – OTHER INFORMATION
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Item 1.
Legal Proceedings
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19
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Item 1A.
Risk Factors
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20
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Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
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20
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Item 3.
Defaults Upon Senior Securities
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20
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Item 4.
Submission of Matters to a Vote of Security Holders
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20
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Item 5.
Other Information
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20
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Item 6.
Exhibits
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20
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PART
I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
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September
30,
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December
31,
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2007
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2006
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CURRENT
ASSETS:
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Cash
and cash equivalents
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Short-term
investments
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23,057,973
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17,957,752
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Inventory
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2,209
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30,598
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PROPERTY
AND EQUIPMENT, net
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13,388,135
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14,074,093
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INVESTMENTS
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—
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42,770
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
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CURRENT
LIABILITIES:
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Accrued
expenses
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3,703,177
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5,245,536
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Deferred
revenue
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550,000
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150,000
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Total
current liabilities
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DEFERRED
LICENSE FEES
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2,582,800
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2,966,500
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COMMITMENTS
AND CONTINGENCIES (Note 9)
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SHAREHOLDERS’
EQUITY:
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Preferred
Stock, par value $.01 per share, 5,000,000 shares authorized, 200,000
shares of Series A Nonconvertible Preferred Stock issued and
outstanding (liquidation value of $7.50 per share or $1,500,000),
300,000
shares of Series B Convertible Preferred Stock authorized and none
outstanding, 5,000 shares of Series C-1 Convertible Preferred Stock
authorized and none outstanding, 5,000 shares of Series D Convertible
Preferred Stock authorized and none outstanding
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Common
Stock, par value $0.01 per share, 50,000,000 shares authorized,
35,117,615 and 31,385,408 shares issued and outstanding at September
30, 2007 and December 31, 2006, respectively
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351,176
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313,854
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Additional
paid-in-capital
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Unrealized
loss on available for sale securities
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(16,682
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(82,846
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Total
shareholders’ equity
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TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
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The
accompanying notes are an integral part of these statements.
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three
Months Ended September 30,
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2007
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2006
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Contract
research revenue
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$ |
1,229,306
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$ |
1,328,109
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Development
chemical revenue
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Commercial
chemical revenue
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1,185,050
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201,227
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Royalty
and license revenue
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Technology
development revenue
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250,000
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540,531
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Cost
of chemicals sold
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281,062
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136,393
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General
and administrative
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2,209,537
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1,965,921
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Royalty
and license expense
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(4,072,749 |
) |
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(3,506,573 |
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INTEREST
INCOME
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1,114,769
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565,262
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(2,585 |
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(1,976 |
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$ |
(2,960,565 |
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$ |
(2,943,287 |
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BASIC
AND DILUTED NET LOSS PER COMMON SHARE
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$ |
(0.08 |
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$ |
(0.09 |
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WEIGHTED
AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER
COMMON
SHARE
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The
accompanying notes are an integral part of these statements.
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
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Nine
Months Ended September 30,
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2007
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2006
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Contract
research revenue
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$
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3,649,076
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$
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2,765,699
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Development
chemical revenue
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Commercial
chemical revenue
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2,727,681
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936,071
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Royalty
and license revenue
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Technology
development revenue
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750,000
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1,938,258
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Cost
of chemicals sold
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727,650
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445,203
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General
and administrative
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7,131,268
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6,198,148
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Royalty
and license expense
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INTEREST
INCOME
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2,523,467
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1,584,278
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BASIC
AND DILUTED NET LOSS PER COMMON SHARE
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WEIGHTED
AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER
COMMON
SHARE
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The
accompanying notes are an integral part of these statements.
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Nine
months ended September 30,
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2007
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2006
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CASH
FLOWS FROM OPERATING ACTIVITIES:
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Net
loss
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$
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(12,719,737
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)
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$
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(10,777,978
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)
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Non-cash
charges to statement of operations:
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Depreciation
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1,347,549
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1,364,378
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Amortization
of intangibles
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Amortization
of premium and discount on investments
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(189,306
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)
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(115,156
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)
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Stock-based
employee compensation
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Stock-based
non-employee compensation
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9,497
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105,011
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Non-cash
expense under a Development Agreement
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Stock-based
compensation to Board of Directors and Scientific Advisory
Board
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318,997
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—
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(Increase)
decrease in assets:
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Accounts
receivable
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(376,575
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)
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(1,797,022
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Other
current assets
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(139,669
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)
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(173,632
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)
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Increase
(decrease) in liabilities:
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Accounts
payable and accrued expenses
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Deferred
license fees
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(383,700
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)
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3,066,301
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Net
cash used in operating activities
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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Purchases
of property and equipment
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(661,591
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)
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(2,015,804
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)
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Proceeds
from sale of investments
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22,543,000
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16,139,000
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Net
cash used in investing activities
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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Proceeds
from the issuance of common stock
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38,000,023
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—
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Proceeds
from the exercise of common stock options and
warrants
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Net
cash provided by financing activities
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INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
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CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
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31,097,533
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30,654,249
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CASH
AND CASH EQUIVALENTS, END OF PERIOD
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The
following non-cash activities occurred:
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Unrealized
gain on available-for-sale securities
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Common
stock issued to Board of Directors and Scientific Advisory Board
that was
earned in a previous period
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|
260,000
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|
588,200
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|
Common
stock issued to employees that was earned in a previous
period
|
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Common
stock issued for royalties that was earned in a previous
period
|
|
|
499,993
|
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|
—
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Common
stock issued under a Development Agreement that was earned in a
previous
period
|
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The
accompanying notes are an integral part of these statements.
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
BACKGROUND
Universal
Display Corporation (the “Company”) is engaged in the research, development and
commercialization of organic light emitting diode (“OLED”) technologies and
materials for use in flat panel display, solid-state lighting and other product
applications. The Company’s primary business strategy is to develop and license
its proprietary OLED technologies to product manufacturers for use in these
applications. In support of this objective, the Company also develops new OLED
materials and sells those materials to product manufacturers. Through internal
research and development efforts and relationships with entities such as
Princeton University (“Princeton”), the University of Southern California
(“USC”), the University of Michigan (“Michigan”), Motorola, Inc. (“Motorola”)
and PPG Industries, Inc. (“PPG”), the Company has established a significant
portfolio of proprietary OLED technologies and materials (Note 4, 5 and
6).
The
Company conducts a substantial portion of its OLED technology and material
development activities at its technology development and transfer facility
in
Ewing, New Jersey.
2.
BASIS OF PRESENTATION
Interim
Financial Information
In
the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of September
30, 2007, the results of operations for the three and nine months ended
September 30, 2007 and 2006, and cash flows for the nine months ended September
30, 2007 and 2006. While management believes that the disclosures presented
are
adequate to make the information not misleading, these unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto in the Company’s latest year-end
financial statements, which are included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2006.
Management’s
Use of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recent
Accounting Pronouncements
In
June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(“FIN 48”), an interpretation of Statement of Financial Accounting Standards
(“SFAS”) No. 109, Accounting for Income Taxes (“SFAS 109”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS 109. FIN 48 prescribes
a two-step process to determine the amount of tax benefit to be recognized.
First, the tax position must be evaluated to determine the likelihood that
it
will be sustained upon examination. If the tax position is deemed
“more-likely-than-not” to be sustained, the tax position is then measured to
determine the amount of benefit to recognize in the financial statements. The
tax position is measured at the largest amount of benefit that is greater than
50% likely of being realized upon ultimate settlement. FIN 48 was adopted by
the
Company on January 1, 2007. The adoption of FIN 48 has not had an impact on
the Company’s results of operations and financial position.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (“SFAS 157”). SFAS 157 clarifies the definition of fair value,
establishes a framework for measuring fair value and expands disclosures on
fair
value measurements. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. The Company does not expect
the adoption of SFAS 157 to have a material impact on its results of operations
and financial position.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits
entities to measure many financial instruments and certain other items at fair
value at specified election dates. Under SFAS 159, any unrealized holding gains
and losses on items for which the fair value option has been elected are
reported in earnings at each subsequent reporting date. If elected, the fair
value option (1) may be applied instrument by instrument, with a few
exceptions, such as investments otherwise accounted for by the equity method;
(2) is irrevocable (unless a new election date occurs); and (3) is
applied only to entire instruments and not to portions of instruments. SFAS
159
is effective for fiscal years beginning after November 15, 2007. The
Company does not expect the adoption of SFAS 159 to have a material impact
on
its results of operations and financial position.
In
June
2007, the FASB approved Emerging Issues Task Force Issue No. 07-03 (“Issue
No. 07-03”), Accounting for Nonrefundable Advance Payments for Goods or
Services to be Used in Future Research and Development Activities. Issue
No. 07-03 requires that nonrefundable advance payments for future research
and development activities be deferred and capitalized. Such amounts should
be
recognized as an expense as goods are delivered or the related services are
performed. Issue No. 07-03 is effective for fiscal years beginning after
December 15, 2007. The Company does not expect the adoption of Issue
No. 07-03 to have a material impact on its results of operations and
financial position.
Adjustment
to Prior Year Consolidated Financials Statements
Certain
prior year amounts have been adjusted to conform to the current year
presentation. The adjustment results in an increase in reported cost of
chemicals sold and a reduction in research and development expenses by $54,756
and $240,192 for the three and nine months ended September 30, 2006,
respectively. In addition, an adjustment was made from accounts payable and
accrued expenses to the non-cash expense under a Development Agreement in
the
Company’s Consolidated Statement of Cash Flows. These adjustments had no impact
on the Company’s balance sheet, reported net loss or cash
flows.
3.
CASH, CASH EQUIVALENTS, SHORT-TERM AND LONG-TERM
INVESTMENTS
The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The Company classifies
its existing marketable securities as available-for-sale. These securities
are
carried at fair market value, with unrealized gains and losses reported in
shareholders’ equity. Gains or losses on securities sold are based on the
specific identification method.
Investments
at September 30, 2007 and December 31, 2006 consist of the
following:
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|
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|
|
|
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|
|
|
|
|
|
|
|
Unrealized
|
|
|
Market
Value
|
|
Investment
Classification
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Aggregate
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$
|
12,464,000
|
|
|
$
|
—
|
|
|
$
|
(17,923
|
)
|
|
$
|
12,446,077
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
|
|
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|
|
Certificates
of deposit
|
|
$
|
11,243,000
|
|
|
$
|
—
|
|
|
$
|
(79,070
|
)
|
|
$
|
11,163,930
|
|
|
|
|
|
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|
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|
4.
RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON, USC AND
MICHIGAN
The
Company has funded OLED technology research at Princeton and, on a subcontractor
basis, at USC, under a Research Agreement executed with Princeton in
August 1997 (as amended, the “1997 Research Agreement”). In
April 2002, the 1997 Research Agreement was amended to provide for, among
other things, an additional five-year term, which expired July 31, 2007.
Payments to Princeton under this agreement are charged to research and
development expenses as they become due. The Company has paid $3,571,226 to
Princeton under the 1997 Research Agreement. Although the payments were charged
to expense when they became due, the actual work performed by Princeton and
USC
did not always equate to the fixed amounts actually paid for each period. In
the
third quarter of 2006, Princeton refunded $1,011,358 to the Company for
cumulative amounts overpaid under the 1997 Research Agreement. The Company
recorded the refund as an offset to research and development
expenses.
On
October 9, 1997, the Company, Princeton and USC entered into an Amended
License Agreement under which Princeton and USC granted the Company worldwide,
exclusive license rights, with rights to sublicense, to make, have made, use,
lease and/or sell products and to practice processes based on patent
applications and issued patents arising out of work performed by Princeton
and
USC under the 1997 Research Agreement (as amended, the “1997 Amended License
Agreement”). Under this agreement, the Company is required to pay Princeton
royalties for licensed products sold by the Company or its sublicensees. For
licensed products sold by the Company, the Company is required to pay Princeton
3% of the net sales price of these products. For licensed products sold by
the
Company’s sublicensees, the Company is required to pay Princeton 3% of the
revenues received by the Company from these sublicensees. These royalty rates
are subject to renegotiation for products not reasonably conceivable as arising
out of the 1997 Research Agreement if Princeton reasonably determines that
the
royalty rates payable with respect to these products are not fair and
competitive. The Company is obligated under the 1997 Amended License Agreement
to pay to Princeton minimum annual royalties. The minimum royalty payment is
$100,000 per year. The Company accrued $119,166 of royalty expense in connection
with the agreement for the nine months ended September 30, 2007.
The
Company also is required under the 1997 Amended License Agreement to use
commercially reasonable efforts to bring the licensed OLED technology to market.
However, this requirement is deemed satisfied provided the Company performs
its
obligations under the 1997 Research Agreement and, when that agreement ends,
the
Company invests a minimum of $800,000 per year in research, development,
commercialization or patenting efforts respecting the patent rights licensed
to
the Company.
In
January 2006, the Principal Investigator conducting research at Princeton
under the 1997 Research Agreement transferred to Michigan. As a result of this
transfer, the Company has entered into a new Sponsored Research Agreement with
USC to sponsor OLED technology research at USC and, on a subcontractor basis,
Michigan. This new Research Agreement (the “2006 Research Agreement”) was
effective as of May 1, 2006, and has a term of three years. The 2006
Research Agreement supersedes the 1997 Research Agreement with respect to all
work being performed at USC and Michigan. Under the 2006 Research Agreement,
the
Company is obligated to pay USC up to $4,636,296 for work actually performed
during the period from May 1, 2006 through April 30, 2009. Amounts
paid to Princeton under the 1997 Research Agreement offset any amounts the
Company was obligated to pay USC under the 2006 Research Agreement. Payments
under the 2006 Research Agreement are made to USC on a quarterly basis as actual
expenses are incurred. Through the period ended September 30, 2007, the
Company had incurred $790,029 in research and development expense under the
2006
Research Agreement.
In
connection with entering into the 2006 Research Agreement, the Company amended
the 1997 Amended License Agreement to include Michigan as a party to that
agreement effective as of January 1, 2006. Under this amendment, Princeton,
USC and Michigan have granted the Company a worldwide exclusive license, with
rights to sublicense, to make, have made, use, lease and/or sell products and
to
practice processes based on patent applications and issued patents arising
out
of work performed under the 2006 Research Agreement. The financial terms of
the
1997 Amended License Agreement were not impacted by this amendment.
5.
ACQUIRED TECHNOLOGY
Acquired
technology consists of acquired license rights for patents and know-how obtained
from PD-LD, Inc. (“PD-LD”) and Motorola. These intangible assets consist of the
following:
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|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Motorola,
Inc.
|
|
|
15,469,468
|
|
|
|
15,469,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated amortization
|
|
|
(11,902,534
|
)
|
|
|
(10,631,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
On
July 19, 2000, the Company, PD-LD, its president Dr. Vladimir Ban and
Princeton entered into a Termination, Amendment and License Agreement whereby
the Company acquired all PD-LD’s rights to certain issued and pending OLED
technology patents in exchange for 50,000 shares of the Company’s common stock.
Pursuant to this transaction, these patents were included in the patent rights
exclusively licensed to the Company by Princeton under the 1997 Amended License
Agreement. The acquisition of these patents had a fair value of
$1,481,250.
On
September 29, 2000, the Company entered into a License Agreement with
Motorola. Pursuant to this agreement, the Company licensed from Motorola what
are now 74 issued U.S. patents and corresponding foreign patents relating to
OLED technologies. These patents expire between 2012 and 2018. The Company
has
the sole right to sublicense these patents to OLED product manufacturers. As
consideration for this license, the Company issued to Motorola 200,000 shares
of
the Company’s common stock (valued at $4,412,500), 300,000 shares of the
Company’s Series B Convertible Preferred Stock (valued at $6,618,750) and a
warrant to purchase 150,000 shares of the Company’s common stock at $21.60 per
share. The warrant was recorded at a fair market value of $2,206,234 based
on
the Black-Scholes option-pricing model, and was recorded as a component of
the
cost of the acquired technology. The warrant expired on September 29, 2007,
without having been exercised by Motorola.
The
Company also issued a warrant to an unaffiliated third party to acquire 150,000
shares of the Company’s common stock as a finder’s fee in connection with the
Motorola transaction. The original exercise price of this warrant was $21.60
per
share and the exercise period was seven years. This warrant was accounted for
at
its fair value based on the Black-Scholes option pricing model and $2,206,234
was recorded as a component of the cost of the acquired technology. The Company
used the following assumptions in the Black-Scholes option pricing model for
the
300,000 warrants issued in connection with this transaction: (1) 6.3%
risk-free interest rate, (2) expected life of 7 years, (3) 60%
volatility and (4) zero expected dividend yield. Based on anti-dilution
adjustments, the number of warrant shares was adjusted to 191,028 shares, and
the exercise price was adjusted to $16.96 per share. The warrant was exercised
on a cashless basis on August 13, 2007.
In
total, the Company recorded an intangible asset of $15,469,468 for the
technology acquired from Motorola. This includes $25,750 of direct cash
transaction costs.
Amortization
expense was $1,271,304 for the nine months ended September 30, 2007 and
$1,271,303 for the same period in 2006. For each of the years 2007 through
2009,
amortization expense will be $1,695,072 and for 2010 amortization expense will
be $1,234,272.
The
Company is required under the License Agreement to pay Motorola based on gross
revenues earned by the Company from its sales of OLED products or components,
or
from its sublicensees for their sales of OLED products or components, whether
or
not these products or components are based on inventions claimed in the patent
rights licensed from Motorola. All royalty payments are payable, at the
Company’s discretion, in either all cash or up to 50% in shares of the Company’s
common stock and the remainder in cash. The number of shares of common stock
used to pay the stock portion of the royalty payment is calculated by dividing
the amount to be paid in stock by the average daily closing price per share
of
the Company’s common stock over the 10 trading days ending two business days
prior to the date the stock is issued.
The
Company was required to pay Motorola minimum royalties of $1,000,000 for the
two-year period ended on December 31, 2006. In satisfaction of this
obligation, in March 2007, the Company issued to Motorola 37,075 shares of
the
Company’s common stock, valued at $499,993, and paid Motorola $500,007 in cash.
For the nine months ended September 30, 2007, the Company accrued $96,058 of
royalty expense in connection with the License Agreement with
Motorola. The Company is no longer subject to a minimum royalty
obligation under this agreement.
6.
EQUITY AND CASH COMPENSATION UNDER THE PPG AGREEMENTS
On
October 1, 2000, the Company entered into a five-year Development and
License Agreement (“Development Agreement”) and a seven-year Supply Agreement
(“Supply Agreement”) with PPG. Under the Development Agreement, a team of PPG
scientists and engineers assisted the Company in developing its proprietary
OLED
materials and supplied the Company with these materials for evaluation purposes.
Under the Supply Agreement, PPG supplied the Company with its proprietary OLED
materials that were intended for resale to customers for commercial
purposes.
For
the
period from inception of the Development Agreement through December 2004,
the Company issued shares of its common stock and warrants to acquire its common
stock to PPG on an annual basis in consideration of the services provided under
the agreement. The consideration to PPG for these services was determined by
reference to an agreed-upon annual budget and was subject to adjustment based
on
costs actually incurred for work performed during the budget period. The
specific number of shares of common stock and warrants issued to PPG was
determined based on the average closing price of the Company’s common stock
during a specified period prior to the start of the budget period. In
January 2003, the Company and PPG amended the Development Agreement,
providing for additional consideration to PPG for additional services to be
provided under that agreement, which services were paid for in cash. All
materials provided by PPG under the Supply Agreement were also paid for in
cash.
In
December 2004 and again in March 2005, the Company and PPG amended
both the Development Agreement and the Supply Agreement to alter the charges
and
method of payment for services and materials provided by PPG under both
agreements during 2005. Under the amended Development Agreement, the Company
compensated PPG on a cost-plus basis for the services provided during each
calendar quarter. The Company was required to pay for some of these services
in
cash and for other of the services in common stock. Payment for up to 50% of
the
remaining services was able to be paid, at the Company’s sole discretion, in
cash or shares of common stock, with the balance payable in all cash. The actual
number of shares of common stock issuable to PPG was determined based on the
average closing price for the Company’s common stock during a specified period
prior to the end of that quarter. If, however, this average closing price was
less than $6.00, the Company was required to compensate PPG in all cash. The
Company recorded these expenses to research and development as they were
incurred. Under the amended Development Agreement, the Company was no longer
required to issue warrants to PPG.
Under
the
amended Supply Agreement, the Company also compensated PPG on a cost-plus basis
for services and materials provided during each calendar quarter of 2005. The
Company was required to pay for all materials and for some of these services
in
cash. Payment for up to 50% of the remaining services was able to be paid,
at
the Company’s sole discretion, in cash or shares of common stock, with the
balance payable in all cash. Again, the specific number of shares of common
stock issuable to PPG was determined based on the average closing price for
the
Company’s common stock during a specified period prior to the end of that
quarter. If, however, this average closing price was less than $6.00, the
Company was required to compensate PPG in all cash.
On
July 29, 2005, the Company entered into an OLED Materials Supply and
Service Agreement with PPG. This Agreement superseded and replaced in their
entireties the amended Development and Supply Agreements effective as of
January 1, 2006, and extended the term of the Company’s existing
relationship with PPG through December 31, 2008. Under the new agreement,
PPG has continued to assist the Company in developing its proprietary OLED
materials and supplying the Company with those materials for evaluation purposes
and for resale to its customers. The financial terms of the new agreement are
substantially similar to those of the amended Development and Supply Agreements,
and include a requirement that the Company pay PPG in a combination of cash
and
the Company’s common stock.
The
Company issued to PPG 50,477 and 176,205 shares of the Company’s common stock as
consideration for services provided by PPG under the OLED Materials Supply
and
Service Agreement during the nine months ended September 30, 2007 and 2006,
respectively. Of these shares, 8,250 shares were issued on October 22, 2007,
39,624 shares were issued on April 16, 2007, 59,624 shares were issued on
October 19, 2006 and 119,184 shares were issued on April 19, 2006. For
these shares, the Company recorded a charge of $745,453 and $2,281,459 to
research and development expense for the nine months ended September 30,
2007 and 2006, respectively. The Company also recorded $746,715 and $773,890
to
research and development expense for the cash portion of the work performed
by
PPG during the nine months ended September 30, 2007 and 2006,
respectively.
Also,
in
accordance with the OLED Materials Supply and Service Agreement, the Company
is
required to reimburse PPG for its raw materials and conversion costs for all
development chemicals produced on behalf of the Company. The Company recorded
$162,132 and $199,873 to research and development expense for this activity
during the nine months ended September 30, 2007 and 2006,
respectively.
Through
the end of 2006, the Company was required under its agreements with PPG to
grant
options to purchase the Company’s common stock to PPG employees performing
development services for the Company, in a manner consistent with that for
issuing options to its own employees. Subject to certain contingencies, these
options were to vest one year following the date of grant and will expire
10 years from the date of grant. However, in connection with a transition
to the Company in 2006 of all work being performed by the PPG development team,
all outstanding options granted to PPG employees became vested as of
December 31, 2006.
On
December 30, 2005, the Company granted to PPG employees performing
development services under the Development Agreement options to purchase 31,500
shares of the Company’s common stock at an exercise price of $10.51. In April
2006, the Company hired several PPG employees as full-time employees of the
Company. As a result of these hirings, the Company accelerated the vesting
of
18,500 of the options granted on December 30, 2005. Accordingly, the Company
recorded $225,882 in research and development costs related to these options
for
the period ended September 30, 2006. The Company also recorded $43,051 in
research and development costs for the remaining 13,000 options for the period
ended September 30, 2006. The Company determined the fair value of the options
earned during the period ended September 30, 2006 using the Black-Scholes
option-pricing model with the following assumptions: (1) risk free interest
rate
of 4.39-4.62%, (2) no expected dividend yield, (3) contractual life of 3.25
years and (4) expected volatility of 48.75-77.59%.
In
lieu
of stock options, and consistent with awards made to the Company’s own
employees, shares of stock were granted to certain PPG employees performing
development services on the Company’s behalf during 2006. On January 9,
2007, the Company issued 1,500 shares of its common stock as a bonus to these
PPG research and development team members for the year ended December 31,
2006. Accordingly, the Company accrued $21,915 as of December 31, 2006 in
research and development costs relating to the issuance. The Company has no
obligation to issue options or shares of stock to any PPG employees in 2007
or
thereafter.
7.
SHAREHOLDERS’ EQUITY
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Preferred
Stock,
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Loss
on
|
|
|
|
|
|
|
|
|
|
Series
A
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Available
for
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Sale
Securities
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock through public offering, net of expenses of
$2,599,977(A)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,800,000
|
|
|
|
28,000
|
|
|
|
37,972,023
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38,000,023
|
|
Exercise
of common stock options and warrants(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
employee compensation (C)
|
|
|
—
|
|
|
|
—
|
|
|
|
69,738
|
|
|
|
698
|
|
|
|
1,747,110
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,747,808
|
|
Stock-based
non-employee compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to Board of Directors and Scientific Advisory Board
(D)
|
|
|
—
|
|
|
|
—
|
|
|
|
32,796
|
|
|
|
328
|
|
|
|
578,669
|
|
|
|
—
|
|
|
|
—
|
|
|
|
578,997
|
|
Issuance
of common stock in connection with Development and License Agreements
(E)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on available-for-sales securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,164
|
|
|
|
—
|
|
|
|
66,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
SEPTEMBER 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
In
May 2007, the Company sold 2,800,000 shares of common stock through
a
public offering at $14.50 per share. The offering resulted in net
proceeds
to the Company of $38,000,023, net of $2,599,977 in associated
costs.
|
(B)
|
During
the nine months ended September 30, 2007, the Company issued
748,870 shares of common stock upon the exercise of common stock
options and warrants, resulting in cash proceeds of
$6,422,284.
|
(C)
|
Includes
$951,321 that was earned in a previous period and charged to expense
when
earned, but issued in 2007.
|
(D)
|
Includes
$260,000 that was earned in a previous period and charged to expense
when
earned, but issued in 2007.
|
(E)
|
Includes
$521,908 that was earned in a previous period and charged to expense
when
earned, but issued in 2007 (see Notes 5 and
6).
|
8.
STOCK-BASED COMPENSATION
On
January 1, 2006, the Company adopted SFAS No. 123R utilizing the
modified prospective transition method. SFAS No. 123R requires employee
stock options to be valued at fair value on the date of grant and charged to
expense over the applicable vesting period. Under the modified prospective
method, compensation expense is recognized for all share based payments issued
on or after January 1, 2006, and for all share payments issued to employees
prior to January 1, 2006 that remain unvested. In accordance with the
modified prospective method, the consolidated financial statements for prior
periods have not been restated to reflect, and do not include, the impact of
SFAS No. 123R. The adoption of SFAS No. 123R did not change the Company’s
accounting for stock-based payments issued to non-employees.
Equity
Compensation Plan
In
1995,
the Board of Directors of the Company adopted a Stock Option Plan (the “1995
Plan”), under which options to purchase a maximum of 500,000 shares of the
Company’s common stock were authorized to be granted at prices not less than the
fair market value of the common stock on the date of the grant, as determined
by
the Compensation Committee of the Board of Directors. Through September 30,
2007, the Company’s shareholders approved increases in the number of shares
reserved for issuance under the 1995 Plan to 7,000,000, and extended the term
of
the plan through 2015. The 1995 Plan was also amended and restated in 2003,
and
is now called the Equity Compensation Plan. The Equity Compensation Plan
provides for the granting of incentive and nonqualified stock options, stock,
stock appreciation rights and performance units to employees, directors and
consultants of the Company. Stock options are exercisable over periods
determined by the Compensation Committee, but for no longer than 10 years
from the grant date.
During
the nine months ended September 30, 2007, the Company granted 4,750 common
stock
options to employees. These stock options vested immediately and had exercise
prices equal to the market price of the Company’s common stock on the date of
grant. The fair value of the options granted during the nine months ended
September 30, 2007 was $35,650. For the nine months ended September 30, 2007
and
2006, compensation expense related to all outstanding common stock options
was
$426,985 and $607,591, respectively.
In
addition, during the nine months ended September 30, 2007, the Company granted
a
total of 115,026 shares of restricted stock to employees and members of the
Scientific Advisory Board. These shares of restricted stock had a value of
$1,705,001 on the date of grant and will vest in equal increments over three
years from the date of grant. For the nine months ended September 30, 2007,
the
Company recorded as compensation charges related to all restricted stock awards
a general and administrative expense of $243,393 and a research and development
expense of $262,282.
On
each of March 31, 2007, June 30, 2007 and September 30, 2007, the Company
issued 5,000 shares of fully vested common stock to members of its Board of
Directors as partial payment for services performed for the three-month periods
ended on such dates. The fair value of the shares issued was $190,030, which
was
recorded as a compensation charge in general and administrative expense for
the
nine months ended September 30, 2007.
Net
Loss Per Common Share
Basic
net
loss per common share is computed by dividing the net loss by the
weighted-average number of shares of common stock outstanding for the period.
Diluted net loss per common share reflects the potential dilution from the
exercise or conversion of securities into common stock. For the nine months
ended September 30, 2007 and 2006, the effects of the exercise of the combined
outstanding stock options and warrants of 5,681,359 and 6,938,651, respectively,
were excluded from the calculation of diluted EPS as the impact would have
been
antidilutive.
9.
COMMITMENTS AND CONTINGENCIES
Commitments
Under
the
2006 Research Agreement with USC, the Company is obligated to make certain
payments to USC. See Note 4 for further explanation.
Under
the
terms of the 1997 Amended License Agreement, the Company is required to make
minimum royalty payments to Princeton. See Note 4 for further
explanation.
In
June 2006, Patent Interference No. 105,461 was declared by the United
States Patent and Trademark Office (the “USPTO”) between Semiconductor Energy
Laboratory Co., Ltd. (“SEL”), and Princeton and USC (the “Universities”). The
dispute concerned U.S. Patent No. 6,734,457, which had been issued to SEL.
The SEL patent claimed aspects of the Company’s phosphorescent OLED technology
that the Company believes were disclosed and claimed in U.S. Application Serial
No.10/913,211, which the Company exclusively licenses from the Universities.
The
Universities sought a ruling by the USPTO that they should be granted a patent
to the claimed invention and that the SEL patent is invalid because the
Universities were first-to-invent and their invention was made prior to that
of
SEL. Under the Company’s agreement with the Universities, it was required to pay
all legal costs and fees associated with the interference
proceeding.
An
oral
hearing in the matter was held before the Board of Patent Appeals and
Interferences (the “BPAI”) of the USPTO on April 25, 2007. The following
day, the BPAI issued a decision in favor of the Universities. The BPAI decision
confirmed that the Universities were first-to-invent the subject matter of
the
interference and that the Universities’ invention is prior art to SEL’s patent.
As a result, all claims of the SEL patent were canceled. SEL did not appeal
the
BPAI decision and the proceeding is effectively terminated.
Notice
of Opposition to European Patent No. 0946958
On
December 8, 2006, Cambridge Display Technology, Ltd. (“CDT”) filed a Notice
of Opposition to European Patent No. 0946958 (the “EP ‘958 patent”). The EP
‘958 patent, which was issued on March 8, 2006, is a European counterpart patent
to U.S. patents 5,844,363, 6,602,540 and 6,888,306, and to pending U.S. patent
application 10/966,417, filed on October 15, 2004. These patents and patent
applications relate to the Company’s flexible OLED technology. They are
exclusively licensed to the Company by Princeton, and under the license
agreement the Company is required to pay all legal costs and fees associated
with this proceeding.
The
European Patent Office (the “EPO”) set a date of May 12, 2007 for the
Company to file a response to the facts and arguments presented by CDT in its
Notice of Opposition. The response was timely filed and the Company is awaiting
the opponent’s response, which is expected in November 2007, although no firm
date has been set. Since the proceeding is still in a relatively early stage,
Company management cannot make any prediction as to the probable outcome of
this
opposition. However, based on a preliminary analysis of the evidence presented,
Company management believes there is a substantial likelihood that the patent
being challenged will be declared valid, and that all or a significant portion
of its claims will be upheld.
Notices
of Opposition to European Patent No. 1449238
On
March 8, 2007, Sumation Company Limited (“Sumation”), a joint venture
between Sumitomo Chemical Company and CDT, filed a first Notice of Opposition
to
European Patent No. 1449238 (the “EP ‘238 patent”). The EP ‘238 patent,
which was issued on November 2, 2006, is a European counterpart patent, in
part, to U.S. patents 6,830,828, 6,902,830 and 7,001,536, and to pending U.S.
patent application 11/233,605, filed on September 22, 2005. These patents
and patent application relate to the Company’s PHOLED technology. They are
exclusively licensed to the Company by Princeton, and under the license
agreement the Company is required to pay all legal costs and fees associated
with this proceeding.
Two
other
parties filed additional oppositions to the EP ‘238 patent just prior to the
August 2, 2007 expiration date for such filings. On July 24, 2007, Merck
Patent GmbH, of Darmstadt, Germany, filed a second Notice of Opposition to
the
EP ‘238 patent, and on July 27, 2007, BASF Aktiengesellschaft, of Mannheim,
Germany, filed a third Notice of Opposition to the EP ‘238 patent.
The
EPO
set a January 6, 2008 due date for the Company to file its responses to the
three oppositions. The Company is in the process of reviewing each Notice of
Opposition and preparing its response to each. There is considerable overlap
in
the prior art evidence relied upon in each opposition. The three oppositions
will be handled in a single proceeding. At this time, Company management cannot
make any prediction as to the probable outcome of the oppositions. However,
based on a preliminary analysis of the evidence presented, Company management
believes there is a substantial likelihood that the patent being challenged
will
be declared valid, and that all or a significant portion of its claims will
be
upheld.
10.
CONCENTRATION OF RISK
All
contract research revenue has been derived from contracts with United States
government agencies. Two non-government customers accounted for 46% and 15%
of consolidated revenue for the nine months ended September 30, 2007 and 2006,
respectively. Accounts receivable from these customers were $902,363 at
September 30, 2007. Revenues from outside of North America represented 54%
and
68% of consolidated revenue for the nine months ended September 30, 2007 and
2006, respectively.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes above.
CAUTIONARY
STATEMENT
CONCERNING
FORWARD-LOOKING STATEMENTS
This
discussion and analysis contains some “forward-looking statements.”
Forward-looking statements concern our possible or assumed future results of
operations, including descriptions of our business strategies and customer
relationships. These statements often include words such as “believe,” “expect,”
“anticipate,” “intend,” “plan,” “estimate,” “seek,” “will,” “may” or similar
expressions. These statements are based on assumptions that we have made in
light of our experience in the industry, as well as our perceptions of
historical trends, current conditions, expected future developments and other
factors we believe are appropriate in these circumstances.
As
you
read and consider this discussion and analysis, you should not place undue
reliance on any forward-looking statements. You should understand that these
statements involve substantial risk and uncertainty and are not guarantees
of
future performance or results. They depend on many factors that are discussed
further in the section entitled “Risk Factors” in our Annual Report on Form 10-K
for the year ended December 31, 2006, as supplemented by any disclosures in
Item 1A of Part II of our Quarterly Report for the quarters ended March 31
and
June 30, 2007 and in Item 1A of Part II below. Changes or developments
in any of these areas could affect our financial results or results of
operations, and could cause actual results to differ materially from those
contemplated in the forward-looking statements.
All
forward-looking statements speak only as of the date of this report or the
documents incorporated by reference, as the case may be. We do not undertake
any
duty to update any of these forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
OVERVIEW
We
are a
leader in the research, development and commercialization of organic light
emitting diode, or OLED, technologies for use in flat panel display, solid-state
lighting and other applications. Since 1994, we have been exclusively engaged,
and expect to continue to be exclusively engaged, in funding and performing
research and development activities relating to OLED technologies and materials,
and in attempting to commercialize these technologies and materials. Our
revenues are generated through contract research, sales of development and
commercial chemicals, technology development and evaluation, and intellectual
property licensing arrangements. We anticipate that in the future revenues
from
licensing our intellectual property will become a more significant part of
our
revenue stream.
While
we
have made significant progress over the past few years developing and
commercializing our family of OLED technologies (PHOLED, TOLED, FOLED, etc.)
and
materials, we have incurred significant losses and will likely continue to
do so
until our OLED technologies and materials become more widely incorporated into
commercial OLED products. We have incurred significant losses since our
inception, resulting in an accumulated deficit of $158,076,363 as of September
30, 2007.
We
anticipate fluctuations in our annual and quarterly results of operations due
to
uncertainty regarding, among other factors:
§
|
the
timing of our receipt of license fees and royalties, as well as fees
for
future contract research and technology development and
evaluation;
|
§
|
the
timing and volume of sales of our OLED materials for both commercial
usage
and evaluation purposes;
|
§
|
the
timing of our customers’ introduction and discontinuance of OLED products
incorporating our technologies and
materials;
|
§
|
the
timing and magnitude of expenditures we may incur in connection with
our
ongoing research and development activities;
and
|
§
|
the
timing and financial consequences of our formation of new business
relationships and alliances.
|
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2007 Compared to Three Months Ended September 30,
2006
We
had a
net loss of $2,960,565 (or $0.08 per diluted share) for the quarter ended
September 30, 2007, compared to a net loss of $2,943,287 (or $0.09 per diluted
share) for the same period in 2006. The increase in net loss was primarily
due
to decreased revenues and increased operating expenses, as described
below.
Our
revenues were $3,077,281 for the quarter ended September 30, 2007, compared
to
$3,096,288 for the same period in 2006.
We
earned
$1,229,306 in contract research revenue from the U.S. government for the quarter
ended September 30, 2007, compared to $1,328,109 for the same period in 2006.
The decrease was mainly due to the timing of revenue recognition in connection
with several new government programs that commenced during the second and third
quarters of 2006, as well as our continuing work under existing government
programs.
We
earned
$229,774 from sales of developmental chemicals during the quarter ended
September 30, 2007, compared to $492,173 for the same period in 2006. The
decrease was mainly due to a decreased volume of material purchases by an OLED
product manufacturer that transitioned from exclusively development chemical
purchases in 2006 to primarily commercial chemical purchases in 2007. We cannot
accurately predict the timing and frequency of development chemical purchases
by
our customers due to participants in the OLED industry having differing OLED
technology development and product launch strategies.
Our
commercial chemical and royalty and license revenues for the quarter ended
September 30, 2007 were $1,185,050 and $183,151, respectively, compared to
$201,227 and $534,248, respectively, for the corresponding period in
2006.
Almost
all of our commercial chemical revenue for the quarter ended September 30,
2007
was from sales of our materials to Samsung SDI Co., Ltd. (“Samsung
SDI”). During the same period in 2006, we recorded most of our
commercial chemical revenue, as well as our license revenues, from sales of
our
materials to AU Optronics Corporation (“AUO”). AUO discontinued
manufacturing the product for which it ordered our materials in the third
quarter of 2006, and we have not sold any commercial chemicals to AUO since
that
time. AUO’s discontinuation of material purchases is also the primary reason for
the decrease in our license revenues. We cannot accurately predict the timing
and frequency of such purchases by our customers due to the early stage of
the
OLED industry.
During
the quarter ended June 30, 2007, we entered into new commercial supply
agreements with two OLED display manufacturers, Chi Mei EL Corporation (“CMEL”)
and LG.Philips LCD Co., Ltd. (“LPL”). These agreements are similar to
the commercial supply agreement we had entered into with AUO, in that we will
record both commercial chemical and license revenues from sales of our materials
under the agreements. A small portion of our commercial chemical and
license revenues for the quarter ended September 30, 2007 were from sales of
our
materials to CMEL and LPL. We cannot accurately predict the timing
and frequency of such purchases by our customers due to the early stage of
the
OLED industry.
We
recorded royalty revenue of $16,051 from Samsung SDI for the quarter ended
September 30, 2007, with no corresponding revenues for the same period of 2006.
This revenue represents royalties received under our patent license agreement
with Samsung SDI, which we entered into in April 2005. Under that
agreement, we receive royalty reports a specified period of time after the
end
of the quarter during which royalty-bearing products are sold by Samsung SDI.
Consequently, the royalty revenue from Samsung SDI for the three months ended
September 30, 2007 represents only royalties earned during the second quarter
of
2007.
Our
royalty and license revenue for each of the quarters ended September 30, 2007
and 2006 also included license fees of $127,900. These revenues were
from our patent license agreement with Samsung SDI, as well as the cross-license
agreement we executed with DuPont Displays, Inc. (“DuPont”) in
December 2002. In connection with each of these agreements, we received
upfront payments that have been classified as deferred license fees and deferred
revenue. The deferred license fees are being recognized as license revenue
over
the term of the agreement with Samsung SDI and over 10 years with DuPont.
In addition, during the third quarter of 2006 we received a non-refundable
payment for granting a license to one of our ink jet printing patents and
certain related patent filings, which payment is creditable against future
amounts payable under a broader license agreement covering other aspects of
our
OLED patent portfolio, if one is executed by a specified date. Therefore, we
have recorded this payment as a deferred license fee rather than recognizing
it
as current license fee revenue.
We
recognized $250,000 in technology development revenue for the quarter ended
September 30, 2007 in connection with the renewal of a technology development
and evaluation agreements. This compares to $540,531 in technology
development revenue for the same period in 2006, which was in connection with
our work under three such agreements. The decrease was due to our completion
of
work under two of these technology development agreements. Also, in the third
quarter of 2006 we received a non-refundable payment for the continuation of
one
of these technology development agreements, which payment is creditable against
future amounts payable under a commercial license agreement, if one is executed
by a specified date. Therefore, we have recorded this payment as a deferred
license fee rather than technology development revenue. The amount and timing
of
our receipt of fees for technology development and similar services is difficult
to predict due to participants in the OLED industry having differing technology
development strategies.
We
incurred research and development expenses of $4,568,299 for the quarter ended
September 30, 2007, compared to $4,331,512 for the same period in
2006. The increase was mainly due to increased operating costs
resulting from the expansion of our New Jersey facility and increased sponsored
research expenses, offset to some extent by a decrease in amounts payable to
PPG
for development work.
General
and administrative expenses were $2,209,537 for the quarter ended September
30,
2007, compared to $1,965,921 for the same period in 2006. The increase in
general and administrative expenses was mainly due to increased personnel costs
and a change in the timing of payments to independent members of our Board
of
Directors.
Interest
income increased to $1,114,769 for the quarter ended September 30, 2007,
compared to $565,262 for the same period in 2006. The increase resulted mainly
from higher rates of return on investments during the second quarter of 2007,
as
well as an increase in investment purchases due to funds received from a common
stock offering we completed in May 2007.
Nine
Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2006
We
had a
net loss of $12,719,737 (or $0.38 per diluted share) for the nine months ended
September 30, 2007, compared to a net loss of $10,777,978 (or $0.35 per diluted
share) for the same period in 2006. The increase in net loss was primarily
due
to decreased revenues and increased operating expenses, as described
below.
Our
revenues were $8,407,081 for the nine months ended September 30, 2007, compared
to $9,377,010 for the same period in 2006.
We
earned
$3,649,076 in contract research revenue from the U.S. government for the nine
months ended September 30, 2007, compared to $2,765,699 for the same period
in
2006. The increase was mainly due to the recognition of revenue on several
new
government programs that commenced during the second and third quarters of
2006,
as well as our continuing work under existing government programs.
We
earned
$805,978 from sales of developmental chemicals during the nine months ended
September 30, 2007, compared to $1,464,703 for the same period in 2006. The
decrease was mainly due to a decreased volume of material purchases by an OLED
product manufacturer that transitioned from exclusively development chemical
purchases in 2006 to primarily commercial chemical purchases in 2007. We cannot
accurately predict the timing and frequency of development chemical purchases
by
our customers due to participants in the OLED industry having differing OLED
technology development and product launch strategies.
Our
commercial chemical and royalty and license revenues for the nine months ended
September 30, 2007 were $2,727,681 and $474,346, respectively, compared to
$936,071 and $2,272,279, respectively, for the corresponding period in
2006.
Almost
all of our commercial chemical revenue for the nine months ended September
30,
2007 was from sales of our materials to Samsung SDI. During the same
period in 2006, we recorded most of our commercial chemical revenue, as well
as
our license revenues, from sales of our materials to AUO. As
previously indicated, we have not sold any commercial chemicals to AUO since
the
third quarter of 2006. AUO’s discontinuation of material purchases is also the
primary reason for the decrease in our license revenues. We cannot accurately
predict the timing and frequency of such purchases by our customers due to
the
early stage of the OLED industry.
We
recorded royalty revenue of $47,446 from Samsung SDI for the nine months ended
September 30, 2007, with no corresponding revenues for the same period of 2006.
As previously indicated, this revenue represents royalties received under our
patent license agreement with Samsung SDI, which we entered into in
April 2005. Under that agreement, we receive royalty reports a specified
period of time after the end of the quarter during which royalty-bearing
products are sold by Samsung SDI. Consequently, the royalty revenue from Samsung
SDI for the nine months ended September 30, 2007 represents only royalties
earned during the first two quarters of 2007.
Our
royalty and license revenue for each of the nine-month periods ended September
30, 2007 and 2006 also included license fees of $383,700. These
revenues were from our patent license agreement with Samsung SDI and our
cross-license agreement with DuPont. In addition, during the third quarter
of
2006 we received a non-refundable payment for granting a license to one of
our
ink jet printing patents and certain related patent filings, which payment
is
creditable against future amounts payable under a broader license agreement
covering other aspects of our OLED patent portfolio, if one is executed by
a
specified date. Therefore, we have recorded this payment as a deferred license
fee rather than recognizing it as current license fee revenue.
We
recognized $750,000 in technology development revenue for the nine months ended
September 30, 2007 in connection with the renewal of a technology development
and evaluation agreements. This compares to $1,938,258 in technology
development revenue for the same period in 2006, which was in connection with
our work under four such agreements. The decrease was due to our completion
of
work under three of these technology development agreements. Also, in the third
quarter of 2006 we received a non-refundable payment for the continuation of
one
of these technology development agreements, which payment is creditable against
future amounts payable under a commercial license agreement, if one is executed
by a specified date. Therefore, we have recorded this payment as a deferred
license fee rather than technology development revenue. The amount and timing
of
our receipt of fees for technology development and similar services is difficult
to predict due to participants in the OLED industry having differing technology
development strategies.
We
incurred research and development expenses of $15,565,452 for the nine months
ended September 30, 2007, compared to $14,563,374 for the same period in 2006.
The increase was mainly due to increased personnel costs, increased direct
materials and subcontract costs resulting from efforts on our government
programs, increased operating costs resulting from the expansion of our New
Jersey facility and increased legal expenses associated with patent application,
prosecution, maintenance and defense costs, offset to some extent by a decrease
in amounts payable to PPG as a result of our hiring certain PPG employees (see
Note 6 to the Notes to Consolidated Financial Statements).
General
and administrative expenses were $7,131,268 for the nine months ended September
30, 2007, compared to $6,198,148 for the same period in 2006. The increase
was
mainly due to increased personnel costs and a change in the timing of payments
to independent members of our Board of Directors.
Interest
income increased to $2,523,467 for the nine months ended September 30, 2007,
compared to $1,584,278 for the same period in 2006. The increase
resulted mainly from higher rates of return on investments during the second
quarter of 2007, as well as an increase in investment purchases due to funds
received from a common stock offering we completed in May 2007.
Liquidity
and Capital Resources
As
of
September 30, 2007, we had cash and cash equivalents of $60,605,836, and
short-term investments of $23,057,973, for a total of $83,663,809. This compares
to cash and cash equivalents of $31,097,533, short-term investments of
$17,957,752 and investments in certificates of deposit and other liquid
instruments with an original maturity of more than one year of $42,770, for
a
total of $49,098,055, as of December 31, 2006. The overall increase in cash
and cash equivalents and short-term and long-term investments of $34,565,754
was
primarily due to proceeds received from the common stock offering we completed
in May 2007, as described below.
Cash
used
in operating activities was $9,450,432 for the nine months ended September
30,
2007, compared to $5,686,012 for the same period in 2006. The increase was
mainly due to an increase in operating expenses and a decrease in the receipt
of
deferred license fees and deferred revenue.
Cash
used
in investing activities was $5,463,572 for the nine months ended September
30,
2007, compared to $1,013,589 for the same period in 2006. The
increase was mainly due to increased investment purchases due to an increase
in
funds received from the common stock offering we completed in May 2007, as
described below.
Cash
provided by financing activities was $44,422,307 for the nine months ended
September 30, 2007, compared to $5,505,298 for the same period in
2006. The increase was mainly due to the completion of our common
stock offering. In May 2007, we completed a public offering of 2,800,000 shares
of our common stock at a price of $14.50 per share. The offering
resulted in proceeds to us of $38,000,023, net of $2,599,977 in underwriting
discounts and commissions and other costs associated with completion of the
offering.
Working
capital increased to $74,236,420 as of September 30, 2007, from working capital
of $37,422,740 as of December 31, 2006. Again, this increase was
mainly due to proceeds from the common stock offering we completed in May
2007.
We
anticipate, based on our internal forecasts and assumptions relating to our
operations (including, among others, assumptions regarding our working capital
requirements, the progress of our research and development efforts, the
availability of sources of funding for our research and development work, and
the timing and costs associated with the preparation, filing, prosecution,
maintenance, defense and enforcement of our patents and patent applications),
that we have sufficient cash, cash equivalents and short-term investments to
meet our obligations through at least the end of 2008.
We
believe that potential additional financing sources for us include long-term
and
short-term borrowings, public and private sales of our equity and debt
securities and the receipt of cash upon the exercise of warrants and options.
It
should be noted, however, that additional funding may be required in the future
for research, development and commercialization of our OLED technologies and
materials, to obtain, maintain and enforce patents respecting these technologies
and materials, and for working capital and other purposes, the timing and amount
of which are difficult to ascertain. There can be no assurance that additional
funds will be available to us when needed, on commercially reasonable terms
or
at all.
Critical
Accounting Policies
Refer
to
our Annual Report on Form 10-K for the year ended December 31, 2006 for a
discussion of our critical accounting policies. There have been no changes
in
critical accounting policies to date in 2007.
Contractual
Obligations
Refer
to
our Annual Report on Form 10-K for the year ended December 31, 2006 for a
discussion of our contractual obligations. There have been no significant
changes in contractual obligations to date in 2007.
Off-Balance
Sheet Arrangements
Refer
to
our Annual Report on Form 10-K for the year ended December 31, 2006 for a
discussion of off-balance sheet arrangements. As of September 30, 2007, we
had
no off-balance sheet arrangements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We
do not
utilize financial instruments for trading purposes and hold no derivative
financial instruments, other financial instruments or derivative commodity
instruments that could expose us to significant market risk. Our primary market
risk exposure with regard to financial instruments is to changes in interest
rates, which would impact interest income earned on investments.
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 of September 30, 2007. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures, as of the end of the period covered by this report,
are
functioning effectively to provide reasonable assurance that the information
required to be disclosed by us in reports filed or submitted under the
Securities Exchange Act of 1934, as amended, is (i) recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and (ii) accumulated and communicated to our management, including
the Chief Executive Officer and Chief Financial Officer, as appropriate to
allow
timely decisions regarding disclosure. However, a controls system, no matter
how
well designed and operated, cannot provide absolute assurance that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if
any, within a company have been detected.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting during the
quarter ended September 30, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Patent
Interference Concerning U.S. Patent No. 6,734,457
In
June 2006, Patent Interference No. 105,461 was declared by the United
States Patent and Trademark Office (the “USPTO”) between Semiconductor Energy
Laboratory Co., Ltd. (“SEL”), and Princeton and USC (the “Universities”). The
dispute concerned U.S. Patent No. 6,734,457, which had been issued to SEL.
The SEL patent claimed aspects of our phosphorescent OLED technology that we
believe were disclosed and claimed in U.S. Application Serial No.10/913,211,
which we exclusively license from the Universities. The Universities sought
a
ruling by the USPTO that they should be granted a patent to the claimed
invention and that the SEL patent is invalid because the Universities were
first-to-invent and their invention was made prior to that of SEL. Under our
agreement with the Universities, we were required to pay all legal costs and
fees associated with the interference proceeding.
An
oral
hearing in the matter was held before the Board of Patent Appeals and
Interferences (the “BPAI”) of the USPTO on April 25, 2007. The following
day, the BPAI issued a decision in favor of the Universities. The BPAI decision
confirmed that the Universities were first-to-invent the subject matter of
the
interference and that the Universities’ invention is prior art to SEL’s patent.
As a result, all claims of the SEL patent were canceled. SEL did not appeal
the
BPAI decision and the proceeding is effectively terminated.
Notice
of Opposition to European Patent No. 0946958
On
December 8, 2006, Cambridge Display Technology, Ltd. (“CDT”) filed a Notice
of Opposition to European Patent No. 0946958 (the “EP ‘958 patent”). The EP
‘958 patent, which was issued on March 8, 2006, is a European counterpart patent
to U.S. patents 5,844,363, 6,602,540 and 6,888,306, and to pending U.S. patent
application 10/966,417, filed on October 15, 2004. These patents and patent
applications relate to our flexible OLED technology. They are exclusively
licensed to us by Princeton, and under the license agreement we are required
to
pay all legal costs and fees associated with this proceeding.
The
European Patent Office (the “EPO”) set a date of May 12, 2007 for us to
file a response to the facts and arguments presented by CDT in its Notice of
Opposition. The response was timely filed and we are awaiting the opponent’s
response, which is expected in November 2007, although no firm date has been
set. Since the proceeding is still in a relatively early stage, we cannot make
any prediction as to the probable outcome of this opposition. However, based
on
a preliminary analysis of the evidence presented, we believe there is a
substantial likelihood that the patent being challenged will be declared valid,
and that all or a significant portion of its claims will be upheld.
Notices
of Opposition to European Patent No. 1449238
On
March 8, 2007, Sumation Company Limited (“Sumation”), a joint venture
between Sumitomo Chemical Company and CDT, filed a first Notice of Opposition
to
European Patent No. 1449238 (the “EP ‘238 patent”). The EP ‘238 patent,
which was issued on November 2, 2006, is a European counterpart patent, in
part, to U.S. patents 6,830,828, 6,902,830 and 7,001,536, and to pending U.S.
patent application 11/233,605, filed on September 22, 2005. These patents
and patent application relate to our PHOLED technology. They are exclusively
licensed to us by Princeton, and under the license agreement we are required
to
pay all legal costs and fees associated with this proceeding.
Two
other
parties filed additional oppositions to the EP ‘238 patent just prior to the
August 2, 2007 expiration date for such filings. On July 24, 2007, Merck
Patent GmbH, of Darmstadt, Germany, filed a second Notice of Opposition to
the
EP ‘238 patent, and on July 27, 2007, BASF Aktiengesellschaft, of Mannheim,
Germany, filed a third Notice of Opposition to the EP ‘238 patent.
The
EPO
set a January 6, 2008 due date for us to file our responses to the three
oppositions. We are in the process of reviewing each Notice of Opposition and
preparing our response to each. There is considerable overlap in the prior
art
evidence relied upon in each opposition. The three oppositions will be handled
in a single proceeding. At this time, we cannot make any prediction as to the
probable outcome of the oppositions. However, based on a preliminary analysis
of
the evidence presented, we believe there is a substantial likelihood that the
patent being challenged will be declared valid, and that all or a significant
portion of its claims will be upheld.
ITEM
1A. RISK FACTORS
There
have been no material changes to the risk factors previously discussed in Part
I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2006, as supplemented by our Quarterly Report on Form 10-Q for
the quarters ended March 31 and June 30, 2007.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
During
the quarter ended September 30, 2007, we issued an aggregate of 159,722
unregistered shares of our common stock. All of these shares were issued upon
the exercise of outstanding warrants. The warrants had a weighted average
exercise price of $10.28 per share. All of the shares were issued in reliance
on
the exemption from registration contained in Section 4(2) of the Securities
Act
of 1933, as amended.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
The
following is a list of the exhibits included as part of this report. Where
so
indicated by footnote, exhibits that were previously included are incorporated
by reference. For exhibits incorporated by reference, the location of the
exhibit in the previous filing is indicated parenthetically, together with
a
reference to the filing indicated by footnote.
Exhibit
|
|
|
Number
|
|
Description
|
|
|
31.1*
|
|
Certifications
of Sherwin I. Seligsohn, Chief Executive Officer, as required by
Rule 13a-14(a) or Rule 15d-14(a)
|
|
|
|
31.2*
|
|
Certifications
of Sidney D. Rosenblatt, Chief Financial Officer, as required by
Rule 13a-14(a) or Rule 15d-14(a)
|
|
|
32.1**
|
|
Certifications
of Sherwin I. Seligsohn, Chief Executive Officer, as required by
Rule 13a-14(b) or Rule 15d-14(b), and by 18 U.S.C. Section 1350.
(This exhibit shall not be deemed “filed” for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, or otherwise
subject
to the liability of that section. Further, this exhibit shall not
be
deemed to be incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Securities Exchange Act
of
1934, as amended.)
|
|
|
|
32.2**
|
|
Certifications
of Sidney D. Rosenblatt, Chief Financial Officer, as required by
Rule 13a-14(b) or Rule 15d-14(b), and by 18 U.S.C. Section 1350.
(This exhibit shall not be deemed “filed” for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, or otherwise
subject
to the liability of that section. Further, this exhibit shall not
be
deemed to be incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Securities Exchange Act
of
1934, as amended.)
|
*
|
Filed
herewith.
|
**
|
Furnished
herewith.
|
|
Note:
Any of the exhibits listed
in the foregoing index not included with this report may be obtained,
without charge, by writing to Mr. Sidney D. Rosenblatt, Corporate
Secretary, Universal Display Corporation, 375 Phillips
Boulevard,
Ewing,
New
Jersey 08618.
|
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.
UNIVERSAL
DISPLAY CORPORATION
Date: November
8,
2007 By:
/s/ Sidney D.
Rosenblatt
Sidney
D. Rosenblatt
Executive
Vice President and Chief Financial Officer