SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the quarterly period ended March 31, 2008
OR
[ ]
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 1-12031
UNIVERSAL DISPLAY
CORPORATION
(Exact
name of registrant as specified in its charter)
Pennsylvania
|
|
23-2372688
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
|
|
|
|
|
|
375
Phillips Boulevard
|
|
|
Ewing,
New Jersey
|
|
08618
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
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 X No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ___
|
|
Accelerated
filer X
___
|
Non-accelerated
filer ___ (Do not check if smaller reporting company)
|
|
Smaller
reporting company ___
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No X
As of May
2, 2008, the registrant had outstanding 35,880,401 shares of common
stock.
|
|
PART
I – FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PART
II – OTHER INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PART
I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
|
March
31,
|
|
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
Short-term
investments
|
|
69,463,331
|
|
|
|
49,788,961
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
Inventory
|
|
41,165
|
|
|
|
41,165
|
|
Other
current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net
|
|
13,299,355
|
|
|
|
13,525,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
3,088,965
|
|
|
|
4,578,147
|
|
Deferred
license fees
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
150,000
|
|
|
|
172,688
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
11,446,094
|
|
|
|
12,790,531
|
|
|
|
|
|
|
|
|
|
DEFERRED
REVENUE
|
|
450,000
|
|
|
|
538,683
|
|
|
|
|
|
|
|
Total
liabilities
|
|
14,223,094
|
|
|
|
15,784,114
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
2,000
|
|
|
|
2,000
|
|
Common
Stock, par value $0.01 per share, 50,000,000 shares authorized,
35,847,455 and 35,563,201 shares issued and outstanding at March 31,
2008 and December 31, 2007, respectively
|
|
|
|
|
|
|
|
Additional
paid-in-capital
|
|
253,590,921
|
|
|
|
250,240,994
|
|
Unrealized
gain (loss) on available for sale securities
|
|
|
|
|
|
|
|
Accumulated
deficit
|
|
(165,525,852
|
)
|
|
|
(161,332,467
|
)
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
88,458,931
|
|
|
|
89,215,957
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
102,682,025
|
|
|
$
|
105,000,071
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
Three
Months Ended March 31,
|
|
2008
|
2007
|
|
|
|
|
|
|
Commercial
revenue
|
$
|
1,555,065
|
|
|
$
|
1,440,900
|
|
Developmental
revenue
|
|
1,161,754
|
|
|
|
1,573,730
|
|
|
|
|
Total
revenue
|
|
2,716,819
|
|
|
|
3,014,630
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
5,151,524
|
|
|
|
5,453,329
|
|
General and administrative
|
|
|
|
|
|
|
|
Royalty
and license expense
|
|
103,185
|
|
|
|
94,998
|
|
|
|
|
Total
operating expenses
|
|
7,823,731
|
|
|
|
8,183,390
|
|
|
|
|
Operating
loss
|
|
(5,106,912
|
)
|
|
|
(5,168,760
|
)
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE
|
|
(5,667
|
)
|
|
|
—
|
|
|
|
|
NET
LOSS
|
$
|
(4,193,385
|
)
|
|
$
|
(4,583,801
|
)
|
|
|
|
BASIC
AND DILUTED NET LOSS PER COMMON SHARE
|
$
|
(0.12
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
WEIGHTED
AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON
SHARE
|
|
35,770,641
|
|
|
|
31,523,070
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
Three
months ended March,
|
|
|
|
2008
|
|
2007
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(4,193,385 |
) |
|
$ |
(4,583,801 |
) |
|
Non-cash
charges to statement of operations:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
445,937 |
|
|
|
466,139 |
|
|
Amortization
of intangibles
|
|
|
423,768 |
|
|
|
423,768 |
|
|
Amortization
of premium and discount on investments, net
|
|
|
(438,296
|
) |
|
|
(45,650 |
) |
|
Stock-based
employee compensation
|
|
|
352,512 |
|
|
|
278,611 |
|
|
Stock-based
non-employee compensation
|
|
|
4,119 |
|
|
|
— |
|
|
Non-cash
expense under a development agreement
|
|
|
241,901 |
|
|
|
37,072 |
|
|
Stock-based
compensation to Board of Directors and Scientific Advisory
Board
|
|
|
116,628 |
|
|
|
109,533 |
|
|
(Increase)
decrease in assets:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
80,648 |
|
|
|
342,412 |
|
|
Inventory
|
|
|
— |
|
|
|
5,333 |
|
|
Other
current assets
|
|
|
90,525 |
|
|
|
(33,409 |
) |
|
Other
assets
|
|
|
2,500 |
|
|
|
(7,500 |
) |
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
(259,176
|
) |
|
|
(909,422 |
) |
|
Deferred
license fees
|
|
|
(128,711
|
) |
|
|
(127,900 |
) |
|
Deferred
revenue
|
|
|
(111,371
|
) |
|
|
750,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(3,372,401
|
) |
|
|
(3,294,814 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(219,578
|
) |
|
|
(175,865 |
) |
|
Purchases
of investments
|
|
|
(30,074,485
|
) |
|
|
(8,601,461 |
) |
|
Proceeds
from sale of investments
|
|
|
10,922,000 |
|
|
|
4,345,000 |
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(19,372,063
|
) |
|
|
(4,432,326 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds
from the exercise of common stock options and warrants
|
|
|
1,575,848 |
|
|
|
1,153,785 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
1,575,848 |
|
|
|
1,153,785 |
|
|
|
|
|
|
|
|
|
|
DECREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
(21,168,616
|
) |
|
|
(6,573,355 |
) |
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
33,870,696 |
|
|
|
31,097,533 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$ |
12,702,080 |
|
|
$ |
24,524,178 |
|
|
|
|
|
|
|
|
|
|
The
following non-cash activities occurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on available-for-sale securities
|
|
$ |
83,589 |
|
|
$ |
55,754 |
|
|
Common
stock issued to Board of Directors and Scientific Advisory Board that was
earned in a previous period
|
|
|
299,968 |
|
|
|
260,000 |
|
|
Common
stock issued to employees that was earned in a previous
period
|
|
|
904,939 |
|
|
|
969,257 |
|
|
Common
stock issued for royalties that was earned in a previous
period
|
|
|
66,403 |
|
|
|
499,993 |
|
|
Common
stock issued to non-employees that was earned in a previous
period
|
|
|
991 |
|
|
|
— |
|
|
The
accompanying notes are an integral part of these statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 and
5).
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. In January 2008, the Company also formed a second
wholly-owned subsidiary, Universal Display Corporation Hong Kong,
Ltd. However, that subsidiary is not currently conducting business
operations.
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 March 31,
2008, the results of operations for the three months ended March 31, 2008 and
2007, and cash flows for the three months ended March 31, 2008 and 2007. 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, 2007.
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
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. In February 2008, the FASB issued
FASB Staff Position (“FSP”) 157-2, Effective Date of FASB Statement
No. 157, which delays the effective date of Statement No. 157’s
fair value measurement requirements for non-financial assets and liabilities
that are not required or permitted to be measured at fair value on a recurring
basis to fiscal years beginning after November 15, 2008. Non-recurring
non-financial assets and liabilities for which the Company has not applied the
provisions of Statement No. 157 include long-lived assets measured at fair
value for an impairment assessment under FASB Statement No. 144. Management
does not expect the adoption of Statement No. 157 for non-recurring
non-financial assets and liabilities to have a significant impact on the
Company’s consolidated financial statements.
SFAS 157
establishes a valuation hierarchy for disclosure of the inputs to valuations
used to measure fair value. This hierarchy prioritizes the inputs into three
broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities. Level 2 inputs are quoted prices
for similar assets and 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 inputs are unobservable inputs based on management’s own
assumptions used to measure assets and liabilities at fair value. A financial
asset or liability’s classification within the hierarchy is determined based on
the lowest level input that is significant to the fair value
measurement.
The
following table provides the assets and liabilities carried at fair value
measured on a recurring basis as of March 31, 2008:
|
|
|
|
|
Fair Value Measurements at March 31, 2008 Using
|
|
|
|
Total carrying
value
as of
March 31, 2008
|
|
|
Quoted prices in
active
markets
(Level
1)
|
|
|
Significant other
observable
inputs
(Level
2)
|
|
|
Significant
unobservable
inputs
(Level
3)
|
|
Short-term
investments
|
|
$ |
69,463,331 |
|
|
$ |
69,463,331 |
|
|
$ |
— |
|
|
$ |
— |
|
Total
|
|
$ |
69,463,331 |
|
|
$ |
69,463,331 |
|
|
$ |
— |
|
|
$ |
— |
|
Short-term
investments are measured at fair value using quoted market prices and are
classified within Level 1 of the valuation hierarchy. The adoption of SFAS 157
did not have any impact on the Company’s 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 adoption of SFAS 159
did not have any impact on the Company’s 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
adoption of Issue No. 07-03 did not have any impact on the Company’s
results of operations and financial position.
3.
|
CASH,
CASH EQUIVALENTS AND SHORT-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 March 31, 2008 and December 31, 2007 consist of the
following:
|
|
|
|
|
|
Unrealized
|
|
|
Market
Value
|
|
Investment
Classification
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Aggregate
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
49,312,347
|
|
|
$
|
8,686
|
|
|
$
|
—
|
|
|
$
|
49,321,033
|
|
Certificates
of deposit
|
|
|
15,117,000
|
|
|
|
10,723
|
|
|
|
(318
|
)
|
|
|
15,127,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
|
14,073,000
|
|
|
|
—
|
|
|
|
(29,108
|
)
|
|
|
14,043,892
|
|
U.S.
Government bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds
|
|
|
500,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,839,163
|
|
|
$
|
1,351
|
|
|
$
|
(51,553
|
)
|
|
$
|
49,788,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
RESEARCH
AND LICENSE AGREEMENTS WITH PRINCETON, USC AND
MICHIGAN
|
The
Company funded OLED technology research at Princeton and, on a subcontractor
basis, at USC, for 10 years under a Research Agreement executed with Princeton
in August 1997 (the “1997 Research Agreement”). The Principal Investigator
conducting work under the 1997 Research Agreement transferred to Michigan in
January 2006. Following this, the 1997 Research Agreement was allowed to expire
on July 31, 2007.
As a
result of the transfer, the Company 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. Payments under the 2006 Research Agreement are made to USC
on a quarterly basis as actual expenses are incurred. Through the period ended
March 31, 2008, the Company had incurred $1,133,695 in research and development
expense under the 2006 Research Agreement.
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 $54,057 of royalty expense in connection with the
agreement for the three months ended March 31, 2008.
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 if 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
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.
|
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.
On
July 29, 2005, the Company entered into an OLED Materials Supply and
Service Agreement with PPG (the “OLED Materials Agreement”). The OLED
Materials Agreement superseded and replaced in their entireties the amended
Development Agreement and Supply Agreement effective as of January 1, 2006,
and extended the term of the Company’s relationship with PPG through
December 31, 2008. Under the OLED Materials Agreement, PPG
continues 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. On January 4, 2008, the term of the OLED Materials
Agreement was extended for an additional three years, through December 31,
2011.
Under the
OLED Materials Agreement, the Company compensates PPG on a cost-plus basis for
the services provided during each calendar quarter. The Company is required to
pay for some of these services in all cash and for other of the services through
the issuance of shares of the Company’s common stock. Up to 50% of the remaining
services are payable, at the Company’s sole discretion, in cash or shares of the
Company’s common stock, with the balance payable in all cash. The actual number
of shares of common stock issuable to PPG is determined based on the average
closing price for the Company’s common stock during a specified number of days
prior to the end of each calendar half-year period ending on March 31 and
September 30. If, however, this average closing price is less than $6.00, the
Company is required to compensate PPG in all cash.
The
Company issued 17,331 and 23,396 shares of the Company’s common stock to PPG as
consideration for services provided by PPG under the OLED Materials Agreement
during the three months ended March 31, 2008 and 2007, respectively. For these
shares, the Company recorded $241,901 and $332,748 to research and development
expense for the three months ended March, 2008 and 2007, respectively. The
Company also recorded $231,681 and $321,844 to research and development expense
for the cash portion of the work performed by PPG during the three months ended
March 31, 2008 and 2007, respectively.
The
Company is also required under the OLED Materials Agreement to reimburse PPG for
its raw materials and conversion costs for all development chemicals produced on
behalf of the Company. The Company recorded $1,191 and $27,952 to research and
development expense for this activity during the three months ended March 31,
2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of common stock options and warrants(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
employee compensation (B)
|
—
|
|
|
—
|
|
|
80,639
|
|
|
806
|
|
|
1,256,645
|
|
|
—
|
|
|
|
—
|
|
|
|
1,257,451
|
|
Stock-based
non-employee compensation (C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to Board of Directors and Scientific Advisory Board
(D)
|
—
|
|
|
—
|
|
|
27,108
|
|
|
271
|
|
|
416,325
|
|
|
—
|
|
|
|
—
|
|
|
|
416,596
|
|
Issuance
of common stock in connection with Development and License Agreements
(E)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on available-for-sales securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
83,589
|
|
|
|
—
|
|
|
|
83,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
During
the three months ended March 31, 2008, the Company issued
170,375 shares of common stock upon the exercise of common stock
options and warrants, resulting in cash proceeds of
$1,575,848.
|
(B)
|
Includes
$904,939 that was earned in a previous period and charged to expense when
earned, but issued in 2008.
|
(C)
|
Includes
$991 that was earned in a previous period and charged to expense when
earned, but issued in 2008.
|
(D)
|
Includes
$299,968 that was earned in a previous period and charged to expense when
earned, but issued in 2008.
|
(E)
|
The
Company was required to pay Motorola royalties of $132,839 for the year
ended December 31, 2007. In March 2008, the Company issued to
Motorola 3,801 shares of the Company’s common stock, valued at
$66,403, and paid Motorola $66,436 in cash to satisfy the royalty
obligation.
|
7.
|
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 March 31, 2008,
the Company’s shareholders have approved increases in the number of shares
reserved for issuance under the 1995 Plan to 7,000,000, and have 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,
shares of common 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 three months ended March 31, 2008, the Company granted to employees options
to purchase 3,750 shares of common stock. 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 three
months ended March 31, 2008 was $31,561. For the three months ended March 31,
2008 and 2007, compensation expense related to all outstanding common stock
options was $108,678 and $165,287, respectively.
In
addition, during the three months ended March 31, 2008, the Company granted a
total of 74,557 shares of restricted stock to employees. These shares
of restricted stock had a value of $1,367,376 on the date of grant and will vest
in equal increments over three years from the date of grant. For the
three months ended March 31, 2008, the Company recorded as compensation charges
related to all restricted stock awards to employees a general and administrative
expense of $154,821 and a research and development expense of $81,455. The
Company also issued 488 shares of stock to employees and the fair value of
$7,558 was charged to research and development.
On
March 31, 2008, the Company issued 5,276 shares of fully vested common
stock to members of its Board of Directors as partial payment for services
performed for the three-month period ended on such date. The fair
value of the shares issued was $106,126, which was recorded as a compensation
charge in general and administrative expense for the three months ended March
31, 2008.
During
the three months ended March 31, 2008, the Company granted a total of 13,086
shares of restricted stock to members of the Scientific Advisory
Board. These shares of restricted stock had a value of $239,997 on
the date of grant and will vest in equal increments over three years from the
date of grant. For the three months ended March 31, 2008, the Company
recorded a charge to research and development expenses of $10,502 for all
restricted stock awards to members of the Scientific Advisory
Board.
During
the three months ended March 31, 2008, the Company also granted to non-employees
options to purchase 250 shares of common stock and 30 shares of stock. 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 and the shares issued to non-employees during the three months
ended March 31, 2008 was $4,119 and was charged to research and development
expense.
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 three months
ended March 31, 2008 and 2007, the effects of the exercise of the combined
outstanding stock options and warrants of 5,005,667 and 6,653,313, respectively,
were excluded from the calculation of diluted EPS as the impact would have been
antidilutive.
8.
|
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.
The
Company is required under a license agreement with Motorola to pay royalties on
gross revenues earned by the Company from its sales of OLED products or
components, or from its OLED technology licensees, whether or not these revenues
relate specifically to 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. For the quarter ended March 31, 2008, the
Company recorded a royalty expense of $46,628.
Notice of Opposition to European
Patent No. 0946958
On
December 8, 2006, Cambridge Display Technology, Ltd. (“CDT”), which was acquired
in 2007 by Sumitomo Chemical Company (“Sumitomo”), 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, 6,888,306 and 7,247,073. These patents relate to the
Company’s FOLED 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. The opponents then filed their reply
to the Company’s response on December 7, 2007. The Company is still considering
whether to file another response before the oral hearing date is set. At this
stage of the proceeding, Company management cannot make any prediction as to the
probable outcome of this opposition. However, based on an analysis of the
evidence presented to date, Company management continues to 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
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,
7,001,536 and 7,291,406, and to pending U.S. patent application 11/879,379,
filed on July 16, 2007. These patents and this 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. Since there
is considerable overlap in the prior art evidence relied upon in each of the
filed oppositions, the EPO is handling them as a single opposition.
The EPO
set a January 6, 2008 due date for the Company to file its response to the
opposition. The Company requested a two-month extension to file this response,
and the Company subsequently filed the response in a timely manner. The Company
is waiting to see whether the other parties in the opposition file any
additional documents, to which the Company may respond. At this time, Company
management cannot make any prediction as to the probable outcome of the
opposition. However, based on an analysis of the evidence presented to date,
Company management continues to 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.
Contract
research revenue of $885,967 and $1,114,524 for the three months ended March 31,
2008 and 2007, respectively, has been derived from contracts with United States
government agencies. One non-government customer accounted for 44% and 47%
of consolidated revenue for the three months ended March 31, 2008 and 2007,
respectively. Accounts receivable from this customer were $665,240 at March 31,
2008. Revenues from outside of North America represented 65% and 60% of
consolidated revenue for the three months ended March 31, 2008 and 2007,
respectively.
|
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, 2007, as supplemented by any disclosures
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 agreements and
license fees and royalties. In the future, we anticipate that 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 adopted by product
manufacturers. We have incurred significant losses since our inception,
resulting in an accumulated deficit of $165,525,852 as of March 31,
2008.
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 technology development and
evaluation;
|
·
|
the
timing and volume of sales of our OLED materials for both commercial usage
and evaluation purposes;
|
·
|
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
We had a
net loss of $4,193,385 (or $0.12 per diluted share) for the quarter ended March
31, 2008, compared to a net loss of $4,583,801 (or $0.15 per diluted share) for
the same period in 2007. The decrease in net loss was primarily due
to:
·
|
a
decrease in operating expenses of $359,659;
and
|
·
|
an
increase in interest income of
$334,235;
|
·
|
offset
to some extent by a decrease in revenues of
$297,811.
|
Our
revenues were $2,716,819 for the quarter ended March 31, 2008, compared to
$3,014,630 for the same period in 2007. Commercial revenue increased to
$1,555,065 from $1,440,900 for the same period in 2007. Commercial
revenue relates to the commercialization of our OLED technologies into our
customers’ products and includes commercial chemical revenue, license fees and
royalty income. Developmental revenue decreased to $1,161,754 from
$1,573,730 for the same period in 2007. Developmental revenue relates
to developmental efforts for which we are paid and includes contract research
revenue, technology development revenue and development chemical sales. We
believe these revenue categories, which now combine accounts previously reported
separately, better reflect our business strategies and core business
efforts.
Our
commercial chemical and royalty and license revenues for the quarter ended March
31, 2008 were $985,560 and $569,505, respectively, compared to $1,313,000 and
$127,900, respectively, for the corresponding period in 2007.
The
majority of our commercial chemical revenue for the quarter ended March 31, 2008
was from sales of our proprietary OLED materials to Samsung SDI Co., Ltd.
(“Samsung SDI”). We also sold small quantities of these materials to
two other commercial chemical customers. During the same period in 2007, we
recorded all of our commercial chemical revenue, as well as the majority of our
license and royalty revenues, from Samsung SDI. We cannot accurately predict how
long our material sales to Samsung SDI or other customers will continue, as they
frequently update and alter their product offerings. Continued sales of our OLED
materials to these customers will depend on several factors, including, pricing,
availability, continued technical improvement and competitive product
offerings.
We
recorded royalty revenue of $267,565 for the quarter ended March 31, 2008, with
no corresponding revenues for the same period in 2007. This revenue represents
royalties received under our patent license agreement with Samsung SDI, which we
entered into in April 2005, as well as royalties from AIXTRON AG for the
sale of an OVPD tool. Under the agreement with Samsung SDI, we receive royalty
reports at 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 March 31, 2008 represents
royalties for products sold by Samsung SDI during the fourth quarter of
2007.
License
revenue for each of the quarters ended March 31, 2008 and 2007 included license
fees of $301,940 and $127,900, respectively. These revenues were received under
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.
We also recorded license revenues from two additional commercial customers for
the quarter ended March 31, 2008.
We earned
$885,967 in contract research revenue from agencies of the U.S. government for
the quarter ended March 31, 2008, compared to $1,114,524 in corresponding
revenue for the same period in 2007. The decrease was mainly due to the timing
of revenue recognition in connection with several new and completed government
programs, as well as our continuing work under existing government
programs.
We earned
$253,099 from sales of developmental chemicals during the quarter ended March
31, 2008, compared to $209,206 in corresponding revenue for the same period in
2007. The increase was mainly due to an increased volume and an increase in the
number of developmental chemical customers. 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.
We
recognized $22,688 in technology development revenue for the quarter ended March
31, 2008 in connection with the renewal of a technology development and
evaluation agreement. This compares to $250,000 in technology development
revenue for the same period in 2007. The decrease was due to our completion of
one phase of work under our technology development agreement with a customer.
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 $5,151,524 for the quarter ended
March 31, 2008, compared to $5,453,329 for the same period in
2007. The decrease was mainly due to:
·
|
a
decrease in subcontract costs from the completion of work under government
contracts, as well as timing of costs incurred under some of
our government programs;
|
·
|
a
decrease in the amounts paid to PPG Industries under our OLED Materials
and Supply and Service Agreement;
and
|
·
|
a
decrease in the amounts paid under our sponsored research
agreements.
|
These
decreases were offset to some extent by an increase in personnel
costs.
General
and administrative expenses were $2,373,546 for the quarter ended March 31,
2008, compared to $2,353,514 for the same period in 2007. These
expenses remained consistent over the corresponding periods.
Interest
income increased to $919,194 for the quarter ended March 31, 2008, compared to
$584,959 for the same period in 2007. The increase was mainly
attributable to increased cash invested, which cash was derived from a common
stock offering that we completed in May 2007.
Liquidity
and Capital Resources
As of
March 31, 2008, we had cash and cash equivalents of $12,702,080 and short-term
investments of $69,463,331, for a total of $82,165,411. This compares to cash
and cash equivalents of $33,870,696 and short-term investments of $49,788,961,
for a total of $83,659,657, as of December 31, 2007.
Cash used
in operating activities was $3,372,401 for the three months ended March 31,
2008, compared to $3,294,814 for the same period in 2007. The cash
usage was consistent over the corresponding periods.
Cash used
in investing activities was $19,372,063 for the three months ended March 31,
2008, compared to $4,432,326 for the same period in 2007. The increase was
mainly due to increased cash invested in short-term investments, which cash was
derived from our May 2007 common stock offering.
Cash
provided by financing activities was $1,575,848 for the three months ended March
31, 2008, compared to $1,153,785 for the same period in 2007. The
increase was mainly due an increase in exercises of stock options and stock
purchase warrants.
Working
capital was $73,658,656 as of March 31, 2008, compared to working capital of
$73,979,638 as of December 31, 2007. Working capital remained
consistent over the corresponding periods.
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 2009.
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, 2007 for a
discussion of our critical accounting policies. There have been no
changes in critical accounting policies to date in 2008.
Contractual
Obligations
Refer to
our Annual Report on Form 10-K for the year ended December 31, 2007 for a
discussion of our contractual obligations. There have been no
significant changes in contractual obligations to date in 2008.
Off-Balance
Sheet Arrangements
Refer to
our Annual Report on Form 10-K for the year ended December 31, 2007 for a
discussion of off-balance sheet arrangements. As of March 31, 2008,
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 other than our
short-term investments disclosed in Note 3 to the consolidated financial
statements included herein. We invest in investment grade financial instruments
to reduce our exposure. 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 March 31, 2008. 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 March 31, 2008 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
Notice
of Opposition to European Patent No. 0946958
On
December 8, 2006, Cambridge Display Technology, Ltd. (“CDT”), which was acquired
in 2007 by Sumitomo Chemical Company (“Sumitomo”), 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, 6,888,306 and 7,247,073. These patents relate to our FOLED
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. The opponents then filed their reply
to our response on December 7, 2007. We are still considering whether we will
file another response before the oral hearing date is set. At this stage of the
proceeding, we cannot make any prediction as to the probable outcome of this
opposition. However, based on our analysis of the evidence presented to date, we
continue to 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
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,
7,001,536 and 7,291,406, and to pending U.S. patent application 11/879,379,
filed on July 16, 2007. These patents and this 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. Since there
is considerable overlap in the prior art evidence relied upon in each of the
filed oppositions, the EPO is handling them as a single opposition.
The EPO
set a January 6, 2008 due date for us to file our response to the opposition. We
requested a two-month extension to file this response, and we subsequently filed
it in a timely manner. We are waiting to see whether the other parties in the
opposition file any additional documents, to which we may respond. At this time,
we cannot make any prediction as to the probable outcome of the opposition.
However, based on our analysis of the evidence presented to date, we continue to
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.
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, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
During
the quarter ended March 31, 2008, we issued an aggregate of 98,801 unregistered
shares of our common stock. Of this amount, 3,801 shares were issued
to Motorola, Inc. in partial satisfaction of our obligation to pay royalties to
Motorola under our license agreement with them. The remaining 95,000
shares were issued upon the exercise of outstanding warrants. The
warrants had a weighted average exercise price of $10.61 per share. 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.
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
|
|
|
10.1*
|
|
Amendment
No. 1 to the OLED Materials Supply and Service Agreement between the
registrant and PPG Industries, Inc., dated as of January 4,
2008
|
|
|
|
31.1*
|
|
Certifications
of Steven V. Abramson, 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 Steven V. Abramson, 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:
May 8, 2008
|
|
By:/s/ Sidney D. Rosenblatt
|
|
|
Sidney
D. Rosenblatt
|
|
|
Executive
Vice President and Chief Financial
Officer
|