UNITED
STATES
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 September 30, 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)
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Pennsylvania
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23-2372688
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|
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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|
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incorporation
or organization)
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375
Phillips Boulevard
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||
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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 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.
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Large
accelerated filer ___
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Accelerated
filer X
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Non-accelerated
filer ___ (Do not check if a smaller reporting
company)
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Smaller
reporting company ___
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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
November 3, 2008, the registrant had outstanding 36,064,017 shares of common
stock.
PART
I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
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September
30,
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December
31,
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|||||||
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2008
|
2007
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|||||||
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ASSETS
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||||||||
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CURRENT
ASSETS:
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||||||||
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Cash
and cash equivalents
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$ | 54,415,132 | $ | 33,870,696 | ||||
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Short-term
investments
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24,644,704 | 49,788,961 | ||||||
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Accounts
receivable
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1,792,761 | 2,395,416 | ||||||
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Inventory
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2,209 | 41,165 | ||||||
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Other
current assets
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649,900 | 673,931 | ||||||
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Total
current assets
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81,504,706 | 86,770,169 | ||||||
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PROPERTY
AND EQUIPMENT, net
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13,275,767 | 13,525,714 | ||||||
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ACQUIRED
TECHNOLOGY, net
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3,353,112 | 4,624,416 | ||||||
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OTHER
ASSETS
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72,272 | 79,772 | ||||||
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TOTAL
ASSETS
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$ | 98,205,857 | $ | 105,000,071 | ||||
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
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||||||||
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CURRENT
LIABILITIES:
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||||||||
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Accounts
payable
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$ | 1,673,009 | $ | 861,428 | ||||
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Accrued
expenses
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4,733,161 | 4,578,147 | ||||||
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Deferred
license fees
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6,148,268 | 7,178,268 | ||||||
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Deferred
revenue
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1,787,634 | 172,688 | ||||||
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Total
current liabilities
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14,342,072 | 12,790,531 | ||||||
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DEFERRED
LICENSE FEES
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3,577,437 | 2,454,900 | ||||||
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DEFERRED
REVENUE
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375,000 | 538,683 | ||||||
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Total
liabilities
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18,294,509 | 15,784,114 | ||||||
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COMMITMENTS
AND CONTINGENCIES (Note 8)
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||||||||
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SHAREHOLDERS’
EQUITY:
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||||||||
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Preferred
Stock, par value $0.01 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)
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2,000 | 2,000 | ||||||
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Common
Stock, par value $0.01 per share, 50,000,000 shares authorized,
36,029,665 and 35,563,201 shares issued and outstanding at September
30, 2008 and December 31, 2007, respectively
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360,297 | 355,632 | ||||||
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Additional
paid-in capital
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255,591,116 | 250,240,994 | ||||||
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Unrealized
loss on available for sale securities
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(7,440 | ) | (50,202 | ) | ||||
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Accumulated
deficit
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(176,034,625 | ) | (161,332,467 | ) | ||||
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Total
shareholders’ equity
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79,911,348 | 89,215,957 | ||||||
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TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
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$ | 98,205,857 | $ | 105,000,071 | ||||
The
accompanying notes are an integral part of these statements.
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARIES
(UNAUDITED)
|
Three
Months Ended September 30,
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||||||||
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2008
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2007
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|||||||
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REVENUE:
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||||||||
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Commercial
revenue
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$ | 1,324,924 | $ | 1,368,201 | ||||
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Developmental
revenue
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1,300,715 | 1,709,080 | ||||||
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Total
revenue
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2,625,639 | 3,077,281 | ||||||
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OPERATING
EXPENSES:
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||||||||
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Cost
of chemicals sold
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266,563 | 281,062 | ||||||
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Research
and development
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5,750,361 | 4,568,299 | ||||||
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General
and administrative
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2,342,962 | 2,209,537 | ||||||
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Royalty
and license expense
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98,617 | 91,132 | ||||||
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Total
operating expense
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8,458,503 | 7,150,030 | ||||||
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Operating
loss
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(5,832,864 | ) | (4,072,749 | ) | ||||
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INTEREST
INCOME
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545,561 | 1,114,769 | ||||||
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INTEREST
EXPENSE
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(15,680 | ) | (2,585 | ) | ||||
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NET
LOSS
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$ | (5,302,983 | ) | $ | (2,960,565 | ) | ||
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BASIC
AND DILUTED NET LOSS PER COMMON SHARE
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$ | (0.15 | ) | $ | (0.08 | ) | ||
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WEIGHTED
AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON
SHARE
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35,989,473 | 34,985,918 | ||||||
The
accompanying notes are an integral part of these statements.
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARIES
(UNAUDITED)
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Nine
Months Ended September 30,
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||||||||
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2008
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2007
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|||||||
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REVENUE:
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||||||||
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Commercial
revenue
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$ | 4,275,476 | $ | 3,202,027 | ||||
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Developmental
revenue
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3,212,580 | 5,205,054 | ||||||
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Total
revenue
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7,488,056 | 8,407,081 | ||||||
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OPERATING
EXPENSES:
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||||||||
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Cost
of chemicals sold
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709,001 | 727,650 | ||||||
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Research
and development
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15,955,238 | 15,565,452 | ||||||
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General
and administrative
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7,396,452 | 7,131,268 | ||||||
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Royalty
and license expense
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297,086 | 222,725 | ||||||
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Total
operating expense
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24,357,777 | 23,647,095 | ||||||
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Operating
loss
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(16,869,721 | ) | (15,240,014 | ) | ||||
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INTEREST
INCOME
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2,202,123 | 2,523,467 | ||||||
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INTEREST
EXPENSE
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(34,560 | ) | (3,190 | ) | ||||
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NET
LOSS
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$ | (14,702,158 | ) | $ | (12,719,737 | ) | ||
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BASIC
AND DILUTED NET LOSS PER COMMON SHARE
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$ | (0.41 | ) | $ | (0.38 | ) | ||
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WEIGHTED
AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON
SHARE
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35,887,264 | 33,230,574 | ||||||
The
accompanying notes are an integral part of these statements.
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARIES
(UNAUDITED)
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Nine
Months Ended September 30,
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||||||||
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2008
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2007
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|||||||
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CASH
FLOWS FROM OPERATING ACTIVITIES:
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||||||||
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Net
loss
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$ | (14,702,158 | ) | $ | (12,719,737 | ) | ||
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Non-cash
charges to statement of operations:
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||||||||
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Depreciation
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1,421,274 | 1,347,549 | ||||||
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Amortization
of intangibles
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1,271,304 | 1,271,304 | ||||||
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Amortization
of premium and discount on investments, net
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(942,761 | ) | (189,306 | ) | ||||
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Stock-based
employee compensation
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895,869 | 803,693 | ||||||
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Stock-based
non-employee compensation
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4,119 | 9,497 | ||||||
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Non-cash
expense under a Development Agreement
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882,540 | 745,453 | ||||||
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Stock-based
compensation to Board of Directors and Scientific Advisory
Board
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345,691 | 318,997 | ||||||
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(Increase)
decrease in assets:
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||||||||
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Accounts
receivable
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602,655 | (376,575 | ) | |||||
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Inventory
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38,956 | 28,389 | ||||||
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Other
current assets
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24,031 | (139,669 | ) | |||||
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Other
assets
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7,500 | 7,500 | ||||||
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Increase
(decrease) in liabilities:
|
||||||||
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Accounts
payable and accrued expenses
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1,805,503 | (526,381 | ) | |||||
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Deferred
license fees
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92,537 | (383,700 | ) | |||||
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Deferred
revenue
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1,451,263 | 352,554 | ||||||
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Net
cash used in operating activities
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(6,801,677 | ) | (9,450,432 | ) | ||||
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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||||||||
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Purchase
of property and equipment
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(1,171,327 | ) | (661,591 | ) | ||||
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Purchase
of investments
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(62,028,220 | ) | (27,344,981 | ) | ||||
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Proceeds
from sale of investments
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88,158,000 | 22,543,000 | ||||||
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Net
cash provided by (used in) investing activities
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24,958,453 | (5,463,572 | ) | |||||
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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||||||||
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Proceeds
from the issuance of common stock
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— | 38,000,023 | ||||||
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Proceeds
from the exercise of common stock options and warrants
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2,387,660 | 6,422,284 | ||||||
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Net
cash provided by financing activities
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2,387,660 | 44,422,307 | ||||||
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INCREASE
IN CASH AND CASH EQUIVALENTS
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20,544,436 | 29,508,303 | ||||||
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CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
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33,870,696 | 31,097,533 | ||||||
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CASH
AND CASH EQUIVALENTS, END OF PERIOD
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$ | 54,415,132 | $ | 60,605,836 | ||||
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The
following non-cash activities occurred:
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||||||||
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Unrealized
gain on available-for-sale securities
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$ | 42,762 | $ | 66,164 | ||||
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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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299,968 | 260,000 | ||||||
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Common
stock issued to employees that was earned in a previous
period
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867,510 | 951,321 | ||||||
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Common
stock issued for royalties that was earned in a previous
period
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66,403 | 499,993 | ||||||
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Common
stock issued under a Development Agreement that was earned in a previous
period
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— | 21,915 | ||||||
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Common
stock issued to non-employee that was earned in a previous
period
|
991 | — | ||||||
The
accompanying notes are an integral part of these statements.
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARIES
(UNAUDITED)
|
1.
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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 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.
|
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, 2008, the results of operations for the three and nine months ended
September 30, 2008 and 2007, and cash flows for the nine months ended September
30, 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. The results of
Company’s operations for any interim period are not necessarily indicative of
the results of operations for any other interim period or for the full
year.
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 Financial Accounting Standards Board (“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 SFAS 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
SFAS 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 SFAS 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 September 30, 2008:
|
Fair
Value Measurements at September 30, 2008, Using
|
||||||||||||||||
|
Total
carrying value as of September 30, 2008
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Quoted
prices in active markets (Level 1)
|
Significant
other observable inputs
(Level
2)
|
Significant
unobservable inputs
(Level
3)
|
|||||||||||||
|
Short-term
Investments
|
$ | 24,644,704 | $ | 24,644,704 | $ | — | $ | — | ||||||||
|
Total
|
$ | 24,644,704 | $ | 24,644,704 | $ | — | $ | — | ||||||||
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, Accounting for Nonrefundable
Advance Payments for Goods or Services to be Used in Future Research and
Development Activities (“Issue No. 07-03”). 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.
In
April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”), which amends the list of factors an
entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under SFAS
No. 142, Goodwill and
Other Intangible Assets. The new guidance applies to (1) intangible
assets that are acquired individually or with a group of other assets and
(2) intangible assets acquired in both business combinations and asset
acquisitions. Under FSP 142-3, entities estimating the useful life of a
recognized intangible asset must consider their historical experience in
renewing or extending similar arrangements or, in the absence of historical
experience, must consider assumptions that market participants would use about
renewal or extension. This FSP shall be effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The Company has not determined the impact FSP
142-3 will have on its 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 September 30, 2008 and December 31, 2007 consist of the
following:
|
Amortized
|
Unrealized
|
Aggregate
Fair
|
||||||||||||||
|
Investment
Classification
|
Cost
|
Gains
|
(Losses)
|
Market
Value
|
||||||||||||
|
September
30, 2008 –
|
||||||||||||||||
|
Corporate
bonds
|
$ | 9,945,846 | $ | — | $ | (7,347 | ) | $ | 9,938,499 | |||||||
|
Certificates
of deposit
|
7,156,000 | 3,194 | (3,698 | ) | 7,155,496 | |||||||||||
|
U.S.
Government bonds
|
7,550,298 | 11,252 | (10,841 | ) | 7,550,709 | |||||||||||
| $ | 24,652,144 | $ | 14,446 | $ | (21,886 | ) | $ | 24,644,704 | ||||||||
|
December
31, 2007 –
|
||||||||||||||||
|
Corporate
bonds
|
$ | 25,486,974 | $ | — | $ | (22,154 | ) | $ | 25,464,820 | |||||||
|
Certificates
of deposit
|
14,073,000 | — | (29,108 | ) | 14,043,892 | |||||||||||
|
U.S.
Government bonds
|
9,779,189 | 1,351 | (291 | ) | 9,780,249 | |||||||||||
|
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 September 30, 2008, the Company had incurred
$1,699,087 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 (as amended, the “1997 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. 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 has accrued $162,035 of royalty
expense in connection with the agreement for the nine months ended September 30,
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 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 63,354 and 50,477 shares of the Company’s common stock to PPG as
consideration for services provided by PPG under the OLED Materials Agreement
during the nine months ended September 30, 2008 and 2007, respectively. For
these shares, the Company recorded $882,540 and $745,453 to research and
development expense for the nine months ended September 30, 2008 and 2007,
respectively. The Company also recorded $771,565 and $746,715 to research and
development expense for the cash portion of the work performed by PPG during the
nine months ended September 30, 2008 and 2007, respectively. Of the shares
earned in the nine months ended September 30, 2008, 28,492 shares were issued in
October 2008.
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 $0 and $162,132 to research and
development expense for this activity during the nine months ended September 30,
2008 and 2007, respectively.
|
6.
|
SHAREHOLDERS’
EQUITY
|
|
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
|
|||||||||||||||||||||||||
|
BALANCE,
JANUARY 1, 2008
|
200,000 | $ | 2,000 | 35,563,201 | $ | 355,632 | $ | 250,240,994 | $ | (50,202 | ) | $ | (161,332,467 | ) | $ | 89,215,957 | ||||||||||||||||
|
Exercise
of common stock options and warrants (A)
|
- | - | 304,650 | 3,046 | 2,384,614 | - | - | 2,387,660 | ||||||||||||||||||||||||
|
Stock-based
employee compensation (B)
|
- | - | 85,407 | 854 | 1,762,525 | - | - | 1,763,379 | ||||||||||||||||||||||||
|
Stock-based
non-employee compensation (C)
|
- | - | 84 | 1 | 5,109 | - | - | 5,110 | ||||||||||||||||||||||||
|
Issuance
of common stock to Board of Directors and Scientific Advisory Board
(D)
|
- | - | 37,660 | 377 | 645,282 | - | - | 645,659 | ||||||||||||||||||||||||
|
Issuance
of common stock in connection with Development and License Agreements
(E)
|
- | - | 38,663 | 387 | 552,592 | - | - | 552,979 | ||||||||||||||||||||||||
|
Unrealized
gain on available-for-sale securities
|
- | - | - | - | - | 42,762 | - | 42,762 | ||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | (14,702,158 | ) | (14,702,158 | ) | ||||||||||||||||||||||
|
Comprehensive
loss
|
(14,659,396 | ) | ||||||||||||||||||||||||||||||
|
BALANCE,
SEPTEMBER 30, 2008
|
200,000 | $ | 2,000 | 36,029,665 | $ | 360,297 | $ | 255,591,116 | $ | (7,440 | ) | $ | (176,034,625 | ) | $ | 79,911,348 | ||||||||||||||||
|
(A)
|
During
the nine months ended September 30, 2008, the Company issued
304,650 shares of common stock upon the exercise of common stock
options and warrants, resulting in cash proceeds of
$2,387,660.
|
|
(B)
|
Includes
$867,510 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. As of September 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 and
non-employee director 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 prior to January 1, 2006 that remain
unvested. 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, 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 nine months ended September 30, 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 closing 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, 2008 was
$31,561. For the nine months ended September 30, 2008 and 2007,
compensation expense related to the vesting of all employee stock options was
$143,577 and $426,985, respectively.
In
addition, during the nine months ended September 30, 2008, the Company granted a
total of 76,057 shares of restricted stock to employees. These shares
of restricted stock had a value of $1,386,395 on the date of grant and will vest
in equal increments annually over three years from the date of
grant. For the nine months ended September 30, 2008, the Company
recorded as compensation charges related to the vesting of all restricted stock
awards to employees a general and administrative expense of $482,196 and a
research and development expense of $252,924. The Company also
granted 1,830 shares of common stock to employees, which were fully vested at
the date of grant, and had a fair value of $26,500 that was charged to research
and development expense. In connection with these shares, 601 shares, with a
fair value of $9,328, were withheld in satisfaction of tax withholding
obligations.
During
the nine months ended September 30, 2008, the Company issued 15,828 shares of
common stock to members of its Board of Directors as partial compensation for
services performed. The fair value of the shares issued was $281,543,
which was recorded as general and administrative expense for the nine months
ended September 30, 2008.
During
the nine months ended September 30, 2008, the Company granted a total of 13,086
shares of restricted stock to certain members of its Scientific Advisory
Board. These shares of restricted stock will vest in equal increments
annually over three years from the date of grant. For the nine months
ended September 30, 2008, the Company recorded a charge to research and
development expenses of $64,148 for the vesting of all restricted stock awards
to these members of the Scientific Advisory Board.
During
the nine months ended September 30, 2008, the Company also granted to
non-employees options to purchase 250 shares of common stock and 30 shares of
unrestricted stock. These stock options vested immediately and had
exercise prices equal to the closing 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 nine months ended September 30, 2008
was $4,119, which 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 nine months ended September 30, 2008 and 2007, the
effects of the exercise of the combined outstanding stock options and warrants
of 4,672,275 and 5,681,359, 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 based on work performed by USC under that agreement, and by
Michigan under its subcontractor agreement with 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 nine
months ended
September
30, 2008, the Company recorded a royalty expense of $127,551.
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 has decided that there is no need to file another
response before the oral hearing date is set. The Company is
currently waiting for the EPO to notify it of the date of the oral
hearing.
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. The EPO combined all three oppositions into a single
opposition proceeding.
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 its response in a timely
manner. The Company is currently waiting for the EPO to notify it of
the date of the oral hearing. The Company is also 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.
|
9.
|
CONCENTRATION
OF RISK
|
Contract
research revenue, which is included in developmental revenue in the accompanying
statement of operations, of $1,841,368 and $3,649,076 for the nine months ended
September 30, 2008 and 2007, respectively, has been derived from contracts with
United States government agencies. One non-government customer accounted
for 48% and 37% of consolidated revenue for the nine months ended September 30,
2008 and 2007, respectively. Accounts receivable from this customer
were $825,000 at September 30, 2008. Revenues from outside of North
America represented 72% and 54% of consolidated revenue for the nine months
ended September 30, 2008 and 2007, 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.
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 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 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 $176,034,625 as of September 30,
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
Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007
We had a
net loss of $5,302,983 (or $0.15 per diluted share) for the quarter ended
September 30, 2008, compared to a net loss of $2,960,565 (or $0.08 per diluted
share) for the same period in 2007. The increase in net loss was
primarily due to:
|
·
|
an
increase in operating expenses of $1,308,473;
|
|
·
|
a
decrease in interest income of $569,208; and
|
|
·
|
a
decrease in revenues of $451,642.
|
Our
revenues were $2,625,639 for the quarter ended September 30, 2008, compared to
$3,077,281 for the same period in 2007. Commercial revenue decreased to
$1,324,924 from $1,368,201 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 $1,300,715 from
$1,709,080 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 revenue. We
believe these revenue categories, which now combine accounts previously reported
separately, better reflect our business strategies and core business
efforts.
Our
commercial chemical revenue and our royalty and license revenues for the quarter
ended September 30, 2008 were $1,025,000 and $299,924, respectively, compared to
$1,185,050 and $183,151, respectively, for the corresponding period in
2007.
The
majority of our commercial chemical revenue for the quarter ended September 30,
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 quarter. 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 $148,261 for the quarter ended September 30, 2008,
compared to $16,051 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. 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
September 30, 2008 and 2007 represents royalties for products sold by Samsung
SDI during the second quarter of 2008 and 2007, respectively.
License
revenue for the quarters ended September 30, 2008 and 2007 included license fees
of $151,663 and $167,100, respectively. These revenues were received under our
patent license agreement with Samsung SDI, as well as a cross-license agreement
we executed with DuPont Displays, Inc. (“DuPont”) in
December 2002. License revenue for the quarter ended September
30, 2008 also included revenues received under a patent license agreement we
entered into with Konica Minolta Holdings, Inc. (“Konica Minolta”) in August
2008, and a joint development agreement we previously entered into with a
subsidiary of Konica Minolta. In connection with 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, based on current
assumptions, over 10 years with DuPont and Konica Minolta.
We earned
$610,316 in contract research revenue from agencies of the U.S. government for
the quarter ended September 30, 2008, compared to $1,229,306 in corresponding
revenue for the same period in 2007. The decrease was due principally
to the timing of revenue recognition in connection with several new and
completed government programs in the third quarter of 2008. However,
the overall contract value remained relatively consistent in both
quarters.
We earned
$628,033 in development chemical revenue for the quarter ended September 30,
2008, compared to $229,774 in corresponding revenue for the same period in 2007.
We had the same number of developmental chemical customers in both periods;
however, the dollar values of shipments to two of these customers was
significantly higher in the third quarter of 2008. 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 $62,366 in technology development revenue for the quarter ended
September 30, 2008, compared to $250,000 in technology development revenue for
the same period in 2007. Technology development revenue for the
quarter ended September 30, 2008 included revenues received under a new joint
development agreement we entered into in August 2008. Payments
received under this new agreement are being classified as deferred revenue and
will be recognized over a period of three years. 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 different
technology development strategies.
During
the third quarter of 2008, we received $2,200,000 in fees from customers for
licenses, technical assistance and joint development work. We have
recorded these fees as deferred revenue and began recognizing a portion of them
in the third quarter.
Total
operating expenses were $8,458,503 for the quarter ending September 30, 2008,
compared to $7,150,030 for the same period in 2007. Total operating expenses for
the third quarter of 2008 are in line with the prior quarters of 2008. Total
operating expenses averaged approximately $8,100,000 per quarter for the first
three quarters of 2008. Total operating expenses for the year 2007 averaged
approximately $7,900,000 per quarter. Operating expenses were
consistent with our expectations on a quarter-to-quarter basis.
We
incurred research and development expenses of $5,750,361 for the quarter ended
September 30, 2008, compared to $4,568,299 for the same period in
2007. The increase was mainly due to:
|
·
|
an
increase in the amounts paid to PPG Industries under our OLED Materials
and Supply and Service Agreement of $279,256;
|
|
·
|
an
increase in patent costs of $261,577;
|
|
·
|
an
increase in personnel costs of $220,765;
|
|
·
|
An
increase in subcontract costs of $204,185;
|
|
·
|
an
increase in sponsored research costs of $196,260; and
|
|
·
|
an
increase in lab supplies of
$181,442.
|
Research
and development expenses for the third quarter 2008 were higher than for the
third quarter 2007, mainly due to differences in the timing of these
expenses. As noted below, research and development expenses remained
consistent for the nine-month periods ended September 30, 2008 and
2007.
General
and administrative expenses were $2,342,962 for the quarter ended September 30,
2008, compared to $2,209,537 for the same period in 2007. These
expenses remained relatively consistent over the corresponding
periods.
Interest
income decreased to $545,561 for the quarter ended September 30, 2008, compared
to $1,114,769 for the same period in 2007. The decrease was mainly
attributable to decreased rates of return on investments during the quarter,
compared to rates for the same period in 2007. Due to current market
conditions, we anticipate that these lower rates of return will continue for the
foreseeable future.
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
We had a
net loss of $14,702,158 (or $0.41 per diluted share) for the nine months ended
September 30, 2008, compared to a net loss of $12,719,737 (or $0.38 per diluted
share) for the same period in 2007. The increased loss was primarily due
to:
|
·
|
an
increase in operating expenses of $710,682;
|
|
·
|
a
decrease in interest income of $321,344; and
|
|
·
|
a
decrease in revenues of $919,025.
|
Our
revenues were $7,488,056 for the nine months ended September 30, 2008, compared
to $8,407,081 for the same period in 2007. Commercial revenue increased to
$4,275,476 from $3,202,027 for the same period in 2007. Developmental
revenue decreased to $3,212,580 from $5,205,054 for the same period in
2007.
Our
commercial chemical revenue and our royalty and license revenues for the nine
months ended September 30, 2008 were $2,948,890 and $1,326,586, respectively,
compared to $2,727,681 and $474,346, respectively, for the corresponding period
in 2007. Almost all of our commercial chemical revenue for the nine months ended
September 30, 2008 and 2007 was from sales of our proprietary OLED materials to
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 $644,413 for the nine months ended September 30,
2008, compared to $47,446 for the same period in 2007. This revenue represents
royalties received under our patent license agreement with Samsung SDI. 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
nine months ended September 30, 2008 represents only royalties earned during the
last of quarter of 2007 and the first two quarters of 2008. We also recorded
royalty revenue of $52,141 for the nine months ended September 30, 2008 from
sales of OVPD equipment by our licensee, Aixtron AG. We received no
corresponding royalty revenue for the same period in 2007.
License
revenue for the nine months ended September 30, 2008 and 2007 was $682,173 and
$426,900, respectively. These revenues were derived primarily from our patent
license agreement with Samsung SDI and our cross-license agreement with
DuPont. License revenue for the nine months ended September 30, 2008
also included revenues received under our patent license agreement with Konica
Minolta and a prior joint development agreement with a subsidiary of Konica
Minolta. We also recorded license revenue from two additional
commercial customers under their commercial material supply agreements during
the first nine months of 2008.
We earned
$1,841,368 in contract research revenue from agencies of the U.S. government for
the nine months ended September 30, 2008, compared to $3,649,076 in
corresponding revenue for the same period in 2007. The decrease was due
principally to the timing of revenue recognition in connection with several new
and completed government programs, including a $500,000 milestone under one of
our contracts achieved in the second quarter of 2007. However, the overall
contract value remained relatively consistent in both periods.
We earned
$1,186,158 in development chemical revenue for the nine months ended September
30, 2008, compared to $805,978 in corresponding revenue for the same period 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.
We
recognized $185,054 in technology development revenue for the nine months ended
September 30, 2008, compared to $750,000 in technology development revenue for
the same period in 2007. The decrease was due in part to our completion at the
end of 2007 of certain work under a technology development agreement with one of
our customers. Technology development revenue for the nine-month period ended
September 30, 2008 included revenues received under a new joint development
agreement we entered into in August 2008. 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 different technology
development strategies.
During
the third quarter of 2008, we received $2,200,000 in fees from customers for
licenses, technical assistance and joint development work. We have
recorded these fees as deferred revenue and began recognizing a portion of them
in the third quarter.
We
incurred research and development expenses of $15,955,238 for the nine
months ended September 30, 2008, compared to $15,565,452 for the same period in
2007. These expenses remained consistent over the corresponding
periods.
General
and administrative expenses were $7,396,452 for the nine months ended September
30, 2008, compared to $7,131,268 for the same period in 2007. These expenses
remained consistent over the corresponding periods.
Interest
income decreased to $2,202,123 for the nine months ended September 30, 2008,
compared to $2,523,467 for the same period in 2007. The decrease was mainly
attributable to decreased rates of return on investments during the nine-month
period, compared to rates for the same period in 2007. Due to current
market conditions, we anticipate that these lower rates of return will continue
for the foreseeable future.
Liquidity
and Capital Resources
As of
September 30, 2008, we had cash and cash equivalents of $54,415,132 and
short-term investments of $24,644,704, for a total of
$79,059,836. 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 $522,950 and $6,801,677 for the three and nine
months ended September 30, 2008, respectively, compared to $2,575,906 and
$9,450,432 for the same periods in 2007. The decrease in cash usage is due in
part to an increase in accounts payable and accrued expenses, which included
increased amounts due to PPG Industries and accruals for year compensation
payments. The decrease in cash usage is also attributable to an increase in
deferred revenue, which included $2,200,000 in fees received from customers for
licenses, technical assistance and joint development work.
Cash
provided by investing activities was $24,958,453 for the nine months ended
September 30, 2008. For the same period in 2007, cash used in
investing activities was $5,463,572. The change was due to timing differences in
the purchases and
maturities of
investments during the two periods. The increased volume of
investments during the period ended September 30, 2008 was due to an increase in cash invested in
short-term investments, which cash was derived
from our May 2007 common stock offering.
Cash
provided by financing activities was $2,387,660 for the nine months ended
September 30, 2008, compared to $44,422,307 for the same period in
2007. The decrease was due to a decrease in exercises of stock
options and stock purchase warrants in 2008, and the completion of our common
stock offering in May 2007.
Working
capital was $67,162,634 as of September 30, 2008, compared to working capital of
$73,979,638 as of December 31, 2007. Working capital decreased primarily
due to cash used in operating activities.
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. Particularly in light of current market conditions, 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 September 30,
2008, we had no off-balance sheet arrangements.
|
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.
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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, 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 September 30, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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PART
II – OTHER INFORMATION
|
|
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 have
decided that there is no need to file another response before the oral hearing
date is set. We are currently waiting for the EPO to notify us of the
date of the oral hearing.
At this
stage of the proceeding, we cannot make any prediction as to the probable
outcome of this opposition. However, based on an 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. The EPO combined all three oppositions into a single
opposition proceeding.
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 our response in a timely manner. We are
currently waiting for the EPO to notify us of the date of the oral
hearing. We are also 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 an 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.
|
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, 2007.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
During
the quarter ended September 30, 2008, we issued an aggregate of 15,415
unregistered shares of our common stock upon the exercise of outstanding
warrants. The warrants had an exercise price of $13.51 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.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
|
OTHER
INFORMATION
|
Amended
and Restated Change in Control Agreements
On
November 4, 2008, the Compensation Committee of our Board of Directors approved
amendments to existing Change in Control Agreements between the Company and the
following executive officers: Sherwin I. Seligsohn, Steven V. Abramson, Sidney
D. Rosenblatt, Julia J. Brown and Janice K. Mahon (the “CIC Agreements”).
The amendments are intended to bring the CIC Agreements into compliance with the
strict timing and documentary requirements of Section 409A of the Internal
Revenue Code of 1986, as amended, and the regulations issued
thereunder.
The
amendments are designed to ensure that amounts payable under the CIC Agreements
will qualify as severance payable in connection with an involuntary termination
of employment. If no changes were made to address Section 409A, these
amounts would be subject to immediate taxation, including a 20% penalty tax, as
well as a six-month deferral requirement. Except as noted below, we do not
believe that the amendments will have a material impact on the aggregate
payments and other benefits to which our executive officers would be entitled
under the CIC Agreements in the event of a termination of employment for a
change in control.
The CIC
Agreement with Ms. Mahon was also amended to increase the payments to which she
would be entitled in the event of a termination of her employment for a change
in control. As previously reported, Ms. Mahon became an executive
officer of the Company effective January 1, 2008. Based on these
amendments, the financial terms of the CIC Agreement with Ms. Mahon are now the
same as those of our other executive officers.
We
implemented the amendments by executing Amended and Restated Change in Control
Agreements with each of our executive officers on November 4, 2008. The
Amended and Restated Change in Control Agreements have been filed as Exhibits to
this Quarterly Report on Form 10-Q. The foregoing statements in this
Quarterly Report on Form 10-Q are qualified in their entirety by reference to
those Exhibits.
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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
|
||
|
10.1*+
|
Amendment
No. 1 to the OLED Patent License Agreement between the registrant and
Samsung SDI Co., Ltd., dated as of July 30, 2008
|
||
|
10.2*+
|
OLED
Technology License and Technical Assistance Agreement between the
registrant and Kyocera Corporation, dated as of July 28,
2008
|
||
|
10.3*+
|
Commercial
OLED Material Supply Agreement between the registrant and Kyocera
Corporation, dated as of July 28, 2008
|
||
|
10.4*+
|
OLED
Technology License Agreement between the registrant and Konica Minolta
Holdings, Inc., dated as of August 11, 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.
|
|
|
+
|
Confidential
treatment has been requested as to certain portions of this exhibit
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as
amended.
|
|
|
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 6, 2008
|
By:/s/ Sidney D. Rosenblatt
|
|
Sidney
D. Rosenblatt
|
|
|
Executive
Vice President and Chief Financial
Officer
|