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 June 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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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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375
Phillips Boulevard
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Ewing,
New Jersey
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08618
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (609) 671-0980
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes 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
July 31, 2008, the registrant had outstanding 35,955,147 shares of common
stock.
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PART
I – FINANCIAL INFORMATION
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PART
II – OTHER INFORMATION
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PART
I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
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June
30,
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December
31,
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|||||||
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2008
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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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$ | 39,540,102 | $ | 33,870,696 | ||||
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Short-term
investments
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40,349,134 | 49,788,961 | ||||||
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Accounts
receivable
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1,729,665 | 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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741,257 | 673,931 | ||||||
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Total
current assets
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82,362,367 | 86,770,169 | ||||||
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PROPERTY
AND EQUIPMENT, net
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13,080,957 | 13,525,714 | ||||||
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ACQUIRED
TECHNOLOGY, net
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3,776,880 | 4,624,416 | ||||||
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OTHER
ASSETS
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74,772 | 79,772 | ||||||
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TOTAL
ASSETS
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$ | 99,294,976 | $ | 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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$ | 1,461,456 | $ | 861,428 | ||||
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Accrued
expenses
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3,458,367 | 4,578,147 | ||||||
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Deferred
license fees
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7,178,268 | 7,178,268 | ||||||
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Deferred
revenue
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150,000 | 172,688 | ||||||
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Total
current liabilities
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12,248,091 | 12,790,531 | ||||||
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DEFERRED
LICENSE FEES
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2,199,100 | 2,454,900 | ||||||
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DEFERRED
REVENUE
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300,000 | 538,683 | ||||||
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Total
liabilities
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14,747,191 | 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 $0.01 per share, 50,000,000 shares authorized,
35,968,937 and 35,563,201 shares issued and outstanding at June 30,
2008 and December 31, 2007, respectively
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359,689 | 355,632 | ||||||
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Additional
paid-in capital
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254,953,573 | 250,240,994 | ||||||
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Unrealized
loss on available for sale securities
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(35,835 | ) | (50,202 | ) | ||||
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Accumulated
deficit
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(170,731,642 | ) | (161,332,467 | ) | ||||
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Total
shareholders’ equity
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84,547,785 | 89,215,957 | ||||||
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TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
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$ | 99,294,976 | $ | 105,000,071 | ||||
The
accompanying notes are an integral part of these statements.
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARIES
(UNAUDITED)
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Three
Months Ended June 30,
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||||||||
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2008
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2007
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REVENUE:
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Commercial
revenue
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$ | 1,395,487 | $ | 392,926 | ||||
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Developmental
revenue
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750,111 | 1,922,244 | ||||||
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Total
revenue
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2,145,598 | 2,315,170 | ||||||
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OPERATING
EXPENSES:
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Cost
of chemicals sold
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246,962 | 165,039 | ||||||
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Research
and development
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5,053,353 | 5,543,824 | ||||||
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General
and administrative
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2,679,944 | 2,568,217 | ||||||
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Royalty
and license expense
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95,284 | 36,595 | ||||||
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Total
operating expense
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8,075,543 | 8,313,675 | ||||||
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Operating
loss
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(5,929,945 | ) | (5,998,505 | ) | ||||
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INTEREST
INCOME
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737,368 | 823,739 | ||||||
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INTEREST
EXPENSE
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(13,213 | ) | (605 | ) | ||||
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NET
LOSS
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$ | (5,205,790 | ) | $ | (5,175,371 | ) | ||
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BASIC
AND DILUTED NET LOSS PER COMMON SHARE
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$ | (0.15 | ) | $ | (0.16 | ) | ||
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WEIGHTED
AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON
SHARE
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35,900,554 | 33,143,347 | ||||||
The
accompanying notes are an integral part of these statements.
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARIES
(UNAUDITED)
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Six
Months Ended June 30,
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2008
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2007
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REVENUE:
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Commercial
revenue
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$ | 2,950,552 | $ | 1,833,826 | ||||
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Developmental
revenue
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1,911,865 | 3,495,974 | ||||||
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Total
revenue
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4,862,417 | 5,329,800 | ||||||
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OPERATING
EXPENSES:
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Cost
of chemicals sold
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442,438 | 446,588 | ||||||
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Research
and development
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10,204,877 | 10,997,153 | ||||||
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General
and administrative
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5,053,490 | 4,921,731 | ||||||
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Royalty
and license expense
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198,469 | 131,593 | ||||||
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Total
operating expense
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15,899,274 | 16,497,065 | ||||||
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Operating
loss
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(11,036,857 | ) | (11,167,265 | ) | ||||
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INTEREST
INCOME
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1,656,562 | 1,408,698 | ||||||
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INTEREST
EXPENSE
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(18,880 | ) | (605 | ) | ||||
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NET
LOSS
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$ | (9,399,175 | ) | $ | (9,759,172 | ) | ||
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BASIC
AND DILUTED NET LOSS PER COMMON SHARE
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$ | (0.26 | ) | $ | (0.30 | ) | ||
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WEIGHTED
AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON
SHARE
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35,835,600 | 32,338,358 | ||||||
The
accompanying notes are an integral part of these statements.
UNIVERSAL
DISPLAY CORPORATION AND SUBSIDIARIES
(UNAUDITED)
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Six
Months Ended June 30,
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2008
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2007
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CASH
FLOWS FROM OPERATING ACTIVITIES:
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Net
loss
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$ | (9,399,175 | ) | $ | (9,759,172 | ) | ||
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Non-cash
charges to statement of operations:
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Depreciation
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926,330 | 920,179 | ||||||
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Amortization
of intangibles
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847,536 | 847,536 | ||||||
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Amortization
of premium and discount on investments, net
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(827,330 | ) | (116,351 | ) | ||||
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Stock-based
employee compensation
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596,432 | 555,687 | ||||||
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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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558,035 | 536,102 | ||||||
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Stock-based
compensation to Board of Directors and Scientific Advisory
Board
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233,613 | 228,911 | ||||||
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(Increase)
decrease in assets:
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Accounts
receivable
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665,751 | 275,590 | ||||||
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Inventory
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38,956 | 28,389 | ||||||
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Other
current assets
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(67,326 | ) | (132,777 | ) | ||||
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Other
assets
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5,000 | (5,000 | ) | |||||
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Increase
(decrease) in liabilities:
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Accounts
payable and accrued expenses
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656,502 | (475,921 | ) | |||||
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Deferred
license fees
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(255,800 | ) | (255,801 | ) | ||||
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Deferred
revenue
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(261,371 | ) | 468,605 | |||||
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Net
cash used in operating activities
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(6,278,728 | ) | (6,874,526 | ) | ||||
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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Purchase
of property and equipment
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(481,573 | ) | (320,120 | ) | ||||
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Purchase
of investments
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(50,542,476 | ) | (17,548,363 | ) | ||||
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Proceeds
from sale of investments
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60,824,000 | 12,860,000 | ||||||
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Net
cash provided by (used in) investing activities
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9,799,951 | (5,008,483 | ) | |||||
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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Proceeds
from the issuance of common stock
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— | 38,029,023 | ||||||
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Proceeds
from the exercise of common stock options and warrants
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2,148,183 | 4,252,080 | ||||||
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Net
cash provided by financing activities
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2,148,183 | 42,281,103 | ||||||
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INCREASE
IN CASH AND CASH EQUIVALENTS
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5,669,406 | 30,398,094 | ||||||
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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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$ | 39,540,102 | $ | 61,495,627 | ||||
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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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$ | 14,367 | $ | 38,235 | ||||
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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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880,352 | 956,994 | ||||||
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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
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991 | — | ||||||
The
accompanying notes are an integral part of these statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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1.
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BACKGROUND
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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.
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2.
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BASIS
OF PRESENTATION
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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 June 30,
2008, the results of operations for the three and six months ended June 30, 2008
and 2007, and cash flows for the six months ended June 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.
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 June 30, 2008:
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Fair
Value Measurements at June 30, 2008, Using
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||||||||||||
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Total
carrying value as of June 30, 2008
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Quoted
prices in active markets (Level 1)
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Significant
other observable inputs
(Level
2)
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Significant
unobservable inputs
(Level
3)
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Short-term
Investments
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$ | 40,349,134 | $ | 40,349,134 | $ | - | $ | - | ||||
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Total
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$ | 40,349,134 | $ | 40,349,134 | $ | - | $ | - | ||||
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.
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3.
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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 June 30, 2008 and December 31, 2007 consist of the
following:
|
Unrealized
|
Aggregate
Fair
|
|||||||||||||
|
Investment
Classification
|
Cost
|
Gains
|
(Losses)
|
Market
Value
|
||||||||||
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June
30, 2008 –
|
||||||||||||||
|
Corporate
bonds
|
$ | 15,198,000 | $ | 1,281 | $ | (6,838 | ) | $ | 15,192,443 | |||||
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Certificates
of deposit
|
21,402,907 | — | (18,465 | ) | 21,384,442 | |||||||||
|
U.S.
Government bonds
|
3,784,062 | — | (11,813 | ) | 3,772,249 | |||||||||
| $ | 40,384,969 | $ | 1,281 | $ | (37,116 | ) | $ | 40,349,134 | ||||||
|
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 the period ended
June 30, 2008, the Company had incurred $1,431,145 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 $104,952 of royalty expense in connection with the
agreement for the six months ended June 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 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 34,862 and 37,694 shares of the Company’s common stock to PPG as
consideration for services provided by PPG under the OLED Materials Agreement
during the six months ended June 30, 2008 and 2007, respectively. For these
shares, the Company recorded $558,035 and $536,102 to research and development
expense for the six months ended June 30, 2008 and 2007, respectively. The
Company also recorded $503,691 and $539,350 to research and development expense
for the cash portion of the work performed by PPG during the six months ended
June 30, 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 $0 and $265,726 to research and
development expense for this activity during the six months ended June 30, 2008
and 2007, respectively.
|
6.
|
SHAREHOLDERS’
EQUITY
|
|
Unrealized
|
|||||||||||||||||||||||||
|
Preferred
Stock,
|
Additional
|
Gain
(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)
|
- | - | 251,500 | 2,515 | 2,145,668 | - | - | 2,148,183 | |||||||||||||||||
|
Stock-based
employee compensation (B)
|
- | - | 83,105 | 830 | 1,475,954 | - | - | 1,476,784 | |||||||||||||||||
|
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)
|
- | - | 32,384 | 324 | 533,257 | - | - | 533,581 | |||||||||||||||||
|
Issuance
of common stock in connection with Development and License Agreements
(E)
|
- | - | 38,663 | 387 | 552,591 | - | - | 552,978 | |||||||||||||||||
|
Unrealized
gain on available-for-sale securities
|
- | - | - | - | - | 14,367 | - | 14,367 | |||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | (9,399,175 | ) | (9,399,175 | ) | |||||||||||||||
|
Comprehensive
loss
|
- | - | - | - | - | - | - | (9,384,808 | ) | ||||||||||||||||
|
BALANCE,
JUNE 30, 2008
|
200,000 | $ | 2,000 | 35,968,937 | $ | 359,689 | $ | 254,953,573 | $ | (35,835 | ) | $ | (170,731,642 | ) | $ | 84,547,785 | |||||||||
|
(A)
|
During
the six months ended June 30, 2008, the Company issued 251,500 shares
of common stock upon the exercise of common stock options and warrants,
resulting in cash proceeds of $2,148,183.
|
|
(B)
|
Includes
$880,352 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 June 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 June 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 six months ended June 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 six months ended June 30, 2008 was $31,561. For the six months ended June
30, 2008 and 2007, compensation expense related to all outstanding common stock
options was $103,732 and $312,848, respectively.
In
addition, during the six months ended June 30, 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 six
months ended June 30, 2008, the Company recorded as compensation charges related
to all restricted stock awards to employees a general and administrative expense
of $317,614 and a research and development expense of $166,168. The Company also
issued 578 shares of unrestricted stock to employees and the fair value of
$8,918 was charged to research and development.
During
the six months ended June 30, 2008, the Company issued 10,552 shares of fully
vested common stock to members of its Board of Directors as partial compensation
for services performed. The fair value of the shares issued was
$193,835, which was recorded as a compensation charge in general and
administrative expense for the six months ended June 30, 2008.
During
the six months ended June 30, 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 six months ended June 30, 2008, the Company
recorded a charge to research and development expenses of $39,778 for all
restricted stock awards to members of the Scientific Advisory
Board.
During
the six months ended June 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 six months ended June 30, 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 six months ended
June 30, 2008 and 2007, the effects of the exercise of the combined outstanding
stock options and warrants of 4,896,124 and 6,275,067, 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 six months ended June 30, 2008,
the Company recorded a royalty expense of $88,517.
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. 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 its response in a timely
manner. The Company is still 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 of $1,231,052 and $2,419,770 for the six months ended June 30,
2008 and 2007, respectively, has been derived from contracts with United States
government agencies. One non-government customer accounted for 49% and 44%
of consolidated revenue for the six months ended June 30, 2008 and 2007,
respectively. Accounts receivable from this customer were $837,650 at June 30,
2008. Revenues from outside of North America represented 71% and 52% of
consolidated revenue for the six months ended June 30, 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 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 $170,731,642 as of June 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 June 30, 2008
Compared to Three Months Ended June 30, 2007
We had a
net loss of $5,205,790 (or $0.15 per diluted share) for the quarter ended June
30, 2008, compared to a net loss of 5,175,371 (or $0.16 per diluted share) for
the same period in 2007. The increase in net loss was primarily due
to:
|
·
|
a
decrease in revenues of $169,572; and
|
|
·
|
a
decrease in interest income of $86,371;
|
|
·
|
offset
by a decrease in operating expenses of
$238,132.
|
Our
revenues were $2,145,598 for the quarter ended June 30, 2008, compared to
$2,315,170 for the same period in 2007. Commercial revenue increased to
$1,395,487 from $392,926 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 $750,111 from
$1,922,244 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 revenues and our royalty and license revenues for the
quarter ended June 30, 2008 were $938,330 and $457,157, respectively, compared
to $229,631 and $163,295, respectively, for the corresponding period in
2007.
The
majority of our commercial chemical revenue for the quarter ended June 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 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 $228,587 for the quarter ended June 30, 2008,
compared to $31,395 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
June 30, 2008 represents royalties for products sold by Samsung SDI during the
first quarter of 2008.
License
revenue for the quarters ended June 30, 2008 and 2007 included license fees of
$228,570 and $131,900, 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 relatively small amounts of license revenue from two additional
commercial customers for the quarter ended June 30, 2008.
We earned
$345,085 in contract research revenue from agencies of the U.S. government for
the quarter ended June 30, 2008, compared to $1,305,246 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 number of contracts and the overall
contract value remained relatively consistent in both quarters.
We earned
$305,026 from sales of developmental chemicals during the quarter ended June 30,
2008, compared to $366,998 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 $100,000 in technology development revenue for the quarter ended June
30, 2008 in connection with the completion of services under a technology
development agreement that we entered into in 2006. This compares to $250,000 in
technology development revenue for the same period in 2007. The decrease was due
to our completion at the end of 2007 of certain work under a technology
development agreement with one of our customers. 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.
We
incurred research and development expenses of $5,053,353 for the quarter ended
June 30, 2008, compared to $5,543,824 for the same period in
2007. The decrease was mainly due to:
|
·
|
a
decrease in subcontractor costs from the completion of work under
government contracts of $461,323; and
|
|
·
|
a
decrease in the amounts paid to PPG Industries under our OLED Materials
and Supply and Service Agreement of
$78,220.
|
These
decreases were offset in part to an increase in operating costs associated with
the expansion of operations at our New Jersey facility of approximately
$50,000.
General
and administrative expenses were $2,679,944 for the quarter ended June 30, 2008,
compared to $2,568,217 for the same period in 2007. These expenses
remained consistent over the corresponding periods.
Interest
income decreased to $737,368 for the quarter ended June 30, 2008, compared to
$823,739 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.
Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007
We had a
net loss of $9,399,175 (or $0.26 per diluted share) for the six months ended
June 30, 2008, compared to a net loss of $9,759,172 (or $0.30 per diluted share)
for the same period in 2007. The decreased loss was primarily due
to:
|
·
|
a
decrease in operating expenses of $597,791; and
|
|
·
|
an
increase in interest income of $247,864;
|
|
·
|
offset
by a decrease in revenues of
$467,383.
|
Our
revenues were $4,862,417 for the six months ended June 30, 2008, compared to
$5,329,800 for the same period in 2007. Commercial revenue increased to
$2,950,552 from $1,833,826 for the same period in 2007. Developmental
revenue decreased to $1,911,865 from $3,495,974 for the same period in
2007.
Our
commercial chemical revenue and our royalty and license revenues for the six
months ended June 30, 2008 were $1,923,890 and $1,026,662, respectively,
compared to $1,542,631 and $291,195, respectively, for the corresponding period
in 2007. Almost all of our commercial chemical revenue for the six months ended
June 30, 2008 and 2007 was from sales of our materials to Samsung SDI. We cannot
accurately predict the timing and frequency of such purchases by our customers
due to the early stage of the OLED industry.
We
recorded royalty revenue of $444,012 from Samsung SDI for the six months ended
June 30, 2008, compared to $31,395 for the same period of 2007. Under our patent
license agreement with Samsung SDI, we receive royalty reports a specified
period of time after the end of the quarter during which royalty-bearing
products are sold by Samsung SDI. Consequently, the royalty revenue from Samsung
SDI for the six months ended June 30, 2007 represents only royalties earned
during the last of quarter of 2007 and the first quarter of 2008. We also
recorded royalty revenue of $52,141 for the six months ended June 30, 2008 from
sales of OVPD equipment by our licensee, Aixtron AG. We received no
corresponding royalty revenue in the same period in 2007.
License
revenue for the six-month periods ended June 30, 2008 and 2007 also included
license fees of $530,510 and $259,800, respectively. These revenues were derived
primarily from our patent license agreement with Samsung SDI and our
cross-license agreement with DuPont. We also recorded relatively small amounts
of license revenue from two additional commercial customers during the first six
months of 2008.
We earned
$1,231,052 in contract research revenue from the U.S. government for the six
months ended June 30, 2008, compared to $2,419,770 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 number of contracts and the overall contract value remained
relatively consistent in both periods.
We
recognized $122,688 in technology development revenue for the six months ended
June 30, 2008 in connection with two technology development agreements that we
entered into in 2006. This compares to $500,000 in technology development
revenue for the same period in 2007. The decrease was due to our completion at
the end of 2007 of certain work under a technology development agreement with
one of our customers. 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.
We earned
$558,125 from sales of developmental chemicals during the six months ended June
30, 2008, compared to $576,204 for the same period in 2007. We cannot accurately
predict the timing and frequency of such purchases by our customers due to the
early stage of the OLED industry.
We
incurred research and development expenses of $10,204,877 for the six
months ended June 30, 2008, compared to $10,997,153 for the same period in 2007.
The decrease was mainly due to:
|
·
|
a
decrease in direct contract costs from the timing of and completion of
work under government contracts of $843,644; and
|
|
·
|
a
decrease in the amounts paid to PPG Industries under our OLED Materials
and Supply and Service Agreement of
$279,451.
|
These
decreases were offset in part to an increase in operating costs associated with
the expansion of operations at our New Jersey facility of approximately
$315,000.
General
and administrative expenses were $5,053,490 for the six months ended June 30,
2008, compared to $4,921,731 for the same period in 2007. These expenses
remained consistent over the corresponding periods.
Interest
income increased to $1,656,562 for the six months ended June 30, 2008, compared
to $1,408,698 for the same period in 2007. This increase resulted mainly from
funds received from a common stock offering we completed in May 2007, offset by
decreased rates of return on investments during the period compared to rates for
the same period in 2007.
Liquidity
and Capital Resources
As of
June 30, 2008, we had cash and cash equivalents of $39,540,102 and short-term
investments of $40,349,134, for a total of $79,889,236. 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 $6,278,728 for the six months ended June 30, 2008,
compared to $6,874,526 for the same period in 2007. The change is due in part to
the decrease in net loss.
Cash
provided by investing activities was $9,799,951 for the six months ended June
30, 2008. For the same period 2007, cash used in investing activities
was $5,008,483. The change was due to timing differences in the purchases and
maturities of
investments during the periods. The increased volume of
investments during the period ended June 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 $2,148,183 for the six months ended June
30, 2008, compared to $42,281,103 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 a common stock offering in May
2007.
Working
capital was $70,114,276 as of June 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. 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 June 30, 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 June 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 June 30, 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 have
decided that there is no need to 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 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. 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 our response in a timely manner. We are
still 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.
ITEM
1A.
RISK FACTORS
There
have been no material changes to the risk factors previously discussed in Part
I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2007.
ITEM
2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During
the quarter ended June 30, 2008, we issued an aggregate of 57,615 unregistered
shares of our common stock. Of this amount, 32,615 shares were issued to PPG
Industries in return for services provided them under our OLED Material Supply
and Service Agreement. The remaining 25,000 shares were issued upon the exercise
of outstanding warrants. The warrants had a weighted average exercise price of
$7.15 per share. All of the shares were issued in reliance on the exemption from
registration contained in Section 4(2) of the Securities Act of 1933, as
amended.
ITEM
3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) We
held our 2008 Annual Meeting of Shareholders on June 19, 2008.
(b) Per
Instruction 3 to Item 4 of Form 10-Q, no response is required.
(c)
The number of votes represented at the annual meeting, in person or by proxy,
was 33,689,010. In determining this number, abstentions and shares held by
brokers who have notified us that they lack voting authority with respect to any
matter (referred to herein as “broker non-votes”) were deemed present. The
matters voted upon at the annual meeting and the results of the vote on each
such matter are set forth below:
1. Election of
Directors. The result of the vote tabulated at the meeting for the
election of seven directors is set forth as follows, opposite their respective
names:
|
Name
|
Number
of Votes
FOR
|
Number
of Votes
WITHHELD
|
Percentage
FOR of
Total
Votes Cast*
|
|||
|
Steven
V. Abramson
|
31,348,330
|
2,340,680
|
93.1
|
|||
|
Leonard
Becker
|
33,217,361
|
471,649
|
98.6
|
|||
|
Elizabeth
H. Gemmill
|
33,383,767
|
305,243
|
99.1
|
|||
|
C.
Keith Hartley
|
33,389,516
|
299,494
|
99.1
|
|||
|
Lawrence
Lacerte
|
33,328,833
|
360,177
|
98.9
|
|||
|
Sidney
D. Rosenblatt
|
31,237,760
|
2,451,250
|
92.7
|
|||
|
Sherwin
I. Seligsohn
|
31,246,455
|
2,442,555
|
92.8
|
* Broker
non-votes are not considered votes “cast” with respect to the election of
directors.
2. Proposal to Ratify the
Appointment of KPMG LLP as the Company’s Independent Registered Public
Accounting Firm for 2008. The result of the vote tabulated at the meeting
for the ratification and approval of this proposal was as follows:
|
Number
of Votes FOR
|
Number
of Votes
AGAINST
|
Number
of
ABSTENTIONS
|
Percentage
FOR of
Total
Votes Cast*
|
|||
|
33,420,218
|
120,873
|
147,919
|
99.2
|
*
Abstentions and broker non-votes are not considered votes “cast” with respect to
this proposal.
(d) Not
applicable.
ITEM
5.
OTHER INFORMATION
None.
ITEM
6.
EXHIBITS
The
following is a list of the exhibits included as part of this
report. Where so indicated by footnote, exhibits that were previously
included are incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is indicated
parenthetically, together with a reference to the filing indicated by
footnote.
|
Exhibit
|
|||
|
Number
|
Description
|
||
|
31.1*
|
Certifications
of 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:
August 7, 2008
|
By:/s/ Sidney D. Rosenblatt
|
|
|
Sidney
D. Rosenblatt
|
||
|
Executive
Vice President and Chief Financial
Officer
|