e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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375 Phillips Boulevard |
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Ewing, New Jersey
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08618 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (609) 671-0980
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of May 4, 2007, the registrant had outstanding 31,954,272 shares of common stock.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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March 31, |
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December 31, |
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2007 |
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2006 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
24,524,178 |
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$ |
31,097,533 |
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Short-term investments |
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22,262,598 |
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17,957,752 |
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Accounts receivable |
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1,770,851 |
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2,113,263 |
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Inventory |
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25,265 |
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30,598 |
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Other current assets |
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639,676 |
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606,267 |
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Total current assets |
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49,222,568 |
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51,805,413 |
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PROPERTY AND EQUIPMENT, net |
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13,783,819 |
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14,074,093 |
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ACQUIRED TECHNOLOGY, net |
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5,895,720 |
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6,319,488 |
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INVESTMENTS |
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95,789 |
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42,770 |
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OTHER ASSETS |
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97,272 |
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89,772 |
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TOTAL ASSETS |
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$ |
69,095,168 |
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$ |
72,331,536 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
1,137,882 |
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$ |
1,808,869 |
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Accrued expenses |
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3,277,851 |
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5,245,536 |
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Deferred license fees |
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7,178,268 |
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7,178,268 |
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Deferred revenue |
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900,000 |
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150,000 |
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Total current liabilities |
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12,494,001 |
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14,382,673 |
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DEFERRED LICENSE FEES |
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2,838,600 |
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2,966,500 |
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DEFERRED REVENUE |
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600,000 |
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600,000 |
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Total liabilities |
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15,932,601 |
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17,949,173 |
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COMMITMENTS AND CONTINGENCIES (Note 8) |
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SHAREHOLDERS EQUITY: |
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Preferred Stock, par value $.01 per share,
5,000,000 shares authorized, 200,000 shares of
Series A Nonconvertible Preferred Stock issued and
outstanding (liquidation value of $7.50 per share or
$1,500,000), 300,000 shares of Series B Convertible
Preferred Stock authorized and none outstanding,
5,000 shares of Series C-1 Convertible Preferred
Stock authorized and none outstanding, 5,000 shares
of Series D Convertible Preferred Stock authorized
and none outstanding |
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2,000 |
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2,000 |
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Common Stock, par value $0.01 per share,
50,000,000 shares authorized, 31,681,012 and
31,385,408 shares issued and outstanding at March
31, 2007 and December 31, 2006 respectively |
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316,810 |
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313,854 |
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Additional paid-in-capital |
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202,811,276 |
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199,505,981 |
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Unrealized loss on available for sale securities |
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(27,092 |
) |
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(82,846 |
) |
Accumulated deficit |
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(149,940,427 |
) |
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(145,356,626 |
) |
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Total shareholders equity |
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53,162,567 |
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54,382,363 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
69,095,168 |
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$ |
72,331,536 |
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The accompanying notes are an integral part of these statements.
3
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended March 31, |
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2007 |
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2006 |
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REVENUE: |
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Contract research revenue |
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$ |
1,114,524 |
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$ |
536,061 |
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Development chemical revenue |
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209,206 |
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675,906 |
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Commercial chemical revenue |
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1,313,000 |
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398,479 |
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Royalty and license revenue |
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127,900 |
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930,846 |
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Technology development revenue |
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250,000 |
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730,114 |
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Total revenue |
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3,014,630 |
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3,271,406 |
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OPERATING EXPENSES: |
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Cost of chemicals sold |
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281,549 |
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236,337 |
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Research and development |
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5,453,329 |
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4,843,176 |
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General and administrative |
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2,353,514 |
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1,997,692 |
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Royalty and license expense |
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94,998 |
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186,525 |
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Total operating expenses |
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8,183,390 |
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7,263,730 |
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Operating loss |
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(5,168,760 |
) |
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(3,992,324 |
) |
INTEREST INCOME |
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584,959 |
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474,390 |
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INTEREST EXPENSE |
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(4,106 |
) |
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NET LOSS |
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$ |
(4,583,801 |
) |
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$ |
(3,522,040 |
) |
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BASIC AND DILUTED NET LOSS PER COMMON SHARE |
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$ |
(0.15 |
) |
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$ |
(0.12 |
) |
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WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER COMMON SHARE |
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31,523,070 |
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30,030,376 |
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The accompanying notes are an integral part of these statements.
4
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three months ended March 31, |
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2007 |
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2006 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
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$ |
(4,583,801 |
) |
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$ |
(3,522,040) |
) |
Non-cash charges to statement of operations: |
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Depreciation |
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466,139 |
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451,943 |
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Amortization of intangibles |
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423,768 |
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423,767 |
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Amortization of premium and discount on investments |
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(45,650 |
) |
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(27,007 |
) |
Stock-based employee compensation |
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278,611 |
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123,691 |
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Stock-based non-employee compensation |
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38,076 |
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Non-cash expense under a Development Agreement |
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37,072 |
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1,171,358 |
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Stock-based compensation to Board of Directors and Scientific Advisory Board |
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109,533 |
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(Increase) decrease in assets: |
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Accounts receivable |
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342,412 |
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(332,011 |
) |
Inventory |
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5,333 |
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(3,295 |
) |
Other current assets |
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(33,409 |
) |
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6,209 |
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Other assets |
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(7,500 |
) |
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(7,500 |
) |
Increase (decrease) in liabilities: |
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Accounts payable and accrued expenses |
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(909,422 |
) |
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(1,356,176 |
) |
Deferred license fees |
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|
(127,900 |
) |
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372,101 |
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Deferred revenue |
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|
750,000 |
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(655,114 |
) |
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Net cash used in operating activities |
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(3,294,814 |
) |
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(3,315,998 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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(175,865 |
) |
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(429,701 |
) |
Purchases of investments |
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(8,601,461 |
) |
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(5,756,377 |
) |
Proceeds from sale of investments |
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4,345,000 |
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3,601,000 |
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Net cash used in investing activities |
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(4,432,326 |
) |
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(2,585,078 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from the exercise of common stock options and warrants |
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1,153,785 |
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3,304,105 |
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Net cash provided by financing activities |
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1,153,785 |
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3,304,105 |
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DECREASE IN CASH AND CASH EQUIVALENTS |
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(6,573,355 |
) |
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(2,596,971 |
) |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
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31,097,533 |
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30,654,249 |
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CASH AND CASH EQUIVALENTS, END OF PERIOD |
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$ |
24,524,178 |
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$ |
28,057,278 |
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The following non-cash activities occurred: |
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Unrealized gain on available-for-sale securities |
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$ |
55,754 |
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$ |
15,692 |
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Common stock issued to Board of Directors and Scientific Advisory Board
that were earned in a previous period |
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260,000 |
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|
588,200 |
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Common stock issued to employees that were earned in a previous period |
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969,257 |
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|
838,854 |
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Common stock
issued for royalties that were earned in a previous period |
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499,993 |
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The accompanying notes are an integral part of these statements.
5
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BACKGROUND
Universal Display Corporation (the Company) is engaged in the research, development and
commercialization of organic light emitting diode (OLED) technologies and materials for
use in flat panel display, solid-state lighting and other product applications. The
Companys 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, the University of Southern California (USC), the
University of Michigan (Michigan), Motorola, Inc. and PPG Industries, Inc., the Company
has established a significant portfolio of proprietary OLED technologies and materials (Note
3).
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
December 2004, the Company acquired the entire 40,200 square foot building at which the
facility is located. During 2005, the Company conducted a two-stage expansion of its
laboratory and office space in the building. The Company also leases approximately 850
square feet of office space in Coeur dAlene, Idaho.
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 March 31, 2007, the results of operations for the three months ended
March 31, 2007 and 2006, and cash flows for the three months ended March 31, 2007 and 2006. While
management believes that the disclosures presented are adequate to make the information not
misleading, these unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto in the Companys latest
year-end financial statements, which are included in the Companys Annual Report on Form 10-K for
the year ended December 31, 2006.
Managements Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (SFAS 109). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an enterprises financial statements
in accordance with SFAS 109. FIN 48 prescribes a two-step process to determine the amount of tax
benefit to be recognized. First, the tax position must be evaluated to determine the likelihood
that it will be sustained upon examination. If the tax position is deemed more-likely-than-not to
be sustained, the tax position is then measured to determine the amount of benefit to recognize in
the financial statements. The tax position is measured at the largest amount of benefit that is
greater than 50% likely of being realized upon ultimate settlement. FIN 48 was adopted by the
Company on January 1, 2007. The adoption of FIN 48 has not had an impact on the Companys results
of operations and financial position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
clarifies the definition of fair value, establishes a framework for measuring fair value and
expands disclosures on fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The Company does not expect the adoption
of SFAS 157 to have a material impact on its results of operations and financial position.
Reclassifications
Certain prior year amounts have been reclassified
to conform to the current year presentation. The reclassification
results in an increase in reported cost of chemicals sold and a
reduction in research and development expenses by $157,896 for the
three months ended March 31, 2006.
6
3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. The Company classifies its existing marketable securities as
available-for-sale. These securities are carried at fair market value, with unrealized gains and
losses reported in shareholders equity. Gains or losses on securities sold are based on the
specific identification method.
Investments at March 31, 2007 and December 31, 2006 consist of the following:
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Unrealized |
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Market Value |
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Investment Classification |
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Cost |
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Gains |
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(Losses) |
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|
Aggregate Fair |
|
March 31, 2007- |
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|
|
Certificates of deposit |
|
$ |
12,090,000 |
|
|
$ |
|
|
|
$ |
(25,338 |
) |
|
$ |
12,064,662 |
|
US Government bonds |
|
|
10,295,479 |
|
|
|
797 |
|
|
|
(2,551 |
) |
|
|
10,293,725 |
|
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|
$ |
22,385,479 |
|
|
$ |
797 |
|
|
$ |
(27,889 |
) |
|
$ |
22,358,387 |
|
|
|
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|
December 31, 2006- |
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|
|
Certificates of deposit |
|
$ |
11,243,000 |
|
|
$ |
|
|
|
$ |
(79,070 |
) |
|
$ |
11,163,930 |
|
US Government bonds |
|
|
6,840,368 |
|
|
|
668 |
|
|
|
(4,444 |
) |
|
|
6,836,592 |
|
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|
|
$ |
18,083,368 |
|
|
$ |
668 |
|
|
$ |
(83,514 |
) |
|
$ |
18,000,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON UNIVERSITY, USC, AND THE UNIVERSITY OF MICHIGAN
The Company has funded OLED technology research at Princeton University and, on a subcontractor
basis, at USC, under a Research Agreement executed with the Trustees of Princeton University in
August 1997 (as amended, the 1997 Research Agreement). In April 2002, the 1997 Research
Agreement was amended to provide for, among other things, an additional five-year term, through
July 31, 2007. Payments to Princeton University under this agreement are charged to research and
development expenses as they become due. Through March 31, 2007, the Company paid $3,571,226 to
Princeton University under the 1997 Research Agreement. Although the payments were charged to
expense when they became due, the actual work performed by Princeton University and USC did not
always equate to the fixed amounts actually paid for each period. In the third quarter of 2006,
Princeton University refunded $1,011,358 to the Company for cumulative amounts overpaid under
the 1997 Research Agreement. The Company recorded the refund as an offset to research and
development expenses.
On October 9, 1997, the Company, Princeton University and USC entered into an Amended License
Agreement under which Princeton University 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 University and USC under the 1997 Research Agreement (as amended, the
1997 Amended License Agreement). Under this agreement, the Company is required to pay
Princeton University 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 University
3% of the net sales price of these products. For licensed products sold by the Companys
sublicensees, the Company is required to pay Princeton University 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
University 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 University minimum annual royalties. The minimum royalty payment is $100,000
per year. The Company accrued $49,271 of royalty expense in connection with the agreement for
the three months ended March 31, 2007.
The Company also is required under the 1997 Amended License Agreement to use commercially
reasonable efforts to bring the licensed OLED technology to market. However, this requirement
is deemed satisfied provided the Company performs its obligations under the 1997 Research
Agreement and, when that agreement ends, the Company invests a minimum of $800,000 per year in
research, development, commercialization or patenting efforts respecting the patent rights
licensed to the Company.
In January 2006, the Principal Investigator conducting research at Princeton University under
the 1997 Research Agreement transferred to Michigan. As a result of this transfer, the Company
has entered into a new Sponsored Research Agreement with USC to sponsor OLED technology
research at USC and, on a subcontractor basis, Michigan. This new Research Agreement (the 2006
Research Agreement) was effective as of May 1, 2006, and has a term of three years. The 2006
Research Agreement supersedes the 1997 Research Agreement with respect to all work being
performed at USC and Michigan. Under the 2006 Research Agreement, the Company is obligated to
pay USC up to $4,636,296 for work actually performed during the period from May 1, 2006 through
April 30, 2009. Amounts paid to Princeton University under the 1997 Research Agreement offset
any amounts the Company is obligated to pay USC under the 2006 Research Agreement. Payments
under the 2006 Research Agreement are made to USC on a quarterly basis as actual expenses are
incurred. Through
7
the period ended March 31, 2007, the Company has incurred $382,925 in research and development
expense under the 2006 Research Agreement.
In connection with entering into the 2006 Research Agreement, the Company amended the 1997
Amended License Agreement to include Michigan as a party to that agreement effective as of
January 1, 2006. Under this amendment, Princeton University, USC and Michigan have granted the
Company a worldwide exclusive license, with rights to sublicense, to make, have made, use,
lease and/or sell products and to practice processes based on patent applications and issued
patents arising out of work performed under the 2006 Research Agreement. The financial terms of
the 1997 Amended License Agreement were not impacted by this amendment.
5. ACQUIRED TECHNOLOGY
Acquired technology consists of acquired license rights for patents and know-how obtained from
PD-LD, Inc and Motorola, Inc. These intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
PD-LD, Inc. |
|
$ |
1,481,250 |
|
|
$ |
1,481,250 |
|
Motorola, Inc. |
|
|
15,469,468 |
|
|
|
15,469,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,950,718 |
|
|
|
16,950,718 |
|
Less: Accumulated amortization |
|
|
(11,054,998 |
) |
|
|
(10,631,230 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired technology, net |
|
$ |
5,895,720 |
|
|
$ |
6,319,488 |
|
|
|
|
|
|
|
|
On July 19, 2000, the Company, PD-LD, Inc. (PD-LD), its president Dr. Vladimir Ban
and the Trustees of Princeton University entered into a Termination, Amendment and License
Agreement whereby the Company acquired all PD-LDs rights to certain issued and pending OLED
technology patents in exchange for 50,000 shares of the Companys common stock. Pursuant to
this transaction, these patents were included in the patent rights exclusively licensed to
the Company under the 1997 Amended License Agreement. The acquisition of these patents had a
fair value of $1,481,250.
On September 29, 2000, the Company entered into a License Agreement with Motorola, Inc.
(Motorola). Pursuant to this agreement, the Company licensed from Motorola what are now 74
issued U.S. patents and corresponding foreign patents relating to OLED technologies. These
patents expire between 2012 and 2018. The Company has the sole right to sublicense these
patents to OLED product manufacturers. As consideration for this license, the Company issued
to Motorola 200,000 shares of the Companys common stock (valued at $4,412,500), 300,000
shares of the Companys Series B Convertible Preferred Stock (valued at $6,618,750), and a
warrant to purchase 150,000 shares of the Companys common stock at $21.60 per share. This
warrant became exercisable on September 29, 2001, and will remain exercisable until
September 29, 2008. The warrant was recorded at a fair market value of $2,206,234 based on
the Black-Scholes option-pricing model, and was recorded as a component of the cost of the
acquired technology.
The Company also issued a warrant to an unaffiliated third party to acquire 150,000 shares
of the Companys common stock as a finders fee in connection with the Motorola transaction.
This warrant was granted with an exercise price of $21.60 per share, was exercisable
immediately and will remain exercisable until September 29, 2007. This warrant was accounted
for at its fair value based on the Black-Scholes option pricing model and $2,206,234 was
recorded as a component of the cost of the acquired technology. The Company used the
following assumptions in the Black-Scholes option pricing model for the 300,000 warrants
issued in connection with this transaction: (1) 6.3% risk-free interest rate, (2) expected
life of 7 years, (3) 60% volatility, and (4) zero expected dividend yield. In addition, the
Company incurred $25,750 of direct cash transaction costs that have been included in the
cost of the acquired technology. In total, the Company recorded an intangible asset of
$15,469,468 for the technology acquired from Motorola.
Amortization expense was $423,768 for the quarters ended March 31, 2007 and 2006. For each
of the years 2007 through 2009, amortization expense will be $1,695,072 and for 2010
amortization expense will be $1,234,272.
The Company is required under the License Agreement to pay Motorola based on gross revenues earned
by the Company from its sales of OLED products or components, or from its sublicensees for their
sales of OLED products or components, whether or not these products or components are based on
inventions claimed in the patent rights licensed from Motorola. Moreover, the Company was required
to pay Motorola minimum royalties of $150,000 for the two-year period ended on December 31, 2002,
and $500,000 for the two-year period ended on December 31, 2004. The Company was also required to
pay Motorola minimum royalties of $1,000,000 for the two-year period ended on December 31, 2006.
All royalty payments are payable, at the Companys discretion, in either all cash or up to 50% in
shares of the Companys 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 Companys common stock over
the 10 trading days ending two business days prior to the date the stock is issued.
8
For the two-year period ended on December 31, 2006, the Company issued to Motorola 37,075 shares of
the Companys common stock, valued at $499,993, and paid Motorola $500,007 in cash to satisfy the
minimum royalty obligation of $1,000,000. The Company accrued $43,227 of royalty expense, in
connection with the agreement, for the three months ended March 31, 2007.
6. EQUITY AND CASH COMPENSATION UNDER THE PPG AGREEMENTS
On October 1, 2000, the Company entered into a five-year Development and License Agreement
(Development Agreement) and a seven-year Supply Agreement (Supply Agreement) with PPG
Industries, Inc. (PPG). Under the Development Agreement, a team of PPG scientists and engineers
assisted the Company in developing its proprietary OLED materials and supplied the Company with
these materials for evaluation purposes. Under the Supply Agreement, PPG supplied the Company with
its proprietary OLED materials that were intended for resale to customers for commercial purposes.
For the period from inception of the Development Agreement through December 2004, the Company
issued shares of its common stock and warrants to acquire its common stock to PPG on an annual
basis in consideration of the services provided under the agreement. The consideration to PPG for
these services was determined by reference to an agreed-upon annual budget and was subject to
adjustment based on costs actually incurred for work performed during the budget period. The
specific number of shares of common stock and warrants issued to PPG was determined based on the
average closing price of the Companys common stock during a specified period prior to the start of
the budget period. In January 2003, the Company and PPG amended the Development Agreement,
providing for additional consideration to PPG for additional services to be provided under that
agreement, which services were paid for in cash. All materials provided by PPG under the Supply
Agreement were also paid for in cash.
In December 2004 and again in March 2005, the Company and PPG amended both the Development
Agreement and the Supply Agreement to alter the charges and method of payment for services and
materials provided by PPG under both agreements during 2005. Under the amended Development
Agreement, the Company compensated PPG on a cost-plus basis for the services provided during each
calendar quarter. The Company was required to pay for some of these services in cash and for other
of the services in common stock. Payment for up to 50% of the remaining services was able to be
paid, at the Companys sole discretion, in cash or shares of common stock, with the balance payable
in all cash. The actual number of shares of common stock issuable to PPG was determined based on
the average closing price for the Companys common stock during a specified period prior to the end
of that quarter. If, however, this average closing price was less than $6.00, the Company was
required to compensate PPG in all cash. The Company recorded these expenses to research and
development as they were incurred. Under the amended Development Agreement, the Company was no
longer required to issue warrants to PPG.
Under the amended Supply Agreement, the Company also compensated PPG on a cost-plus basis for
services and materials provided during each calendar quarter of 2005. The Company was required to
pay for all materials and for some of these services in cash. Payment for up to 50% of the
remaining services was able to be paid, at the Companys sole discretion, in cash or shares of
common stock, with the balance payable in all cash. Again, the specific number of shares of common
stock issuable to PPG was determined based on the average closing price for the Companys common
stock during a specified period prior to the end of that quarter. If, however, this average closing
price was less than $6.00, the Company was required to compensate PPG in all cash.
On July 29, 2005, the Company entered into an OLED Materials Supply and Service Agreement with PPG.
This Agreement superseded and replaced in their entireties the amended Development and Supply
Agreements effective as of January 1, 2006, and extended the term of the Companys existing
relationship with PPG through December 31, 2008. Under the new agreement, PPG is continuing to
assist the Company in developing its proprietary OLED materials and supplying the Company with
those materials for evaluation purposes and for resale to its customers. The financial terms of the
new agreement are substantially similar to those of the amended Development and Supply Agreements,
and include a requirement that the Company pay PPG in a combination of cash and the Companys
common stock.
The Company issued to PPG 23,396 and 77,402 shares of the Companys common stock, respectively, as
consideration for services provided by PPG under the OLED Materials Supply and Service Agreement
during the three months ended March 31, 2007 and 2006, respectively. Of these shares, 20,793 shares
were issued on April 16, 2007, 2,603 shares were issued on October 19, 2006 and 77,402 shares were
issued on April 19, 2006. For these shares, the Company recorded a charge of $332,748 and
$1,075,965 to research and development expense for the three months ended March 31, 2007 and 2006,
respectively. The Company also recorded $321,844 and $284,281 to research and development for the
cash portion of the work performed by PPG during the three months ended March 31, 2007 and 2006,
respectively.
Also, in accordance with the OLED Materials Supply and Service Agreement, the Company is required
to reimburse PPG for its raw materials and conversion costs for all development chemicals produced
on behalf of the Company. The Company recorded $27,952 and $67,503 to research and development
expense for this activity during the three months ended March 31, 2007 and 2006, respectively.
Through the end of 2006, the Company was required under its agreements with PPG to grant options to
purchase the Companys common stock to PPG employees performing development services for the
Company, in a manner consistent with that for issuing options to its own employees. Subject to
certain contingencies, these options were to vest one year following the date of grant and will
expire 10 years from the date of grant. However, in connection with the transition to the Company
of work being performed by the PPG development team, all outstanding options granted to PPG
employees became vested as of December 31, 2006.
9
On December 30, 2005, the Company granted to PPG employees performing development services under
the Development Agreement options to purchase 31,500 of the Companys common stock at an exercise
price of $10.51. During the quarter ended March 31, 2006 the Company recorded $95,393 in research
and development costs related to these options. The Company determined the fair value of the
options earned during the quarter ended March 31, 2006 using the Black-Scholes option-pricing model
with the following assumptions: (1) risk free interest rate of 4.39%, (2) no expected dividend
yield, (3) contractual life of 10 years and (4) expected volatility of 77.59%.
In lieu of stock options, and consistent with awards made to the Companys own employees, shares of
stock were granted to certain PPG employees performing development services on the Companys behalf
in 2006. On January 9, 2007, the Company issued 1,500 shares of its common stock as a bonus to the
PPG research and development team members for the year ended December 31, 2006. Accordingly, the
Company accrued $21,915 as of December 31, 2006 in research and development costs relating to the
issuance. The Company has no obligation to issue options or shares of stock to any PPG employees in
2007 or thereafter.
7. SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
Preferred Stock, |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Losses on |
|
|
|
|
|
|
|
|
|
Series A |
|
|
Common Stock |
|
|
Paid-In |
|
|
Available for |
|
|
Accumulated |
|
|
Total |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Sale Securities |
|
|
Deficit |
|
|
Equity |
|
BALANCE, JANUARY 1, 2007 |
|
|
200,000 |
|
|
$ |
2,000 |
|
|
|
31,385,408 |
|
|
$ |
313,854 |
|
|
$ |
199,505,981 |
|
|
$ |
(82,846 |
) |
|
$ |
(145,356,626 |
) |
|
$ |
54,382,363 |
|
Exercise of common stock options and warrants (A) |
|
|
|
|
|
|
|
|
|
|
162,288 |
|
|
|
1,623 |
|
|
|
1,152,162 |
|
|
|
|
|
|
|
|
|
|
|
1,153,785 |
|
Stock based employee compensation (B) |
|
|
|
|
|
|
|
|
|
|
70,842 |
|
|
|
708 |
|
|
|
1,247,160 |
|
|
|
|
|
|
|
|
|
|
|
1,247,868 |
|
Issuance of common stock to Board of Directors and
Scientific Advisory Board (C) |
|
|
|
|
|
|
|
|
|
|
22,796 |
|
|
|
228 |
|
|
|
369,305 |
|
|
|
|
|
|
|
|
|
|
|
369,533 |
|
Issuance of common stock in connection with Development
and License Agreements (D) |
|
|
|
|
|
|
|
|
|
|
39,678 |
|
|
|
397 |
|
|
|
536,668 |
|
|
|
|
|
|
|
|
|
|
|
537,065 |
|
Unrealized gain on available-for-sales securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,754 |
|
|
|
|
|
|
|
55,754 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,583,801 |
) |
|
|
(4,583,801 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,528,047 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, MARCH 31, 2007 |
|
|
200,000 |
|
|
$ |
2,000 |
|
|
|
31,681,012 |
|
|
$ |
316,810 |
|
|
$ |
202,811,276 |
|
|
$ |
(27,092 |
) |
|
$ |
(149,940,427 |
) |
|
$ |
53,162,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
During the period ended March 31, 2007, the Company issued 162,288 shares of common stock upon the exercise of common stock options and warrants, resulting in cash proceeds of $1,153,785. |
|
(B) |
|
This includes $969,257 that was earned in a previous period and charged to expense when earned, but issued in 2007. |
|
(C) |
|
This includes $260,000 that was earned in a previous period and charged to expense when earned, but issued in 2007. |
|
(D) |
|
This includes $499,993 that was earned in a previous period
and charged to expense when earned, but issued in 2007 (see
Note 5). |
8. STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted SFAS No. 123R utilizing the modified prospective transition
method. SFAS No. 123R requires employee stock options to be valued at fair value on the date of
grant and charged to expense over the applicable vesting period. Under the modified prospective
method, compensation expense is recognized for all share based payments issued on or after January
1, 2006, and for all share payments issued to employees prior to January 1, 2006 that remain
unvested. In accordance with the modified prospective method, the consolidated financial statements
for prior periods have not been restated to reflect, and do not include, the impact of SFAS No.
123R. The adoption of SFAS No. 123R did not change the Companys accounting for share 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 Companys common stock were authorized
to be granted at prices not less than the fair market value of the common stock on the date of the
grant, as determined by the Compensation Committee of the Board of Directors. Through March 31,
2007, the Companys 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,
stock, stock appreciation rights and performance units to employees, directors and consultants of
the Company. Stock options are exercisable over periods determined by the Compensation Committee,
but for no longer than 10 years from the grant date.
During the three months ended March 31, 2007, the Company granted 2,750 common stock options to
employees. The stock options vested immediately with an exercise price equal to 100% of the market
price of the Companys common stock on the date of grant. The fair value of the options granted
during the three months ended March 31, 2007 was $18,583. For the three months ended March 31,
2007, compensation expense related to all outstanding common stock options was $165,287.
In addition, during the first quarter of 2007,
the Company granted a total of 93,968 shares of
restricted stock to employees and members of the Scientific Advisory
Board. These shares of restricted stock
had a value of $1,604,261 on the date of grant and will vest in equal increments over three
10
years from the date of grant. For the three months ended March 31, 2007, the Company recorded as a
compensation charge related to all restricted stock awards in general and administrative expense of
$74,907 and in research and development expense of $72,502.
On March 31, 2007, the Company also issued a total of 5,000 shares of fully vested common stock to
members of its Board of Directors as partial payment for services performed in the first quarter.
The fair value of the shares issued of $75,450 was recorded as a compensation charge in general and
administrative expense for the three months ended March 31, 2007.
Net Loss Per Common Share
Basic net loss per common share is computed by dividing the net loss by the weighted-average number
of shares of common stock outstanding for the period. Diluted net loss per common share reflects
the potential dilution from the exercise or conversion of securities into common stock. For the
three months ended March 31, 2007 and 2006, the effects of the exercise of the combined outstanding
stock options and warrants of 6,653,313 and 7,243,593 respectively, were excluded from the
calculation of diluted EPS as the impact would have been antidilutive.
9. COMMITMENTS AND CONTINGENCIES
Commitments
Under the 2006 Research Agreement with USC, the Company is obligated to make certain payments to
USC. See Note 4 for further explanation.
Under the terms of the 1997 Amended License Agreement, the Company is required to make minimum
royalty payments to Princeton University. See Note 4 for further explanation.
Patent Interference with Semiconductor Energy Laboratory Co., Ltd.
In June 2006, Patent Interference No. 105,461 was declared by the United States Patent and
Trademark Office (the USPTO) between Semiconductor Energy Laboratory Co., Ltd. (SEL), and
Princeton University and the University of Southern California (the Universities). The dispute
concerned U.S. Patent No. 6,734,457, which had been issued to SEL. The SEL patent claimed aspects
of the Companys phosphorescent OLED technology that the Company believes was disclosed and claimed
in U.S. Application Serial No.10/913,211, which the Company exclusively licenses from the
Universities. The Universities sought a ruling by the USPTO that they should be granted a patent
to the claimed invention and that the SEL patent is invalid because the Universities were
first-to-invent and their invention was made prior to that of SEL. Under the Companys agreement
with the Universities, the Company is required to pay all legal costs and fees associated with the
interference proceeding.
An oral hearing in the matter was held before the Board of Patent Appeals and Interferences (the
BPAI) of the USPTO on April 25, 2007. The following day, the BPAI issued a decision in favor of
the Universities. The BPAI decision confirmed that the Universities were first-to-invent the
subject matter of the interference and that the Universities invention is prior art to SELs
patent. As a result, all claims of the SEL patent were canceled. SEL has two months to file an
appeal from the BPAI decision.
Patent Opposition Initiated by Cambridge Display Technology, Ltd.
On December 8, 2006, Cambridge Display Technology, Ltd. (CDT) filed a Notice of Opposition to
European Patent No. 0946958 (the EP 958 patent). The EP 958 patent, which was issued on March
8, 2006, is a European counterpart patent to U.S. patents 5,844,363, 6,602,540 and 6,888,306, and
to pending U.S. patent application 10/966,417, filed on October 15, 2004. These patents and patent
applications relate to the Companys flexible OLED technology. They are exclusively licensed to
the Company by Princeton University, 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) has 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 has
now been substantially completed and will soon be ready for a timely filing. Since the Company is
still in a relatively early stage of this proceeding, Company management cannot make any prediction
as to the probable outcome of this opposition. However, based on preliminary analysis of the
evidence presented, Company management believes there is a substantial likelihood that the patent
being challenged will be declared valid, and that all or a significant portion of its claims will
be upheld.
Patent Opposition Initiated by Sumation Company, Ltd.
On March 8, 2007, Sumation Company Limited (Sumation), a joint venture between Sumitomo Chemical
Company and CDT, filed a Notice of Opposition to European Patent No. 1449238 (the EP 238
patent). The EP 238 patent, which was issued on November 2, 2006, is a European counterpart
patent, in part, to U.S. patents 6,830,828, 6,902,830 and 7,001,536, and to pending U.S. patent
application 11/233,605, filed on September 22, 2005. These patents and patent application relate
to the Companys PHOLED technology. They are exclusively licensed to the Company by Princeton
University, and under the license agreement the Company is required to pay all legal costs and fees
associated with this proceeding.
11
The EPO will not set a due date for the Company to file a response to the opposition until
approximately one month after the August 2, 2007 expiration date of the opposition period. Until
such time, other parties may file additional oppositions to the EP 238 patent. Accordingly, the
due date for responding to the opposition will not be until late this year or early next year. The
Company is in the process of reviewing the Notice of Opposition and preparing its response. At
this time, Company management cannot make any prediction as to the probable outcome of this opposition.
However, based on preliminary analysis of the evidence presented, Company management believes there
is a substantial likelihood that the patent being challenged will be declared valid, and that all
or a significant portion of its claims will be upheld.
10. CONCENTRATION OF RISK
One customer accounted for 47% and 4% of consolidated revenue for the three months ended March 31,
2007 and 2006, respectively. Accounts receivable from this customer were $292,300 at March 31,
2007. Revenues from outside of North America represented 60% and 81% of the consolidated revenue for the
three months ended March 31, 2007 and 2006, respectively.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related notes above.
CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS
This discussion and analysis contains some forward-looking statements. Forward-looking statements
concern our possible or assumed future results of operations, including descriptions of our
business strategies and customer relationships. These statements often include words such as
believe, expect, anticipate, intend, plan, estimate, seek, will, may or similar
expressions. These statements are based on assumptions that we have made in light of our experience
in the industry, as well as our perceptions of historical trends, current conditions, expected
future developments and other factors we believe are appropriate in these circumstances.
As you read and consider this discussion and analysis, you should not place undue reliance on any
forward-looking statements. You should understand that these statements involve substantial risk
and uncertainty and are not guarantees of future performance or results. They depend on many
factors that are discussed further in the section entitled Risk Factors in our Annual Report on
Form 10-K for the year ended December 31, 2006, as supplemented by any disclosures in Item 1A. of
Part II 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. We anticipate that in the
future revenues from licensing our intellectual property will become a more significant part of our
revenue stream.
While we have made significant progress over the past few years developing and commercializing our
family of OLED technologies (PHOLED, TOLED, FOLED, etc.) and materials, we have incurred
significant losses and will likely continue to do so until our OLED technologies and materials
become more widely adopted by product manufacturers. We have incurred significant losses since our
inception, resulting in an accumulated deficit of $149,940,427 as of March 31, 2007.
We anticipate fluctuations in our annual and quarterly results of operations due to uncertainty
regarding:
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the timing of our receipt of license fees and royalties, as well as fees for future technology development and evaluation; |
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the timing and volume of sales of our OLED materials for both commercial usage and evaluation purposes; |
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the timing of our customers introduction and discontinuance of OLED products; |
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the timing and magnitude of expenditures we may incur in connection with our ongoing research and development activities; and |
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the timing and financial consequences of our formation of new business relationships and alliances. |
RESULTS OF OPERATIONS
We had a net loss of $4,583,801 (or $0.15 per diluted share) for the quarter ended March 31, 2007,
compared to a net loss of $3,522,040 (or $0.12 per diluted share) for the same period in 2006. The
increased loss was primarily due to increased research and development expenses and increased
general and administrative expenses, as described below.
Our revenues were $3,014,630 for the quarter ended March 31, 2007, compared to $3,271,406 for the
same period in 2006.
Our commercial chemical revenues and royalty and license revenues for the quarter ended March 31,
2007 were $1,313,000 and $127,900, respectively, compared to $398,479 and $930,846, respectively,
for the corresponding period in 2006. In the quarter ended March 31, 2006, we entered into a
material supply agreement with AU Optronics for the purchase of materials from us for use in
specified OLED products. Based on the terms of that agreement, we recorded both commercial
chemical sales and license fee revenues from our sales of materials under the agreement. AU
Optronics discontinued manufacturing the product for which it ordered our materials in the third
quarter of 2006, and we have not sold any materials to AU Optronics under the agreement since that
time.
In the first quarter of 2007, commercial chemical sales represent sales of our PHOLED materials to
Samsung SDI. We cannot accurately predict how long these material sales will continue, as Samsung
SDI is purchasing material from us on a purchase order basis. Continued sales of our PHOLED
materials to Samsung SDI will depend on several factors, including pricing, availability, continued
technical improvement and competitive product offerings.
We entered into a royalty-bearing patent license agreement with Samsung SDI in April 2005. We
expect to receive royalty payments based on Samsung SDIs commencement of sales of licensed
products during the first quarter of 2007. However, we have not received any royalty payments in
connection with this agreement as of March 31, 2007, since royalty payments are not due under the
agreement until a period of time after the quarter during which royalty-bearing products are sold.
We cannot accurately predict the timing and frequency of such payments due to the early stage of
the OLED industry.
Our royalty and license revenue for the quarters ended March 31, 2007 and 2006 also included
license fees recorded as a result of the patent license agreement with Samsung SDI, as well as a
cross-license agreement executed with DuPont Displays, Inc. 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 fee
revenue over the life of the agreement with Samsung SDI and over 10 years with DuPont Displays,
Inc.
We earned $1,114,524 in contract research revenue from the U.S. government for the quarter ended
March 31, 2007, compared to $536,061 for the same period in 2006. The increase is mainly due to the
timing of revenue recognition in connection with several programs that commenced in the second and
third quarters of 2006.
We recognized $250,000 in technology development revenue for the quarter ended March 31, 2007 in
connection with one technology development and evaluation agreement entered into in 2006, compared
to $730,114 for the same period in 2006 in connection with four such agreements. The decrease is
due to the completion of work under two of the technology development agreements in 2006. Also, we
received a non-refundable payment for the continuation of one of the technology development
agreements, which payment is creditable against future amounts payable under a commercial license
agreement, if one is executed. Therefore, we have classified this payment as a deferred license fee
rather than technology development revenue. The amount and timing of our receipt of fees for
technology development and similar services is difficult to predict due to the early stage of the
OLED industry.
We earned $209,206 from sales of developmental chemicals in the quarter ended March 31, 2007,
compared to $675,906 for the same period in 2006. The decrease was mainly due to a decrease in
high-volume purchases of OLED materials from us by potential OLED display manufacturers for
pre-commercial scale up and test marketing purposes. We cannot accurately predict the timing and
frequency of such purchases from customers due to the early stage of the OLED industry and the
different pre-commercial launch strategies of the various manufacturers planning to enter the OLED
display market.
We incurred research and development expenses of $5,453,329 for the quarter ended March 31, 2007,
compared to $4,843,176 for the same period in 2006. The increase was due mainly to:
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an increase of $433,954 in personnel costs; |
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an increase of $627,987 in operating costs associated with our recent expansion of our New Jersey facility; and |
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an increase of $237,452 in research and development legal expenses associated
with patent application, prosecution, maintenance and defense costs. |
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The increase was offset by a decrease of $689,241 in amounts payable to PPG Industries due to the
hiring of certain PPG employees as employees of ours.
General and administrative expenses were $2,353,514 for the quarter ended March 31, 2007, compared
to $1,997,692 for the same period in 2006. The increase was mainly due to:
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an increase of $170,979 in personnel cost; and |
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an increase of $177,086 in operating costs associated with operation of our expanded facility. |
Interest income increased to $584,959 for the quarter ended March 31, 2007, compared to $474,390
for the same period in 2006. This increase resulted mainly from higher rates of return on
investments during the first quarter of 2007.
Liquidity and Capital Resources
As of March 31, 2007, we had cash and cash equivalents of $24,524,178, short-term investments of
$22,262,598 and investments in certificates of deposit and other liquid instruments with an
original maturity of more than one year of $95,789, for a total of $46,882,565. This compares to
cash and cash equivalents of $31,097,533, short-term investments of $17,957,752 and investments in
certificates of deposit and other liquid instruments with an original maturity of more than one
year of $42,770, for a total of $49,098,055, as of December 31, 2006. The overall decrease in cash
and cash equivalents and short-term and long-term investments of $2,215,490 was primarily due to
increased operating activities, offset to some extent by proceeds received from stock-purchase
warrant and stock option exercises.
Cash used in operating activities was $3,294,814 for the quarter ended March 31, 2007, compared to
$3,315,998 for the same period in 2006.
Working capital decreased to $36,728,567 as of March 31, 2007, from working capital of $37,422,740
as of December 31, 2006. The net decrease was due primarily to a decrease in cash which was used in
operations.
We anticipate, based on our internal forecasts and assumptions relating to our operations
(including, among others, assumptions regarding our working capital requirements, the progress of
our research and development efforts, the availability of sources of funding for our research and
development work, and the timing and costs associated with the preparation, filing, prosecution,
maintenance, defense and enforcement of our patents and patent applications), that we have
sufficient cash, cash equivalents and short-term investments to meet our obligations through at
least the end of 2008.
We believe that potential additional financing sources for us include long-term and short-term
borrowings, public and private sales of our equity and debt securities and the receipt of cash upon
the exercise of warrants and options. We have an effective shelf registration statement that would
enable us to offer, from time to time, up to $44,725,524 of our common stock, preferred stock and
other securities, subject to market conditions and other factors.
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 and maintain
patents respecting these technologies and materials, and for working capital and other purposes,
the timing and amount of which are difficult to ascertain. There can be no assurance that
additional funds will be available to us when needed, on commercially reasonable terms or at all.
Critical Accounting Policies
Refer to our Annual Report on Form 10-K for the year ended December 31, 2006 for a discussion of
our critical accounting policies. There have been no changes in critical accounting policies to
date in 2007.
Contractual Obligations
Refer to our Annual Report on Form 10-K for the year ended December 31, 2006 for a discussion of
our contractual obligations. There have been no significant changes in contractual obligations to
date in 2007.
Off-Balance Sheet Arrangements
Refer to our Annual Report on Form 10-K for the year ended December 31, 2006 for a discussion of
off-balance sheet arrangements. As of March 31, 2007, we had no off-balance sheet arrangements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not utilize financial instruments for trading purposes and hold no derivative financial
instruments, other financial instruments or derivative commodity instruments that could expose us
to significant market risk. Our primary market risk exposure with regard to financial instruments
is to changes in interest rates, which would impact interest income earned on investments.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2007. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures, as of the end of the period covered by this report, are
functioning effectively to provide reasonable assurance that the information required to be
disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as
amended, is (i) recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms, and (ii) accumulated and communicated to our management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding disclosure. However, a controls system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the controls system are met, and no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any,
within a company have been detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended
March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Patent Interference with Semiconductor Energy Laboratory Co., Ltd.
In June 2006, Patent Interference No. 105,461 was declared by the United States Patent and
Trademark Office (the USPTO) between Semiconductor Energy Laboratory Co., Ltd. (SEL), and
Princeton University and the University of Southern California (the Universities). The dispute
concerned U.S. Patent No. 6,734,457, which had been issued to SEL. The SEL patent claimed aspects
of our phosphorescent OLED technology that we believe was disclosed and claimed in U.S. Application
Serial No.10/913,211, which we exclusively license from the Universities. The Universities sought
a ruling by the USPTO that they should be granted a patent to the claimed invention and that the
SEL patent is invalid because the Universities were first-to-invent and their invention was made
prior to that of SEL. Under our agreement with the Universities, we are required to pay all legal
costs and fees associated with the interference proceeding. An oral hearing in the matter was held before the Board of Patent Appeals and Interferences (the
BPAI) of the USPTO on April 25, 2007. The following day, the BPAI issued a decision in favor of
the Universities. The BPAI decision confirmed that the Universities were first-to-invent the
subject matter of the interference and that the Universities invention is prior art to SELs
patent. As a result, all claims of the SEL patent were canceled. SEL has two months to file an
appeal from the BPAI decision.
Patent Opposition Initiated by Cambridge Display Technology, Ltd.
On December 8, 2006, Cambridge Display Technology, Ltd. (CDT) filed a Notice of Opposition to
European Patent No. 0946958 (the EP 958 patent). The EP 958 patent, which was issued on March
8, 2006, is a European counterpart patent to U.S. patents 5,844,363, 6,602,540 and 6,888,306, and
to pending U.S. patent application 10/966,417, filed on October 15, 2004. These patents and patent
applications relate to our flexible OLED technology. They are exclusively licensed to us by
Princeton University, 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) has 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 has now been
substantially completed and will soon be ready for a timely filing. Since we are still in a
relatively early stage of this proceeding, we cannot make any prediction as to the probable outcome
of this opposition. However, based on our preliminary analysis of the evidence presented, we
believe there is a substantial likelihood that the patent being challenged will be declared valid,
and that all or a significant portion of its claims will be upheld.
Patent Opposition Initiated by Sumation Company, Ltd.
On March 8, 2007, Sumation Company Limited (Sumation), a joint venture between Sumitomo Chemical
Company and CDT, filed a Notice of Opposition to European Patent No. 1449238 (the EP 238
patent). The EP 238 patent, which was issued on November 2, 2006, is a European counterpart
patent, in part, to U.S. patents 6,830,828, 6,902,830 and 7,001,536, and to pending U.S. patent
application 11/233,605, filed on September 22, 2005. These patents and patent application relate
to our PHOLED technology. They are exclusively licensed to us by Princeton University, and under
the license agreement we are required to pay all legal costs and fees associated with this
proceeding.
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The EPO will not set a due date for us to file a response to the opposition until approximately one
month after the August 2, 2007 expiration date of the opposition period. Until such time, other
parties may file additional oppositions to the EP 238 patent. Accordingly, the due date for
responding to the opposition will not be until late this year or early next year. We are in the
process of reviewing the Notice of Opposition and preparing our response. At this time, we cannot
make any prediction as to the probable outcome of this opposition. However, based on our
preliminary analysis of the evidence presented, we believe there is a substantial likelihood that
the patent being challenged will be declared valid, and that all or a significant portion of its
claims will be upheld.
ITEM 1A. RISK FACTORS
A recent U.S. Supreme Court decision may raise the standards for all patent applicants and holders
for patentability.
On April 30, 2007, the U.S. Supreme Court, in KSR International Co. vs. Teleflex, Inc., mandated a
more expansive and flexible approach towards a determination as to whether a patent is obvious and
invalid. This ruling may make it more difficult for patent holders to maintain patents. At the
present time, we are unable to predict the impact, if any, that this recent ruling will have on our
currently issued or future patents. As a result of the Supreme Court ruling, it may be more
difficult for us to defend our currently issued patents or to obtain additional patents in the
future. If we are unable to defend our currently issued patents, or to obtain new patents for any
reason, our business could suffer.
In
addition to the other information contained in this Report, you should
carefully consider the factors discussed in Part I, Item 1A
Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2006 in evaluating our operating results and
financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 2007, we issued an aggregate of 108,301 unregistered shares of
our common stock. Of this amount, 37,075 shares were issued to Motorola, Inc. in partial
satisfaction of our obligation to pay minimum royalties to Motorola under our license agreement
with them. The remaining 71,226 shares were issued upon the exercise of outstanding warrants. The
warrants had a weighted average exercise price of $6.58 per share. The shares were issued in
reliance on the exemption from registration contained in Section 4(2) of the Securities Act of
1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following is a list of the exhibits filed as part of this report. Where so indicated by
footnote, exhibits that were previously filed 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.
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Description |
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31.1*
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Certifications of Sherwin I. Seligsohn, Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a) |
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31.2*
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Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a) |
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32.1**
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Certifications of Sherwin I. Seligsohn, Chief Executive Officer, as required by Rule 13a-14(b) or Rule
15d-14(b), and by 18 U.S.C. Section 1350. (This exhibit shall not be deemed filed for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further,
this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933,
as amended, or the Securities Exchange Act of 1934, as amended.) |
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32.2**
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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.) |
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Filed herewith. |
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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.
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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:
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UNIVERSAL DISPLAY CORPORATION |
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Date: May 9, 2007
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By:
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/s/ Sidney D. Rosenblatt |
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Sidney D. Rosenblatt
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Executive Vice President and Chief Financial Officer |
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