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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-12031
UNIVERSAL DISPLAY CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2372688
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
375 Phillips Boulevard
Ewing, New Jersey 08618
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(609) 671-0980
----------------------------------------------------
(Registrant's telephone number, including area code)
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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
As of November 1, 2004, the registrant had outstanding 27,913,882 shares of
Common Stock.
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 2004 (unaudited) and December 31, 2003 3
Consolidated Statements of Operations - Three months ended September 30, 2004 4
and 2003 and inception to September 30, 2004 (unaudited)
Consolidated Statements of Operations - Nine months ended September 30, 2004 5
and 2003 and inception to September 30, 2004 (unaudited)
Consolidated Statements of Cash Flows - Nine months ended September 30, 2004 6
and 2003 and inception to September 30, 2004 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
ITEM 4. CONTROLS AND PROCEDURES 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
September 30, 2004 December 31,
(Unaudited) 2003
---------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,499,593 $ 14,070,207
Short-term investments 37,990,705 12,811,704
Accounts receivable 953,713 805,602
Inventory 33,704 33,044
Other current assets 363,033 153,924
------------- ------------
Total current assets 53,840,748 27,874,481
PROPERTY AND EQUIPMENT, net 3,315,993 3,532,115
ACQUIRED TECHNOLOGY, net 10,133,399 11,404,703
INVESTMENTS 2,732,256 3,255,574
OTHER ASSETS 153,209 134,773
------------ ------------
$ 70,175,605 $ 46,201,646
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Capital lease obligations $ -- $ 3,886
Accounts payable 559,628 436,809
Accrued expenses 2,757,181 2,020,210
Deferred license fees 1,516,667 1,266,667
Deferred revenue 67,204 467,204
------------ ------------
Total current liabilities 4,900,680 4,194,776
DEFERRED LICENSE FEES 3,100,000 3,100,000
------------- ------------
Total liabilities 8,000,680 7,294,776
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized,
200,000 shares Series A Nonconvertible Preferred Stock issued and
Outstanding (liquidation value of $7.50 per share or $1,500,000),
300,000 shares Series B Convertible Preferred Stock issued and
outstanding (liquidation value of $21.48 per share or $6,444,000),
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 5,000 5,000
Common Stock, par value $0.01 per share, 50,000,000 shares authorized,
27,465,123 and 24,196,765 shares issued and outstanding, respectively 274,651 241,968
Additional paid-in capital 172,862,565 137,160,751
Deferred compensation (101,922) --
Accumulated other comprehensive loss (22,822) (38,837)
Deficit accumulated during development stage (110,842,547) (98,462,012)
------------ ------------
Total shareholders' equity 62,174,925 38,906,870
------------ ------------
$ 70,175,605 $ 46,201,646
============ ============
The accompanying notes are an integral part of these statements.
3
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Period From Inception
-------------------------------- (June 17, 1994) To
2004 2003 September 30, 2004
--------------------------------- -----------------------
REVENUE:
Contract research $ 614,066 $ 267,860 $ 7,334,444
Development chemicals 736,963 303,725 5,114,935
Commercial chemicals 18,180 19,890 176,160
Royalty and license fees 92,420 46,410 461,040
Technology development fees 250,000 1,450,000 4,032,796
------------- ------------- --------------
Total revenue 1,711,629 2,087,885 17,119,375
OPERATING EXPENSES:
Cost of chemicals sold 18,121 37,003 285,846
Research and development 3,952,649 4,385,019 77,724,632
General and administrative 1,544,649 1,298,880 31,263,749
Royalty expense 87,500 87,500 937,500
------------- ------------- --------------
Total operating expenses 5,602,919 5,808,402 110,211,727
------------- ------------- --------------
Operating loss (3,891,290) (3,720,517) (93,092,352)
INTEREST INCOME 222,097 57,883 2,801,547
INTEREST EXPENSE (21) (161) (5,146,910)
DEBT CONVERSION AND EXTINGUISHMENT EXPENSE -- -- (10,011,780)
OTHER INCOME -- -- 241,689
------------- ------------- --------------
NET LOSS (3,669,214) (3,662,795) (105,207,806)
DEEMED DIVIDEND (83,448) (1,034,302) (5,634,741)
------------- ------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (3,752,662) $ (4,697,097) $ (110,842,547)
============= ============= ==============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.14) $ (0.21)
============= =============
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS
PER COMMON SHARE 27,366,453 22,504,673
============= =============
The accompanying notes are an integral part of these statements.
4
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30, Period From Inception
------------------------------- (June 17, 1994) To
2004 2003 September 30, 2004
---------------- ------------- ------------------------
REVENUE:
Contract research $ 1,911,240 $ 1,105,213 $ 7,334,444
Development chemicals 1,792,402 1,549,726 5,114,935
Commercial chemicals 108,000 19,890 176,160
Royalty and license fees 302,000 46,410 461,040
Technology development fees 1,200,000 1,950,000 4,032,796
------------ ------------ -------------
Total revenue 5,313,642 4,671,239 17,119,375
OPERATING EXPENSES:
Cost of chemicals sold 135,667 84,542 285,846
Research and development 12,597,592 12,493,267 77,724,632
General and administrative 5,152,841 3,637,342 31,263,749
Royalty expense 262,500 262,500 937,500
------------ ------------ -------------
Total operating expenses 18,148,600 16,477,651 110,211,727
------------ ------------ -------------
Operating loss (12,834,958) (11,806,412) (93,092,352)
INTEREST INCOME 584,226 171,336 2,801,547
INTEREST EXPENSE (179) (579) (5,146,910)
DEBT CONVERSION AND EXTINGUISHMENT EXPENSE -- -- (10,011,780)
OTHER INCOME -- 16,032 241,689
------------ ------------ -------------
NET LOSS (12,250,911) (11,619,623) (105,207,806)
DEEMED DIVIDEND (129,624) (1,034,302) (5,634,741)
------------ ------------ -------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(12,380,535) $(12,653,925) $(110,842,547)
============ ============ =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.47) $ (0.58)
============ ============
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS
PER COMMON SHARE 26,450,235 21,899,091
============ ============
The accompanying notes are an integral part of these statements.
5
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, Period From Inception
-------------------------------- (June 17, 1994) To
2004 2003 September 30, 2004
---------------- -------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (12,250,911) $ (11,619,623) $(105,207,806)
Non-cash charges to statement of operations:
Depreciation 1,048,988 1,571,227 6,778,851
Amortization of intangibles 1,271,304 1,271,304 6,817,319
Amortization of discounts on Convertible Promissory Note -- -- 14,734,168
Amortization of premium on investments 23,657 -- 84,747
Issuance of Common Stock options and warrants for services (9,946) 40,399 1,678,456
Issuance of Common Stock and warrants in connection
with amended research and license agreements -- -- 3,120,329
Issuance of Common Stock in connection with
employee bonus 251,592 -- 958,555
Issuance of redeemable Common Stock, Common Stock options and
warrants in connection with the PPG development agreement 2,603,963 4,004,638 17,142,352
Issuance of Common Stock, options and warrants to Board of
Directors and Scientific Advisory Board 643,720 -- 2,591,089
Issuance of Common Stock in connection with License Agreement -- -- 71,816
Acquired in-process technology -- -- 350,000
(Increase) decrease in assets:
Accounts receivable (148,111) 53,674 (953,713)
Inventory (660) (28,812) (33,704)
Other current assets (209,109) (30,727) (55,185)
Other assets (18,436) (1,010) (153,209)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 1,427,523 246,967 3,875,760
Deferred license fees 250,000 200,000 4,616,667
Deferred revenue (400,000) (255,000) 67,204
------------- ------------- -------------
Net cash used in operating activities (5,516,426) (4,546,963) (43,516,304)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (832,866) (935,166) (9,212,823)
Purchase of intangibles -- -- (25,750)
Purchases of investments (42,998,872) (8,513,163) (95,084,637)
Proceeds from sale of investments 18,335,547 4,497,192 54,254,107
------------- ------------- -------------
Net cash used in investing activities (25,496,191) (4,951,137) (50,069,103)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net 28,522,249 14,841,857 74,383,543
Proceeds from issuance of Preferred Stock -- -- 9,137,079
Proceeds from issuance of Convertible Promissory Notes and
equity instruments -- -- 15,000,000
Repayment of Convertible Promissory Notes -- -- (8,819,997)
Proceeds from the exercise of Common Stock options and warrants 2,923,640 412,735 18,404,396
Principal payments on capital lease (3,886) (3,486) (20,021)
------------- ------------- -------------
Net cash provided by financing activities 31,442,003 15,251,106 108,085,000
INCREASE IN CASH AND CASH EQUIVALENTS 429,386 5,753,006 14,499,593
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,070,207 15,905,416 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,499,593 $ 21,658,422 $ 14,499,593
============= ============= =============
The accompanying notes are an integral part of these statements.
6
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARY
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND:
Universal Display Corporation (the "Company"), a development-stage company, is
engaged in the research and development and commercialization of organic light
emitting diode ("OLED") technologies and materials for use in flat panel display
and other applications.
The Company, formerly known as Enzymatics, Inc. ("Enzymatics"), was incorporated
under the laws of the Commonwealth of Pennsylvania on April 24, 1985, and
commenced its current business activities on August 1, 1994. The New Jersey
corporation formerly known as Universal Display Corporation and now known as
UDC, Inc. ("UDC") was incorporated under the laws of the State of New Jersey on
June 17, 1994.
The Company also sponsors substantial OLED technology research being conducted
at the Advanced Technology Center for Photonics and Optoelectronic Materials at
Princeton University and at the University of Southern California ("USC") (on a
subcontract basis with Princeton University), pursuant to a Research Agreement
between the Company and the Trustees of Princeton University dated October 9,
1997 (as amended, the "1997 Research Agreement") (Note 3). The Company
previously sponsored OLED technology research conducted at Princeton University
under a Sponsored Research Agreement between the Trustees of Princeton
University and American Biomimetics Corporation ("ABC") dated August 1, 1994 (as
amended, the "1994 Sponsored Research Agreement"). ABC, a privately held
Pennsylvania corporation that is affiliated with the Company, assigned its
rights and obligations under the 1994 Sponsored Research Agreement to the
Company in October 1995.
Pursuant to a License Agreement between the Trustees of Princeton University and
ABC dated August 1, 1994 (as amended, the "1994 License Agreement"), Princeton
University 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 a pending patent application of Princeton University relating
to OLED technology. Under the 1994 License Agreement, Princeton University
further granted ABC similar license rights with respect to patent applications
and issued patents arising out of work performed by Princeton University under
the 1994 Sponsored Research Agreement. ABC assigned its rights and obligations
under the 1994 License Agreement to the Company in June 1995. On October 9,
1997, the Company and Princeton University entered into an Amended License
Agreement that amended and restated the 1994 License Agreement (as amended, the
"1997 Amended License Agreement") (Note 3). Under the 1997 Amended License
Agreement, Princeton University granted the Company corresponding license rights
with respect to patent applications and issued patents arising out of work
performed by Princeton University and USC under the 1997 Research Agreement.
The Company conducts a substantial portion of its OLED technology development
activities at its technology development and transfer facility in Ewing, New
Jersey. The Company moved its operations to this facility in the fourth quarter
of 1999 and expanded the facility from 11,000 square feet to 21,000 square feet
in 2001. In September 2003, the Company renewed its lease for this facility for
an additional five years through the end of 2008. In connection with renewing
this lease, the Company negotiated an option to purchase the entire facility at
a fixed price, exercisable at any time on or after July 1, 2004. In October
2004, the Company entered into an Agreement of Sale to purchase the property and
building at which its Ewing, New Jersey facility is located for a purchase price
of $5,500,000. The purchase is subject to a 15-day right of first refusal in
favor of four adjoining property owners. The Company plans to complete the
purchase in December 2004.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of September
30, 2004, and the results of operations for the three and nine months ended
September 30, 2004 and 2003 and cash flows for the nine months ended September
30, 2004 and 2003. 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 were included in the Company's Annual Report on Form
10-K for the year ended December 31, 2003.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents. At September 30, 2004,
cash and cash equivalents included cash on hand, cash in banks, money market
accounts, corporate bonds and certificates of deposit.
7
The Company classifies its existing marketable securities as available-for-sale
in accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
These securities are carried at fair market value, with unrealized gains and
losses reported in shareholders' equity as a component of accumulated other
comprehensive loss. Gains or losses on securities sold are based on the specific
identification method. Investments classified as current have maturity dates of
greater than three months but less than one year. Investments classified as
long-term have maturity dates greater than one year.
The Company reported accumulated unrealized holding losses of $22,822 and
$38,837 at September 30, 2004 and December 31, 2003, respectively. Comprehensive
loss, which includes the net loss and change in unrealized holding losses, was
$12,234,896 and $11,619,542 for the nine months ended September 30, 2004 and
2003, respectively, and $3,610,248 and $3,666,004 for the three months ended
September 30, 2004 and 2003, respectively. Gross realized gains and losses for
the quarter ended September 30, 2004 and 2003 were not material.
INVENTORY
Inventory consists of chemicals held at the Company's location. Inventory is
valued at the lower of cost or market, with the cost determined using the
specific identification method.
ACQUIRED TECHNOLOGY
Acquired technology consists of acquired license rights for patents and know-how
obtained from PD-LD, Inc. and Motorola, Inc. (Note 4). These intangible assets
consist of the following:
September 30, 2004 December 31, 2003
------------------- -----------------
PD-LD, Inc. $ 1,481,250 $ 1,481,250
Motorola 15,469,468 15,469,468
--------------- --------------
16,950,718 16,950,718
Less: Accumulated amortization (6,817,319) (5,546,015)
--------------- --------------
Acquired Technology, net $ 10,133,399 $ 11,404,703
=============== ==============
Acquired technology is amortized on a straight-line basis over its estimated
useful life of ten years.
NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing net loss attributable to
Common shareholders 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 and nine months ended September 30, 2004 and 2003, the
effects of the exercise of 8,415,697 and 8,228,936 outstanding stock options and
warrants, respectively, were excluded from the calculation of diluted EPS as the
impact would be antidilutive.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are charged to operations as incurred.
CERTAIN RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
The EITF recently reached a consensus on EITF Issue No. 00-21, which provides
accounting guidance for customer solutions where delivery or performance of
products, services and/or performances may occur at different points in time or
over different periods of time. Companies are required to adopt this consensus
for fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No.
00-21 had no impact on the Company's financial position, results of operations
or liquidity.
8
STATEMENT OF CASH FLOW INFORMATION
The following non-cash investing and financing activities occurred:
Three Months Ended September 30,
----------------------------------
2004 2003
--------------- -----------------
Unrealized gain (loss) on available-for-sale securities 58,966 (3,209)
Nine Months Ended September 30,
----------------------------------
2004 2003
---------------- ----------------
Unrealized gain on available-for-sale securities 16,015 81
STOCK OPTIONS
The Company accounts for its stock option plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25")
under which no compensation cost is recognized for options issued to employees
at fair market value on the date of grant. In 1995, the FASB issued SFAS No.
123, "Accounting for Stock-Based Compensation," which established a fair value
based method of accounting for stock-based compensation plans. SFAS No. 123
requires that a company's financial statements include certain disclosures about
stock-based employee compensation arrangement regardless of the method used to
account for the plan. In 2003, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which amended SFAS No. 123
to provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation and amended the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements.
As allowed by SFAS No. 123, the Company has selected to continue to account for
its employee stock-based compensation plans under APB No. 25, and adopted only
disclosure requirements of SFAS No. 123 as amended by SFAS No. 148. Had the
Company recognized compensation cost for it stock-based compensation plans
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per share would have been increased to the following pro forma amounts:
Three Months Ended September 30,
-------------------------------------
2004 2003
------------------- ----------------
Net loss attributable to common shareholders:
As reported $ (3,752,662) $ (4,697,097)
Add stock-based employee compensation
expense included in reported net income, net of tax 389,946 --
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (631,962) (263,328)
------------- ------------
Pro forma (3,994,678) $ (4,960,425)
============= ============
Basic and diluted net loss per share:
As reported $ (0.14) $ (0.21)
Pro forma (0.15) (0.22)
Nine Months Ended September 30,
-------------------------------------
2004 2003
----------------- -----------------
Net loss attributable to common shareholders:
As reported $ (12,380,535) $(12,653,925)
Add stock-based employee compensation
expense included in reported net income, net of tax 1,506,802 --
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (6,081,647) (755,193)
------------- ------------
Pro forma $ (16,955,380) $(13,409,118)
============= ============
Basic and diluted net loss per share:
As reported $ (0.47) $ (0.58)
Pro forma (0.64) (0.61)
9
The year-to-date 2004 amounts are primarily due to the Company granting
immediately vested bonus options to executive management for 2003 and options to
the members of its Board of Directors for Board and Committee service in 2003 in
the first quarter of 2004. The Company granted similar options for 2002 in the
fourth quarter of 2002.
The Company accounts for its stock option and warrant grants to non-employees in
exchange for goods or services in accordance with SFAS No. 123 and Emerging
Issues Task Force No. 96-18 ("EITF 96-18"). SFAS No. 123 and EITF 96-18 require
that the Company account for its option and warrant grants to non-employees
based on the fair value of the options and warrants granted.
3. RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON UNIVERSITY:
In April 2002, the Company amended the 1997 Research Agreement with Princeton
University providing, among other things, for an additional five-year term. The
Company is obligated to pay Princeton University up to $7,477,993 under the 1997
Research Agreement from July 31, 2002 through July 31, 2007. Payments to
Princeton University under this agreement are charged to research and
development expenses when they become due. As of September 30, 2004, the Company
has funded $2,222,256 of this agreement and is obligated to fund an additional
$5,255,737 through July 2007.
Under the 1997 Amended License 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 Company's 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 was
$75,000 in 2001 and $100,000 in 2002 and thereafter. The Company accrued $75,000
of royalty expense for the nine months ended September 30, 2004.
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 connection with executing the Research Agreement and the Amended License
Agreement, in 1997 the Company issued to Princeton University 140,000 shares of
the Company's Common Stock and immediately vesting 10-year warrants to purchase
an additional 175,000 shares of the Common Stock at an exercise price of $7.25
per share. The Company also issued to USC 60,000 shares of the Common Stock and
immediately vesting 10-year warrants to purchase an additional 75,000 shares of
the Common Stock at an exercise price of $7.25 per share.
4. ACQUIRED TECHNOLOGY:
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-LD's rights
to certain issued and pending OLED technology patents in exchange for 50,000
shares of the Company's Common Stock. Pursuant to this transaction, these
patents were included in the patent rights exclusively licensed to the Company
under the 1997 Amended License Agreement. The acquisition of these patents had a
fair value of $1,481,250 (Note 2).
On September 29, 2000, the Company entered into a License Agreement with
Motorola, Inc. ("Motorola"). Pursuant to this agreement, the Company licensed
from Motorola 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 manufacturers. As
consideration for this license, the Company issued to Motorola 200,000 shares of
the Company's Common Stock (valued at $4,412,500), 300,000 shares of the
Company's Series B Convertible Preferred Stock ("Series B") (valued at
$6,618,750), and a warrant to purchase 150,000 shares of the Company's 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 Common Stock as a finder's fee in connection
with this transaction. This warrant was granted with an exercise price of $21.60
per share and 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
10
assumptions in the Black-Scholes option pricing model for the warrants to
purchase 300,000 shares issued in connection with this transaction: (1) 6.3%
risk-free interest rate, (2) expected life of seven 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 (Note 2).
The Company is required under the License Agreement to pay Motorola royalties on
gross revenues earned by the Company for 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 is
required to pay Motorola minimum royalties of $150,000 for the two-year period
ending on December 31, 2002, $500,000 for the two-year period ending on December
31, 2004, and $1,000,000 for the two-year period ending on December 31, 2006.
All royalty payments may be made, at the Company's discretion, in either all
cash or 50% cash and 50% in shares of the Company's Common Stock. The number of
shares of Common Stock used to pay the stock portion of the royalty is equal to
50% of the royalty due divided 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 Common Stock is issued. Since the minimum royalty exceeded
the actual royalties for the nine months ended September 30, 2004, the Company
accrued $187,500 of royalty expense.
In September 2003, the Company adjusted the conversion price of the Series B in
accordance with the terms of the Series B, to take into account 75,000 shares of
the Series B that became convertible into the Company's Common Stock in that
period. As such, the original conversion price was reduced to $16.59 for the
shares issuable resulting in an additional 22,107 shares of Common Stock being
issuable to Motorola upon conversion. The incremental shares issuable upon
conversion were accounted for as a contingent beneficial conversion feature
("CBCF") in accordance with Emerging Issues Task Force No. 00-27, "Application
of Issue No. 98-5 to Certain Convertible Instruments" and the Company recorded a
CBCF in the amount of $487,681 for the nine months ended September 30, 2003. The
CBCF was treated as a deemed dividend.
In September 2004, the Company elected to make a cash payment to Motorola in the
amount of $83,448, as in accordance with the terms of the Series B, in lieu of
adjusting the conversion price on the 75,000 shares of the Series B that became
convertible in the Company's Common Stock in that period. The cash paid was
treated as a deemed dividend.
On October 6, 2004, all shares of the Series B were automatically converted into
shares of Common Stock according to the terms of the Series B. As a result, all
outstanding shares of the Series B were redeemed and Motorola received 418,916
shares of the Company's Common Stock.
5. COMMON STOCK AND WARRANTS ISSUED UNDER THE PPG DEVELOPMENT AND LICENSE
AGREEMENT:
On October 1, 2000, the Company entered into a five-year Development and License
Agreement with PPG Industries, Inc. ("PPG") to leverage the Company's OLED
technologies with PPG's expertise in the development and manufacture of organic
materials. A team of PPG scientists and engineers is assisting the Company in
developing and commercializing its proprietary OLED materials. In consideration
for PPG's services under the agreement, the Company is required to issue shares
of its Common Stock and warrants to acquire its Common Stock to PPG on an annual
basis for the period from January 1, 2001 through December 31, 2005. The amount
of securities the Company is required to issue is subject to adjustment under
certain circumstances, as defined in the agreement. In January 2003, the Company
amended the Development and License Agreement, providing for additional
consideration to PPG for services provided under the agreement, which are to be
paid for in cash. The Company records these expenses to research and development
as they are incurred.
During the respective first quarters of 2004 and 2003, the Company issued to PPG
157,609 and 305,715 shares of the Company's Common Stock as consideration for
services required to be provided by PPG under the Development and License
Agreement. During the nine months ended September 30, 2004 and 2003,
respectively, the Company recorded a charge of $1,451,889 and $2,099,284 to
research and development expense for the portion of the shares issued that were
earned during the period the services were provided. The charge was determined
based on the fair value of the Common Stock earned by PPG.
As required under the Development and License Agreement, the Company issued
9,746 shares of Common Stock to PPG in February 2004. The additional shares were
issued to PPG based on a final accounting for actual costs incurred by PPG under
the agreement for the year ended December 31, 2003. Accordingly, the Company
accrued $133,715 of additional research and development expense as of December
31, 2003, based on the fair value of these additional shares.
In further consideration of the services performed by PPG under the Development
and License Agreement, the Company is required to issue warrants to PPG to
acquire shares of the Company's Common Stock. The number of warrants earned and
issued is based on the number of shares of Common Stock earned by, and issued
to, PPG by the Company during each calendar year of the term of the agreement.
Accordingly, the Company issued warrants to PPG to acquire 315,461 shares of the
Company's Common Stock as part of the consideration for services performed by
PPG during 2003. The warrants were earned and charged to research and
development expenses during 2003, but were not issued until February 2004. The
Company will similarly issue warrants to PPG for services performed during 2004
in the first quarter of 2005 and will charge the related fair value of the
warrants to research and development in 2004 as they are earned.
11
During the nine months ended September 30, 2004 and 2003, the Company recorded
charges to research and development expense of $1,025,283 and $1,675,999,
respectively, for the portion of the warrants that were earned by PPG during
these periods. These charges were recorded based on the estimated fair value of
the warrants earned. The Company determined the fair value of the warrants
earned during each such period using the Black-Scholes option-pricing model with
the following assumptions: (1) risk free interest rate of 3.35%-4.24% and
3.03%-3.41%, respectively, (2) no expected dividend yield, (3) expected life of
seven years and (4) expected volatility of 86.45-94% and 94%.
The Company is required to grant options to purchase the Company's Common Stock
to PPG employees performing development services for the Company under the
Development and License Agreement, in a manner consistent with that for issuing
options to its own employees. Subject to certain contingencies, these options
vest one year following the date of grant and expire 10 years from the date of
grant.
On September 23, 2002, the Company granted to PPG employees performing
development services under the agreement options to purchase 30,000 shares of
the Company's Common Stock at an exercise price of $5.45. During the nine months
ended September 30, 2003, the Company recorded $229,355 in research and
development costs related to these options.
On April 20, 2004 and December 23, 2003, the Company granted to PPG employees
performing development services under the agreement options to purchase 4,000
and 21,000 shares, respectively, of the Company's Common Stock at exercise
prices of $13.28 and $13.92, respectively. During the nine months ended
September 30, 2004, the Company recorded $126,791 in research and development
costs related to these options.
The Company determined the fair value of the options earned during the nine
months ended September 30, 2004 and 2003, using the Black-Scholes option-pricing
model with the following assumptions: (1) risk free interest rate of 4.28%-4.43%
and 3.70%, respectively, (2) no expected dividend yield, (3) expected life of 10
years and (4) expected volatility of 94%.
6. SHAREHOLDERS' EQUITY:
The following table summarizes the shareholders' equity activity from January 1,
2004 through September 30, 2004:
Accumulated
Preferred Stock, Deficit and
Series A & B Common Stock Additional Other
----------------- ------------------- Paid-In Deferred Comprehensive
Shares Amount Shares Amount Capital Compensation Loss Total Equity
-------- --------- ----------- --------- ------------ ------------- -------------- ---------------
BALANCE, JANUARY 1, 2004 500,000 $ 5,000 24,196,765 $241,968 $137,160,751 $ -- $(98,500,849) $38,906,870
Exercise of Common Stock
options and warrants -- -- 467,599 4,676 2,918,964 -- -- 2,923,640
Issuance of Common Stock
through public offering,
net of fees of $2,077,750 -- -- 2,550,000 25,500 28,496,749 -- -- 28,522,249 (A)
Deemed dividend -- -- -- -- 46,176 -- (129,624) (83,448)(B)
Issuance of Common Stock to
employees -- -- 64,750 647 870,332 (353,513) -- 517,466
Issuance of Common Stock to
Board of Directors and
Scientific Advisory Board -- -- 38,000 380 643,340 -- -- 643,720
Issuance of Common Stock
options to non-employees -- -- -- -- (9,946) -- -- (9,946)
Issuance of Common Stock,
options and warrants in
connection with Development
Agreements -- -- 148,009 1,480 2,736,199 -- -- 2,737,679 (C)
Amortization of deferred
compensation -- -- -- -- -- 251,591 -- 251,591
Unrealized gain on available-
for-sales securities -- -- -- -- -- -- 16,015 16,015
Net loss -- -- -- -- -- -- (12,250,911) (12,250,911)
------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004 500,000 $ 5,000 27,465,123 $274,651 $172,862,565 $(101,922) $(110,865,369) $62,174,925
===============================================================================================
(A) In March 2004, the Company sold 2,500,000 shares of its Common Stock at
$12.00 per share in a registered underwritten public offering. The offering
resulted in proceeds to the Company of $28,036,218, net of $1,963,782 in
associated costs. In April 2004, the Company sold an additional 50,000 shares of
its Common Stock at $12.00 per share to cover over-allotments in connection with
this public offering. The sale of these additional shares resulted in proceeds
of $486,031, net of $113,968 in associated costs.
12
(B) In February 2004, the Company issued to PPG a warrant to purchase 315,461
shares of the Company's Common Stock and in March 2004, it sold 2,500,000 shares
of its Common Stock in a public offering. These transactions were deemed
dilutive under the terms of certain warrants the Company had previously issued
and resulted in the reduction of the exercise price of those warrants and
increases in the number of shares issuable under certain of those warrants. The
Company treated this occurrence as a deemed dividend of $46,176.
In September 2004, in accordance with the terms of the Series B, the Company
made a cash payment to Motorola in the amount of $83,448 to take into account
75,000 shares of the Series B that became convertible into the Company's Common
Stock. The Company made the payment in lieu of reducing the conversion price of
the Series B. The cash payment was treated and recorded as a deemed dividend.
(C) In accordance with the PPG Development and License Agreement (Note 5), PPG
earned shares of the Company's Common Stock and warrants to purchase shares of
the Company's Common Stock, and options to purchase shares of the Company's
Common Stock were granted to certain PPG employees, for the nine months ended
September 30, 2004.
7. COMMITMENTS AND CONTINGENCIES:
Under the terms of the Company's License Agreement with Motorola (Note 4), the
Company agreed to make minimum royalty payments. To the extent that the
royalties otherwise payable to Motorola under this agreement are not sufficient
to meet the minimums, the Company is required to pay the shortfall, at its
discretion, in all cash or in 50% cash and 50% Common Stock within 90 days after
the end of each two-year period specified below in which the shortfall occurs.
For the two-year period ending December 31, 2002, the Company issued to Motorola
8,000 shares of the Company's Common Stock, valued at $71,816, and paid $78,184
in cash as a result of the minimum royalty due of $150,000. Future required
minimum royalty payments are as follows:
JANUARY 1, 2003 - DECEMBER 31, 2004: $ 500,000
JANUARY 1, 2005 - DECEMBER 31, 2006: $1,000,000
In accordance with the April 2002 amendment to the 1997 Research Agreement with
the Princeton University, the Company is required to pay annually to Princeton
University up to $1,495,999 for the period from July 31, 2002 through July 31,
2007.
Under the terms of the 1997 Amended License Agreement (Note 3), the Company is
required to pay Princeton University minimum royalty payments. To the extent
that the royalties otherwise payable to Princeton University under this
agreement are not sufficient to meet the minimums, the Company is required to
pay Princeton University the difference between the royalties paid and the
minimum royalty. The minimum royalty was $25,000 in 1999, $50,000 in 2000,
$75,000 in 2001, and is $100,000 in 2002 and each year thereafter.
In October 2004, the Company entered into an Agreement of Sale to purchase the
property and building at which its Ewing, New Jersey facility is located for a
purchase price of $5,500,000. The purchase is subject to a 15-day right of first
refusal in favor of four adjoining property owners. The Company plans to
complete the purchase in December 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS
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. This discussion and analysis contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These include, but are not limited to, statements
regarding our beliefs, expectations, hopes or intentions regarding the future.
It is important to note that these statements are subject to risks and
uncertainties that could cause our actual results to differ materially from
those projected. These risks and uncertainties include, but are not limited to:
the success of alternatives to OLEDs for flat panel displays; the success of
competing OLED technologies, or of other flat panel display technologies;
potential lack of demand for OLED displays or downturns in demand for flat panel
displays in general; we and our partners failing to make sufficient advances in
OLED technology and materials research; our being unable to form or maintain
lasting business relationships with display manufacturers and others; and our
being unable to obtain and maintain appropriate intellectual property protection
for our OLED technologies and materials, or being required to incur excessive
expenditures to enforce our intellectual property rights. These and other risks
and uncertainties that could cause our actual results to differ materially from
those projected are discussed in our periodic reports filed with the SEC,
including the section entitled "Factors that May Affect Future Results and
Financial Condition" in our Annual Report on Form 10-K for the year ended
December 31, 2003. We expressly disclaim any obligation or undertaking to update
or revise any forward-looking statements contained in this document to reflect
any change in expectations with regard to such statements, or any change in
events, conditions or circumstances on which any such statements are based.
13
OVERVIEW
We are a leader in the research, development and commercialization of organic
light emitting diode, or OLED, technologies for use in a variety of flat panel
display 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, development and technology evaluation agreements and
license fees.
We have incurred significant losses since our inception, resulting in an
accumulated deficit of $110,842,547 as of September 30, 2004. Moreover, we
expect our losses to continue for the foreseeable future and until such time, if
ever, as we are able to achieve, from the commercial licensing of our OLED
technologies and the sale of our OLED materials, sustained licensing and
chemical sales revenues that are sufficient to support our ongoing research and
development activities and other operations.
We anticipate fluctuations in our annual and quarterly results of operations for
the foreseeable future due to uncertainty regarding:
o the timing of our receipt of license fees and royalties, contracts
and fees for future technology development and evaluation;
o the timing and volume of sales of our OLED materials for both
commercial usage and evaluation purposes;
o the timing and magnitude of expenditures we may incur in connection
with our ongoing research and development activities; and
o the timing and financial consequences of our formation of new
business relationships and alliances.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2003
We had a net loss attributable to common shareholders of $3,752,662 (or $0.14
per share) for the quarter ended September 30, 2004, compared to $4,697,097 (or
$0.21 per share) for the same period in 2003. The decrease in net loss was
primarily attributable to the following:
o a decrease in research and development expenses as a result of the
accounting treatment of the services performed under the PPG
Development and License Agreement,
o an increase in interest income, and
o a decrease in deemed dividends as a result of the accounting
treatment for Series B conversion price adjustment and the pricing
adjustments to certain warrants.
Our revenues were $1,711,629 for the quarter ended September 30, 2004 compared
to $2,087,885 for the same period in 2003. The $376,256, or 18%, net decrease
was due to the recognition of $1,200,000 in revenue in the third quarter of 2003
in connection with a technology development and evaluation agreement which was
executed in September 2003, but which included monthly fees dating back to
February 2003, thereby increasing revenue for the third quarter of 2003. This
decrease was partially offset by increased contract research revenue and sales
of chemicals.
We earned $614,066 in contract research revenue from the U.S. government for the
quarter ended September 30, 2004, compared to $267,860 for the same period in
2003. The increase was due to the recognition of revenue from continued efforts
on existing, active government contracts and work on new contracts awarded after
the second quarter in 2003.
We earned $736,963 from our sales of OLED materials for evaluation purposes in
the quarter ended September 30, 2004, compared to $303,725 for the same period
in 2003. The increase in this amount was mainly due to growth of development
chemical sales and the timing of the purchase of materials in connection with
the development efforts by our evaluation partners. The amount and timing of
purchases of material for development efforts by potential OLED licensees is
difficult to predict due to the early stage of the OLED industry, and the
revenue in any specific period is not necessarily an accurate indicator of
revenues for any future period.
We entered into an agreement in the third quarter of 2003 under which we began
supplying one of our proprietary OLED materials to a customer for use in the
manufacture of commercial passive matrix OLED displays. As a result, we earned
$18,180 in commercial chemical revenue and $42,420 in license fees in connection
with this agreement for the three months ended September 30, 2004, compared to
$19,890 in commercial chemical revenue and $46,410 in license fees for the same
period in 2003. Also included in royalty and license fees for the three months
ended September 30, 2004, is $50,000 of royalty revenue from the sale of organic
vapor phase deposition ("OVPD") equipment by Aixtron AG. We have granted Aixtron
an exclusive license to produce and sell equipment used to manufacture OLEDs and
other devices using the OVPD process.
14
We recognized $250,000 in technology development revenue in connection with one
technology development and evaluation agreement, compared to $1,450,000 for the
same period in 2003. In 2003, the revenue recognized was in connection with two
technology development and evaluation agreements, one of which was executed in
October 2002 and the other in September 2003. The latter of these two
agreements, which represented $1,200,000 of the $1,450,000, expired in
accordance with its terms at the end of March 2004.
We incurred research and development expenses of $3,952,649 for the quarter
ended September 30, 2004, compared to $4,385,019 for the same period 2003. The
decrease in these expenses was primarily the result of a decrease in non-cash
charges of $797,520 related to the accounting treatment in connection with the
Development and License Agreement with PPG (Note 5).
We incurred general and administrative expenses of $1,544,649 for the quarter
ended September 30, 2004, compared to $1,298,880 for the same period in 2003.
The increase was primarily the result of an increase of $297,305 in costs
associated with the issuance of stock performance bonuses to executive officers
for 2003 and estimated stock performance bonuses to employees and executive
management for 2004. No similar costs were recognized for the same period in
2003.
Our interest income was $222,097 for the quarter ended September 30, 2004,
compared to $57,883 for the same period in 2003. The increase was mainly due to
increased cash and investment balances for the period ended September 30, 2004.
The cash and investment balances at September 30, 2004 were $55,222,554, as
compared to the $30,717,125 at September 30, 2003. The balance increase was
primarily due to an increase in funds from our registered underwritten public
offering completed in March and April of 2004.
We recorded deemed dividends in the amount of $83,448 for the quarter ended
September 30, 2004, compared to $1,034,302 for the same period in 2003. In
accordance with the terms of the Series B, in September 2004, we elected to make
a cash payment to Motorola in the amount of $83,448 in lieu of adjusting the
conversion price of the Series B. The cash payment was treated and recorded as a
deemed dividend. In the same period in 2003, we reduced the conversion price
creating additional issuable shares of Common Stock upon conversion which were
treated as a contingent beneficial conversion feature ("CBCF"). The CBCF was
treated and recorded as a deemed dividend in the amount of $487,681. Also, in
the quarter ended September 30, 2004, we adjusted the pricing on certain
warrants as a result of stock issuances to PPG and in connection with the
closing of our public offering earlier in the year. The price adjustments were
treated and recorded as a deemed dividend in the amount of $46,176. During the
same period of 2003, we adjusted the pricing on certain warrants as a result of
our public offering completed in August 2003. The price adjustment was treated
and recorded as a deemed dividend in the amount of $546,621.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2003
We had a net loss attributable to common shareholders of $12,380,535 (or $0.47
per share) for the nine months ended September 30, 2004, compared to $12,653,925
(or $0.58 per share) for the same period in 2003. The decrease in net loss was
primarily attributable to a decrease in deemed dividends due to the accounting
treatment for the Series B conversion price adjustment and the pricing
adjustments to certain warrants. The decrease was offset by an increase in
general and administrative expenses.
Our revenues were $5,313,642 for the nine months ended September 30, 2004
compared to $4,671,239 for the same period in 2003. The $642,403, or 14%, net
increase was primarily due to:
o additional revenues earned under U.S. government contracts, and
o increased sales of OLED materials for commercial and evaluation
purposes.
The increase in the above revenues was offset by a decrease in technology
development revenue.
We earned $1,911,240 in contract research revenue from the U.S. government for
the nine months ended September 30, 2004, compared to $1,105,213 for the same
period in 2003. The increase was due to the recognition of revenue related to
two completed Phase I contracts and final billing on one completed subcontract,
as well as continued efforts on existing, active government contracts and work
on new contracts awarded after the third quarter of 2003.
We recognized $1,200,000 in technology development revenue in connection with
two technology development and evaluation agreements, one of which was executed
in October 2002 and the other in September 2003, compared to $1,950,000 for the
same period in 2003. The latter of these two agreements, which represented
$1,200,000 of the $1,950,000 in 2003, expired in accordance with its terms at
the end of March 2004.
We earned $1,792,402 from our sales of OLED materials for evaluation purposes in
the nine months ended September 30, 2004, compared to $1,549,726 for the same
period in 2003. The increase in this amount was mainly due to growth of
development chemical sales and timing of the purchase of materials in connection
with the development efforts by our evaluation partners. The amount and timing
of purchases of material for development efforts by potential OLED licensees is
difficult to predict due to the early stage of the OLED industry, and the
revenue in any specific period is not necessarily an accurate indicator of
revenues for any future period.
15
We entered into an agreement in the third quarter of 2003 under which we began
supplying one of our proprietary OLED materials to a customer for use in the
manufacture of commercial passive matrix OLED displays. As a result, we earned
$108,000 in commercial chemical revenue and $252,000 in license fees in
connection with this agreement for the nine months ended September 30, 2004,
compared to $19,890 in commercial chemical revenue and $46,410 in license fees
for the same period in 2003. Also included in royalty and license fees for the
nine months ended September 30, 2004, is $50,000 of royalty revenue from the
sale of organic vapor phase deposition ("OVPD") equipment by Aixtron AG. We have
granted Aixtron an exclusive license to produce and sell equipment used to
manufacture OLEDs and other devices using the OVPD process.
We incurred general and administrative expenses of $5,152,841 for the nine
months ended September 30, 2004, compared to $3,637,342 for the same period
2003. The increase was primarily a result of the following:
o an increase of $214,612 in costs associated with existing and new
personnel and $890,079 in costs associated with the issuance of
stock performance bonuses to executive officers for 2003 and
estimated stock performance bonuses to employees and executive
management for 2004. No similar costs were recognized for the same
period in 2003.
o an increase of $338,800 in costs associated with the issuance of
stock to our Board of Directors for Board and Committee service in
2003. No such issuances of stock were made in the same period in
2003.
Our interest income was $584,226 for the nine months ended September 30, 2004,
compared to $171,336 for the same period in 2003. The increase was mainly due to
increased cash and investment balances in the period ended September 30, 2004.
The cash and investment balances at September 30, 2004 were $55,222,554, as
compared to the $30,717,125 at September 30, 2003. The balance increase was
primarily due to an increase in funds from our registered underwritten public
offering completed in March and April of 2004.
We recorded deemed dividends in the amount of $129,624 for the nine months ended
September 30, 2004, compared to $1,034,302 for the same period in 2003. In
accordance with the terms of the Series B, in September 2004, we elected to make
a cash payment to Motorola in the amount of $83,448 in lieu of adjusting the
conversion price of the Series B. In the same period in 2003, we reduced the
conversion price of the Series B creating additional issuable shares of Common
Stock upon conversion which were treated as a CBCF. The CBCF was treated and
recorded as a deemed dividend in the amount of $487,681. Also, in the nine
months ended September 30, 2004, we adjusted the pricing on certain warrants as
a result of stock issuance to PPG and in connection with the closing of our
public offering earlier this year. The price adjustments were treated and
recorded as a deemed dividend in the amount of $46,176. During the same period
of 2003, we adjusted the pricing on certain warrants as a result of our public
offering completed in August 2003. The price adjustment was treated and recorded
as a deemed dividend in the amount of $546,621.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, we had cash and cash equivalents of $14,499,593,
short-term investments of $37,990,705 and long-term investments of $2,732,256,
for a total of $55,222,554. This compares to cash and cash equivalents of
$14,070,207, short-term investments of $12,811,704 and long-term investments of
$3,255,574, for a total of $30,137,485, as of December 31, 2003.
In the nine months ended September 30, 2004, the cash used in operating
activities was $5,516,426, as compared to $4,546,963 for the same period in
2003. The increased use of cash in operating activities was mainly due to an
increase in operating loss of $1,685,578 (net of non-cash adjustments) primarily
as a result of hiring additional personnel and increased general and
administrative expenses.
In the nine months ended September 30, 2004, cash used in investing activities
was $25,496,191 as compared to net cash used in investing activities of
$4,951,137 for the same period in 2003. The increase was mainly due to an
increase in purchases of investments as a result of increased funds from
financing activities.
In the nine months ended September 30, 2004, net cash provided by financing
activities was $31,442,003, as compared to $15,251,106 for the same period in
2003. The increase was primarily due to our completion of the following
financing activities:
o a registered underwritten public offering in March 2004 of 2,500,000
shares of our Common Stock at $12.00 per share. The offering
resulted in proceeds to us of $28,036,218, net of $1,963,782 in
associated costs.
o The sale in April 2004 of 50,000 additional shares of our Common
Stock at $12.00 per share to cover over-allotments in connection
with the public offering completed in March 2004. The sale of these
additional shares resulted in proceeds to us of $486,031, net of
$113,968 in associated costs.
o the exercise of options and warrants resulting in proceeds to us of
$2,923,640.
Working capital increased to $48,940,068 at September 30, 2004, from working
capital of $23,679,705 at December 31, 2003. The net increase was due primarily
to the net cash proceeds received from our financing activities.
16
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 and enforcement of our patents and patent applications), that we
have sufficient cash, cash equivalents and short-term investments to meet our
obligations for at least the next 12 months. We believe that our potential
additional financing sources 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, debt securities and other securities, subject
to market conditions and other factors. It should be noted, however, that
substantial additional funds will 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. For example, under our 1997 Research Agreement with Princeton
University, we are required to pay Princeton University $1,495,599 per year
through July 2007. 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, 2003 for
a discussion of critical accounting policies.
CONTRACTUAL OBLIGATIONS
Refer to our Annual Report on Form 10-K for the year ended December 31, 2003 for
a discussion of our contractual obligations. In July 2004, we signed a one-year
lease for 1,609 square feet of space in Monmouth Junction, New Jersey for OLED
technology development activities. The minimum rental payments to be made under
this lease is $38,616. In October 2004, we entered into an Agreement of Sale to
purchase the property and building at which our Ewing, New Jersey facility is
located for a purchase price of $5,500,000. The purchase is subject to a 15-day
right of refusal in favor of four adjoining property owners. We plan to complete
the purchase in December 2004.
OFF-BALANCE SHEET ARRANGEMENTS
Refer to our Annual Report on Form 10-K for the year ended December 31, 2003 for
a discussion of off-balance sheet arrangements. As of September 30, 2004, we had
no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments, other financial instruments or derivative
commodity instruments that could expose us to significant market risk. Our
primary market risk exposure with regard to financial instruments is to changes
in interest rates, which would impact interest income earned on investments.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end
of the period covered by this report. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have 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 information
required to be disclosed by us in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that information required to
be disclosed by us in the reports we file or submit under the Exchange Act is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. 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.
There have been no changes in our internal control over financial reporting that
occurred during our last fiscal quarter and 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
Not applicable.
17
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following is a list of the exhibits filed as part of this report.
Exhibit
Number Description
------- -----------
10.28* Agreement between the Registrant and Hitachi High-Technologies
Corporation dated as of July 9, 2004.
10.29* Agreement of Sale among the Registrant, Ibeth Lotte Biermann
and Gesipa Fasteners USA, Inc. dated October 26, 2004.
31.1* Certifications of Sherwin I. Seligsohn, Chief Executive
Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).
31.2* Certifications of Sidney D. Rosenblatt, Chief Financial
Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).
32.1** Certifications of Sherwin I. Seligsohn, Chief Executive
Officer, as required by Rule 13a-14(b) or Rule 15d-14(b), and
by 18 U.S.C. Section 1350. (This exhibit shall not be deemed
"filed" for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended, or otherwise subject to the liability
of that section. Further, this exhibit shall not be deemed to
be incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended.)
32.2** Certifications of Sidney D. Rosenblatt, Chief Financial
Officer, as required by Rule 13a-14(b) or Rule 15d-14(b), and
by 18 U.S.C. Section 1350. (This exhibit shall not be deemed
"filed" for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended, or otherwise subject to the liability
of that section. Further, this exhibit shall not be deemed to
be incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended.)
* Filed herewith.
** Furnished herewith.
(b) Reports on Form 8-K:
The Company did not file any Current Reports on Form 8-K with the SEC during the
quarter ended September 30, 2004. Subsequently, the Company filed with the SEC a
Current Report on Form 8-K, on November 1, 2004, reporting Items 1.01 and 9.01.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q for the quarter ended
September 30, 2004, to be signed on its behalf by the undersigned thereunto duly
authorized.
UNIVERSAL DISPLAY CORPORATION
Date: November 5, 2004 By: /s/ Sidney D. Rosenblatt
------------------------------------------
Sidney D. Rosenblatt
Executive Vice President, Chief Financial
Officer, Treasurer and Secretary