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| PANL > SEC Filings for PANL > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
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 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, 2008, as amended, as supplemented by any disclosures in Item 1A of Part II below. Changes or developments in any of these areas could affect our financial results or results of operations, and could cause actual results to differ materially from those contemplated in the forward-looking statements.
All forward-looking statements speak only as of the date of this report or the documents incorporated by reference, as the case may be. We do not undertake any duty to update any of these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
OVERVIEW
We are a leader in the research, development and commercialization of organic light emitting diode, or OLED, technologies for use in flat panel display, solid-state lighting and other applications. Since 1994, we have been exclusively engaged, and expect to continue to be exclusively engaged, in funding and performing research and development activities relating to OLED technologies and materials, and in attempting to commercialize these technologies and materials. Our revenues are generated through contract research, sales of development and commercial chemicals, technology development and evaluation agreements and license fees and royalties. In the future, we anticipate that revenues from licensing our intellectual property will become a more significant part of our revenue stream.
While we have made significant progress over the past few years developing and commercializing our family of OLED technologies (PHOLED, TOLED, FOLED, etc.) and materials, we have incurred significant losses and will likely continue to do so until our OLED technologies and materials become more widely adopted by product manufacturers. We have incurred significant losses since our inception, resulting in an accumulated deficit of $188,588,162 as of June 30, 2009.
We anticipate fluctuations in our annual and quarterly results of operations due to uncertainty regarding, among other factors:
· the timing of our receipt of license fees and royalties, as well as fees for future technology development and evaluation;
· the timing and volume of sales of our OLED materials for both commercial usage and evaluation purposes;
· the timing and magnitude of expenditures we may incur in connection with our ongoing research and development activities; and
· the timing and financial consequences of our formation of new business relationships and alliances.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
We had a net loss of $6,415,178 (or $0.18 per basic and diluted share) for the quarter ended June 30, 2009, compared to a net loss of $5,205,790 (or $0.15 per basic and diluted share) for the same period in 2008. The increase in net loss was primarily due to:
· an increase in operating expenses of $1,191,574; and
· a decrease in interest income of $548,775; and
· a loss on stock warrant liability of $292,710;
· partially offset by an increase in revenues of $810,756.
Our revenues were $2,956,354 for the quarter ended June 30, 2009, compared to $2,145,598 for the same period in 2008. Commercial revenue decreased to $1,239,056 from $1,395,487 for the same period in 2008. Commercial revenue relates to the incorporation of our OLED technologies and materials into our customers' commercial products, and includes commercial chemical revenue, royalty and license revenues, and commercialization assistance revenue. Developmental revenue increased to $1,717,298 for the quarter ended June 30, 2009, from $750,111 for the same period in 2008. Developmental revenue relates to OLED technology and material development activities for which we are paid, and includes contract research revenue, development chemical revenue and technology development revenue.
Our commercial chemical revenue and our royalty and license revenues for the quarter ended June 30, 2009 were $569,600 and $502,559, respectively, compared to $938,330 and $457,157, respectively, for the corresponding period in 2008.
For the quarter ended June 30, 2009, the majority of our commercial chemical revenue was from sales of our proprietary OLED materials to Samsung Mobile Display Co., Ltd. ("Samsung SMD"). We also sold small quantities of our proprietary OLED materials to another customer during the quarter. We recorded commercial chemical revenue and license revenue on account of the sales to that customer. For the corresponding period in 2008, the majority of our commercial chemical revenue was from Samsung SDI Co., Ltd. ("Samsung SDI"), whose OLED business was transferred to Samsung SMD in September 2008 (Samsung SDI and Samsung SMD collectively referred to as "Samsung"). We also sold small quantities of our proprietary OLED materials to two other customers during the second quarter of 2008. We recorded commercial chemical revenue and license revenue on account of the sales to those customers.
The decrease in commercial chemical revenue from the second quarter of 2008 to the second quarter of 2009 resulted primarily from a lower volume of OLED material sales to Samsung. Our understanding is that this lower sales volume was due to Samsung's implementation of manufacturing process efficiencies, improved materials utilization and more efficient and improved device structures, offset in part by increased production volume. We cannot accurately predict how long our material sales to Samsung or other customers will continue, as they frequently update and alter their product offerings in response to market demands. Continued sales of our OLED materials to these customers will depend on several factors, including, pricing, availability, continued technical improvement and competitive product offerings.
We recorded royalty revenue of $257,959 for the quarter ended June 30, 2009, compared to $228,587 for the same period in 2008. This revenue primarily represents royalties received under our patent license agreement with Samsung, which we entered into in April 2005. Under this agreement, we receive royalty reports at a specified period of time after the end of the quarter during which royalty-bearing products are sold by Samsung. Royalty revenue for these sales is recognized when the report is received. Consequently, our royalty revenues from Samsung for the three months ended June 30, 2009 and 2008 represent royalties for licensed products sold by Samsung during the first quarters of 2009 and 2008, respectively.
License revenue for the quarters ended June 30, 2009 and 2008 included license fees of $244,600 and $228,570, respectively. These revenues were received under our patent license agreement with Samsung, as well as a cross-license agreement we executed with DuPont Displays, Inc. ("DuPont") in December 2002. License revenue for the quarter ended June 30, 2009 also included amounts received under a patent license agreement we entered into with Konica Minolta Holdings, Inc. ("Konica Minolta") in August 2008, and a joint development agreement we previously entered into with a subsidiary of Konica Minolta. Under our agreements with Samsung, DuPont and Konica Minolta, we received upfront payments that have been classified as deferred license fees and deferred revenue. The deferred license fees are being recognized as license revenue over the term of the agreement with Samsung and, based on current assumptions, over 10 years with DuPont and Konica Minolta.
Commercial revenue for the quarter ended June 30, 2009 also included $166,897 in commercialization assistance revenue that we received under a business support agreement executed during the fourth quarter of 2008. We received no such revenue for the quarter ended June 30, 2008.
We earned $908,225 in contract research revenue from agencies of the U.S. Government for the quarter ended June 30, 2009, compared to $345,085 in corresponding revenue for the same period in 2008. The increase was due to the overall value of our government contracts increasing by approximately 50%, as well as the timing of expenses incurred under these contracts.
We earned $627,699 in development chemical revenue for the quarter ended June 30, 2009, compared to $305,026 in corresponding revenue for the same period in 2008. The increase was due primarily to increased development chemical sales to four customers, offset to some extent by decreased development chemical sales to two other customers. We cannot accurately predict the timing and frequency of development chemical purchases by our customers due to participants in the OLED industry having differing OLED technology development and product launch strategies, which are subject to change at any time.
We recognized $181,374 in technology development revenue for the quarter ended June 30, 2009, compared to $100,000 in corresponding revenue for the same period in 2008. Technology development revenue for the second quarter of 2009 included amounts received under two joint development agreements that we entered into during the second half of 2008. Technology development revenue for the second quarter of 2009 also included amounts received for a technical assistance program that began in the fourth quarter of 2008. Payments received under these agreements are being classified as deferred revenue and are being recognized as revenue over the life of the applicable agreement. The amount and timing of our receipt of fees for technology development and similar services is difficult to predict due to participants in the OLED industry having different technology development strategies, which are subject to change at any time.
Total operating expenses were $9,267,117 for the quarter ending June 30, 2009, compared to $8,075,543 for the same period in 2008.
We incurred research and development expenses of $5,324,695 for the quarter ended June 30, 2009, compared to $4,377,329 for the same period in 2008. The increase was mainly due to:
· the timing of $438,866 in costs associated with subcontractors and consultants under government contracts;
· increased employee costs of $316,185; and
· increased costs incurred under our sponsored research agreements of $165,623;
· partially offset by a decrease of $141,853 in costs incurred under our agreement with PPG Industries, Inc. ("PPG Industries").
Selling, general and administrative expenses remained relatively consistent over the corresponding periods and were $2,715,071 for the quarter ended June 30, 2009, compared to $2,679,944 for the same period in 2008.
Patent costs increased to $823,729 for the quarter ended June 30, 2009, compared to $676,024 for the same period in 2008. The increase was mainly attributable to the timing of costs associated with the prosecution of patent applications.
Interest income decreased to $188,593 for the quarter ended June 30, 2009, compared to $737,368 for the same period in 2008. The decrease was mainly attributable to decreased rates of return on investments during the quarter, compared to rates for the same period in 2008, as well as a decrease in the amount of cash available for investment. Due to current market conditions, we anticipate that these lower rates of return will continue for the foreseeable future.
At January 1, 2009, the Company had warrants to purchase 838,446 shares of common stock outstanding containing a "down-round" provision that did not qualify for the scope of exception from the provisions of SFAS No. 133. The change in fair value of these warrants from March 31, 2009 to June 30, 2009 resulted in a $292,710 loss on the statement of operations for the three months ended June 30, 2009.
There was no such loss for the same period of 2008. The Company will continue to report the warrants as a liability, with changes in fair value recorded in the statement of operations, until such time as these warrants are exercised or expire.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
We had a net loss of $11,984,777 (or $0.33 per basic and diluted share) for the six months ended June 30, 2009, compared to a net loss of $9,399,175 (or $0.26 per basic and diluted share) for the same period in 2008. The increase in net loss was primarily due to:
· an increase in operating expenses of $2,195,299;
· a decrease in interest income of $1,214,569; and
· a loss on stock warrant liability of $119,468;
· partially offset by an increase in revenues of $927,795.
Our revenues were $5,790,212 for the six months ended June 30, 2009, compared to $4,862,417 for the same period in 2008. Commercial revenue decreased to $2,608,193 from $2,950,552 for the same period in 2008. Commercial revenue relates to the incorporation of our OLED technologies and materials into our customers' commercial products, and includes commercial chemical revenue, royalty and license revenues, and commercialization assistance revenue. Developmental revenue increased to $3,182,019 for the six months ended June 30, 2009, from $1,911,865 for the same period in 2008. Developmental revenue relates to OLED technology and material development activities for which we are paid, and includes contract research revenue, development chemical revenue and technology development revenue.
Our commercial chemical revenue and our royalty and license revenues for the six months ended June 30, 2009 were $1,255,765 and $1,018,633, respectively, compared to $1,923,890 and $1,026,662, respectively, for the corresponding period in 2008.
For the six months ended June 30, 2009, the majority of our commercial chemical revenue was from sales of our proprietary OLED materials to Samsung SMD. We also sold small quantities of our proprietary OLED materials to another customer during the first half of 2009. We recorded commercial chemical revenue and license revenue on account of the sales to that customer. For the corresponding period in 2008, the majority of our commercial chemical revenue was from Samsung SDI. We also sold small quantities of our proprietary OLED materials to two other customers during the first half of 2008. We recorded commercial chemical revenue and license revenue on account of the sales to those customers.
The decrease in commercial chemical revenue from the first half of 2008 to the first half of 2009 resulted primarily from a lower volume of OLED material sales to Samsung. Our understanding is that this lower sales volume was due to Samsung's implementation of manufacturing process efficiencies, improved materials utilization and more efficient and improved device structures, offset in part by increased production volume. We cannot accurately predict how long our material sales to Samsung or other customers will continue, as they frequently update and alter their product offerings in response to market demands. Continued sales of our OLED materials to these customers will depend on several factors, including, pricing, availability, continued technical improvement and competitive product offerings.
We recorded royalty revenue of $536,138 for the six months ended June 30, 2009, compared to $444,012 for the same period in 2008. This revenue primarily represents royalties received under our patent license agreement with Samsung. Under this agreement, we receive royalty reports at a specified period of time after the end of the quarter during which royalty-bearing products are sold by Samsung. Royalty revenue for these sales is recognized when the report is received. Consequently, our royalty revenues from Samsung for the six months ended June 30, 2009 represent royalties for licensed products sold by Samsung during the first quarter of 2009 and the fourth quarter of 2008. For the six months ended June 30, 2008, we also received a small amount of royalties from AIXTRON AG for the sale of an OVPD tool. No such royalties were earned for the same period in 2009.
License revenue for the six months ended June 30, 2009 and 2008 included license fees of $482,495 and $530,510, respectively. These revenues were received under our patent license agreement with Samsung, as well as our cross-license agreement with DuPont. License revenue for the six months ended June 30, 2009 also included amounts received under a patent license agreement we entered into with Konica Minolta in August 2008, and a joint development agreement we previously entered into with a subsidiary of Konica Minolta. Under our agreements with Samsung, DuPont and Konica Minolta, we received upfront payments that have been classified as deferred license fees and deferred revenue. The deferred license fees are being recognized as license revenue over the term of the agreement with Samsung and, based on current assumptions, over 10 years with DuPont and Konica Minolta.
Commercial revenue for the six months ended June 30, 2009 also included $333,795 in commercialization assistance revenue that we received under a business support agreement executed during the fourth quarter of 2008. We received no such revenue for the same period in 2008.
We earned $1,803,811 in contract research revenue from agencies of the U.S. Government for the six months ended June 30, 2009, compared to $1,231,052 in corresponding revenue for the same period in 2008. The increase was due to the overall value of our government contracts increasing by approximately 40% as well as the timing of expenses incurred under these contracts.
We earned $907,997 in development chemical revenue for the six months ended June 30, 2009, compared to $558,125 in corresponding revenue for the same period in 2008. The increase was due primarily to increased development chemical sales to five customers, offset to some extent by decreased development chemical sales to two other customers. We cannot accurately predict the timing and frequency of development chemical purchases by our customers due to participants in the OLED industry having differing OLED technology development and product launch strategies, which are subject to change at any time.
We recognized $470,211 in technology development revenue for the six months ended June 30, 2009, compared to $122,688 in corresponding revenue for the same period in 2008. Technology development revenue for the first six months of 2009 included amounts received under two joint development agreements that we entered into during the second half of 2008. Technology development revenue for the first six months of 2009 also included amounts received for a technical assistance program that began in the fourth quarter of 2008. Payments received under these agreements are being classified as deferred revenue and are being recognized as revenue over the life of the applicable agreement. The amount and timing of our receipt of fees for technology development and similar services is difficult to predict due to participants in the OLED industry having different technology development strategies, which are subject to change at any time.
Total operating expenses were $18,094,573 for the six months ending June 30, 2009, compared to $15,899,274 for the same period in 2008.
We incurred research and development expenses of $10,543,757 for the six months ended June 30, 2009, compared to $8,817,467 for the same period in 2008. The increase was due mainly to:
· the timing of $401,523 in costs associated with subcontractors and consultants under government contracts;
· an increase of $541,589 in costs incurred under our agreement with PPG Industries;
· increased employee costs of $324,240; and
· increased costs incurred under our sponsored research agreements of $284,385.
Selling, general and administrative expenses remained relatively consistent over the corresponding periods and were $5,338,016 for the six months ended June 30, 2009, compared to $5,053,490 for the same period in 2008.
Patent costs increased to $1,555,260 for the six months ended June 30, 2009, compared to $1,387,410 for the same period in 2008. The increase was mainly attributable to the timing of costs associated with the prosecution of patent applications.
Interest income decreased to $441,993 for the six months ended June 30, 2009, compared to $1,656,562 for the same period in 2008. The decrease was mainly attributable to decreased rates of return on investments during the six-month period, compared to rates for the same period in 2008, as well as a decrease in the amount of cash available for investment. Due to current market conditions, we anticipate that these lower rates of return will continue for the foreseeable future.
At January 1, 2009, the Company had warrants to purchase 838,446 shares of common stock outstanding containing a "down-round" provision that did not qualify for the scope of exception from the provisions of SFAS No.133. On January 1, 2009, the fair value of these warrants was $2,689,110 and was reclassified from equity to a liability upon the adoption of EITF 07-5. The change in fair value of these warrants resulted in a $119,468 loss on the statement of operations for the six months ended June 30, 2009. There was no such loss for the same period of 2008. The Company will continue to report the warrants as a liability, with changes in fair value recorded in the statement of operations, until such time as these warrants are exercised or expire.
Liquidity and Capital Resources
As of June 30, 2009, we had cash and cash equivalents of $9,881,422 and short-term investments of $58,248,626, for a total of $68,130,048. This compares to cash and cash equivalents of $28,321,581 and short-term investments of $49,132,619, for a total of $77,454,200, as of December 31, 2008. The decrease in cash and cash equivalents and short-term investments of $9,324,152 was primarily due to the usage of cash in operating activities.
Cash used in operating activities was $8,798,154 for the six months ended June 30, 2009, compared to $5,528,958 for the same period in 2008. The increase in cash used in operating activities was due mainly to an increased net loss for the six months of 2009, compared to the same period in 2008.
Cash used in investing activities was $8,996,501 for the six months ended June 30, 2009. For the same period in 2008, cash provided by investing activities was $9,799,951. The increase in cash used in investing activities was due to the timing of short-term investment purchases and the fact that the Company's investment portfolio contains instruments with longer periods to maturity than in the past.
Cash used in financing activities was $645,504 for the six months ended June 30, 2009. For the same period in 2008, cash provided by financing activities was $1,398,413. In the first six months of 2009, we received proceeds of $198,970 from the exercise of options to purchase shares of our common stock. This compares to $2,148,183 in corresponding proceeds that we received during the same period of 2008.
Working capital was $56,869,966 as of June 30, 2009, compared to working capital of $64,600,256 as of December 31, 2008. Working capital decreased primarily due to the use of cash in operating activities. We anticipate, based on our internal forecasts and assumptions relating to our operations (including, among others, assumptions regarding our working capital requirements, the progress of our research and development efforts, the availability of sources of funding for our research and development work, and the timing and costs associated with the preparation, filing, prosecution, maintenance, defense and enforcement of our patents and patent applications), that we have sufficient cash, cash equivalents and short-term investments to meet our obligations for at least the next 12 months.
We believe that potential additional financing sources for us include long-term and short-term borrowings, public and private sales of our equity and debt securities and the receipt of cash upon the exercise of warrants and options. It should be noted, however, that additional funding may be required in the future for research, development and commercialization of our OLED technologies and materials, to obtain, maintain and enforce patents respecting these technologies and materials, and for working capital and other purposes, the timing and amount of which are difficult to ascertain. There can be no assurance that additional funds will be available to us when needed, on commercially reasonable terms or at all, particularly in the current economic environment.
Critical Accounting Policies
Refer to our Annual Report on Form 10-K for the year ended December 31, 2008, as amended, for a discussion of our critical accounting policies. There have been no changes in critical accounting policies to date in 2009.
Contractual Obligations
Refer to our Annual Report on Form 10-K for the year ended December 31, 2008, as amended, for a discussion of our contractual obligations. There have been no significant changes in contractual obligations to date in 2009.
Off-Balance Sheet Arrangements
Refer to our Annual Report on Form 10-K for the year ended December 31, 2008, as amended, for a discussion of off-balance sheet arrangements. As of June 30, 2009, we had no off-balance sheet arrangements.
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