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PANL > SEC Filings for PANL > Form 10-Q on 9-May-2012All Recent SEC Filings

Show all filings for UNIVERSAL DISPLAY CORP \PA\

Form 10-Q for UNIVERSAL DISPLAY CORP \PA\


9-May-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes above.

CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS

This discussion and analysis contains some "forward-looking statements." Forward-looking statements concern 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, 2011, as supplemented by disclosures, if any, 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. We derive our revenue from the following:

intellectual property and technology licensing;

sales of OLED materials for evaluation, development and commercial manufacturing; and

technology development and support, including government contract work and support provided to third parties for commercialization of their OLED products.

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 since our inception, resulting in an accumulated deficit of $215.1 million as of March 31, 2012.

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 activities;

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.


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RESULTS OF OPERATIONS

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

We had an operating loss of $1.6 million for the three months ended March 31, 2012, compared to an operating loss of $2.7 million for the three months ended March 31, 2011. The decrease in operating loss was due to the following:

an increase in revenue of $3.0 million; offset by

an increase in operating expenses of $1.8 million.

We had a net loss of $1.2 million (or $0.03 per basic and diluted share) for the three months ended March 31, 2012, compared to a net loss of $11.9 million (or $0.31 per basic and diluted share) for the three months ended March 31, 2011. In 2011, the net loss included an $8.9 million loss on stock warrant liability related to warrants that were previously recorded as a liability. In August 2011, all remaining outstanding stock warrants to purchase shares of our common stock were exercised.

Our revenues were $12.6 million for the three months ended March 31, 2012, compared to $9.6 million for the three months ended March 31, 2011. The increase in our overall revenue was primarily due to additional OLED material sales from the expanded adoption of our technology and materials in the marketplace by display manufacturers, particularly Samsung Mobile Display Co., Ltd. (SMD).

Material sales increased to $10.5 million for the three months ended March 31, 2012, compared to $4.5 million for the same period in 2011. Material sales relates to the sale of our OLED materials for incorporation into our customers' commercial OLED products, or for their OLED development and evaluation activities.

Material sales included sales of both phosphorescent emitter and host materials. Phosphorescent emitter sales were 81% of our total material sales for the three months ended March 31, 2012, compared to 95% of our total material sales for the three months ended March 31, 2011. Host material sales were 19% of our total material sales for the three months ended March 31, 2012, compared to 5% of our total material sales for the three months ended March 31, 2011. We believe we can participate in the host materials business due to our long experience in developing emitter materials, which are used together with host materials in the emissive layer of an OLED. However, our customers are not required to purchase our host materials in order to utilize our phosphorescent emitter materials, and the host material sales business is more competitive than the phosphorescent emitter material sales business. Thus, our long-term prospects for host material sales are uncertain.

We cannot accurately predict how long our phosphorescent emitter material sales or host material sales to particular customers will continue, as our customers 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.

Royalty and license fees decreased to $422,000 for the three months ended March 31, 2012, compared to $2.7 million for the three months ended March 31, 2011. A substantial portion of the decrease was due to the timing of royalty and license fee payments to be received under our patent license agreements with SMD. In August 2011 we entered into a patent license agreement with SMD which replaced and superseded the then existing patent license agreement. This patent license agreement with SMD runs through December 31, 2017.

Our new patent license agreement with SMD covers the manufacture and sale of specified OLED display products. Under the agreement, SMD has agreed to pay us a fixed license fee, payable in semi-annual installments over the agreement term. These installments increase on an annual basis over the term of the license agreement. The installment amounts replaced the quarterly royalty reporting structure in the prior patent license agreement. The installment amounts were determined through negotiation based on a number of factors, including, without limitation, estimates of SMD's OLED business growth as a percentage of published OLED market forecasts, the use of red and green phosphorescent materials in SMD's OLED display products, and appropriate royalty rates relating to SMD's practice under the licensed patents. Based upon the extended payment arrangement, such amounts are not considered fixed and determinable for revenue recognition purposes until such time the installments become due and payable. As a result, the recognition of license fees under our new agreement with SMD is scheduled to be taken in the second and fourth quarter of each year; therefore our quarterly license fees will fluctuate accordingly, depending on the timing of such payments. No such payments became due in the three months ended March 31, 2012.

At the same time we entered into the August 2011 patent license agreement with SMD, we also entered into a new supplemental material purchase agreement. Under the August 2011 supplemental material purchase agreement, SMD agreed


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to purchase from us a minimum dollar amount of phosphorescent emitter materials for use in the manufacture of licensed products. This minimum purchase commitment is subject to SMD's requirements for phosphorescent emitter materials and our ability to meet these requirements over the term of the supplemental agreement. The minimum purchase amounts increase on an annual basis over the term of the supplemental agreement. These amounts were determined through negotiation based on a number of factors, including, without limitation, estimates of SMD's OLED business growth as a percentage of published OLED market forecasts and SMD's projected minimum usage of red and green phosphorescent emitter materials over the term of the agreement.

Cost of material sales increased to $1.1 million for the three months ended March 31, 2012, compared to $103,000 for the three months ended March 31, 2011, based on the aforementioned increase in material sales. Cost of material sales includes the cost of producing materials that have been classified as commercial and shipping costs for such materials, but excludes the cost of producing certain materials, which cost has already been included in research and development expense. Commercial materials are materials that have been validated by us for use in commercial OLED products.

Depending on the amounts, timing and stage of materials being classified as commercial, we expect cost of materials sales to fluctuate from quarter to quarter. As a result of these timing issues, and due to increased sales of commercial materials, cost of material sales increased for the three months ended March 31, 2012, compared to the same period in 2011. For the three months ended March 31, 2012 and 2011, costs associated with $7.5 million and $3.1 million, respectively, of material sales relating to commercial materials were included in cost of material sales.

We incurred research and development expenses of $6.7 million for the three months ended March 31, 2012, compared to $6.6 million for the three months ended March 31, 2011. Although total expenses remained relatively consistent over the corresponding periods, the following significant changes occurred:

increased employee costs of $351,000, due primarily to increased salaries, costs associated with retirement benefits and stock-based compensation for certain executive officers;

increased costs of $214,000 related to outsourced research and development efforts;

decreased costs of $421,000 related to stock-based compensation for members of our Scientific Advisory Board.

Research and development expenses for the three months ended March 31, 2012 were reduced by $603,000 due to the reversal of certain compensation accruals, resulting from actual payments made during the first quarter of 2012 being lower than previously estimated at December 31, 2011.

Selling, general and administrative expenses were $4.3 million for the three months ended March 31, 2012, compared to $3.9 million for the three months ended March 31, 2011. The overall increase in these costs was driven in part by increased employee costs, commercial activities, professional fees and non-cash expenses related to stock-based compensation. Selling, general and administrative expenses for the three months ended March 31, 2012 were reduced by $315,000 due to the reversal of certain compensation accruals, resulting from actual payments made during the first quarter of 2012 being lower than previously estimated at December 31, 2011.

Patent costs increased to $1.9 million for the three months ended March 31, 2012, compared to $1.6 million for the three months ended March 31, 2011. The increase was mainly due to increased costs associated with our defense of certain ongoing and new challenges to our issued patents, as well as the timing of prosecution and maintenance costs associated with a number of patents and patent applications.

Royalty and license expense increased to $250,000 for the three months ended March 31, 2012, compared to $202,000 for the three months ended March 31, 2011. The increase consisted mainly of royalties incurred under our amended license agreement with Princeton, USC and Michigan, resulting from increased revenues. See Note 5 in Notes to Consolidated Financial Statements for further discussion.

Interest income increased to $357,000 for the three months ended March 31, 2012, compared to $96,000 for the three months ended March 31, 2011. The increase was mainly attributable to interest earned on higher average cash and investment balances as a result of proceeds received from the completion of our public offering in March 2011.

At March 31, 2011, we had outstanding warrants to purchase shares of common stock, which warrants contained a "down-round" provision requiring liability classification. The change in fair value of these warrants during the period resulted in an $8.9 million non-cash loss on our statement of comprehensive loss for the three months ended March 31, 2011. In August 2011, all remaining outstanding stock warrants to purchase shares of our common stock were exercised.


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Samsung SMD has been required to withhold tax upon payment of royalties to us at a rate of 16.5%. For the three months ended March 31, 2011, foreign income taxes of $297,000 were withheld in connection with royalties paid by SMD. No such payments occurred in the three months ended March 31, 2012. We anticipate the amount of withholding taxes to increase as associated payments received from SMD increase in the future.

Liquidity and Capital Resources

As of March 31, 2012, we had cash and cash equivalents of $144.3 million and short-term investments of $194.3 million, for a total of $338.6 million. This compares to cash and cash equivalents of $111.8 million and short-term investments of $234.3 million, for a total of $346.1 million, as of December 31, 2011.

Cash used in operating activities was $2.0 million for the three months ended March 31, 2012, compared to cash provided of $1.6 million for the same period in 2011. The increase in cash used in operating activities was primarily due to the following:

the impact of the timing of payment of accounts payable and accrued expenses of $2.2 million;

the impact of the timing of inventory purchases of $1.6 million; and

the impact of the timing of payment for other current assets $1.2 million; offset partially by

a decrease in net loss of $912,000, which amount excludes the impact of non-cash items; and

the impact of the timing of receipt of accounts receivable of $756,000.

Cash provided from investing activities was $37.3 million for the three months ended March 31, 2012, compared to cash used of $14.9 million for the same period in 2011. The increase in cash provided from investing activities was mainly due to net sales of investments as a result of the completion of our public offering described below.

Cash used in financing activities was $2.9 million for the three months ended March 31, 2012, compared to cash provided of $251.0 million for the same period in 2011. In March 2011, the Company completed a public offering of its common stock. For the three months ended March 31, 2012, we received proceeds of $541,000 from the exercise of options and warrants to purchase shares of our common stock, compared to proceeds of $5.1 million from the exercise of options and warrants to purchase shares of our common stock for the same period in 2011.

Working capital was $338.0 million as of March 31, 2012, compared to $342.8 million as of December 31, 2011.

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 outstanding stock 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, 2011, for a discussion of our critical accounting policies. There have been no changes in critical accounting policies to date in 2012.


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Contractual Obligations

Refer to our Annual Report on Form 10-K for the year ended December 31, 2011 for a discussion of our contractual obligations.

Off-Balance Sheet Arrangements

Refer to our Annual Report on Form 10-K for the year ended December 31, 2011 for a discussion of off-balance sheet arrangements. As of March 31, 2012, we had no off-balance sheet arrangements.

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