# Universal Display Corp \\pa\\: Form 10-Q for the period ended Mar 31, 2010

- Company: [Universal Display Corp \\pa\\](/companies/oled.md) (CIK 1005284)
- Form: 10-Q
- Filed: 2010-05-10
- Accepted by EDGAR: May 10, 2010, 20:05 ET
- Period: 2010-03-31
- Accession: 0001005284-10-000041
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1005284/000100528410000041/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005284/000100528410000041/

## Management's discussion and analysis

As filed, 13,751 characters.

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

### CAUTIONARY STATEMENT

### CONCERNING FORWARD-LOOKING STATEMENTS

This discussion and analysis contains some “forward-looking statements.” Forward-looking statements concern our possible or assumed future results of operations, including descriptions of our business strategies and customer relationships. These statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “seek,” “will,” “may” or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate in these circumstances.

As you read and consider this discussion and analysis, you should not place undue reliance on any forward-looking statements. You should understand that these statements involve substantial risk and uncertainty and are not guarantees of future performance or results. They depend on many factors that are discussed further in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, 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 PHOLED and other OLED technologies 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 $200,087,036 as of March 31, 2010.

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 March 31, 2010 Compared to Three Months Ended March 31, 2009

We had an operating loss of $4,224,332 for the three months ended March 31, 2010, compared to an operating loss of $5,993,599 for the three months ended March 31, 2009. The decrease in operating loss was due to:

- an increase in revenue of $1,412,792; and
- a decrease in operating expenses of $356,474.

We had a net loss of $2,978,331 (or $0.08 per basic and diluted share) for the three months ended March 31, 2010, compared to a net loss of $5,569,599 (or $0.15 per basic and diluted share) for the three months ended March 31, 2009. The decrease in net loss was primarily due to:

- an increase in gain on stock warrant liability of $540,001;
- an income tax benefit of $464,162; and
- a decrease in total operating loss of $1,769,266.

Our revenues were $4,246,650 for the three months ended March 31, 2010, compared to $2,833,858 for the three months ended March 31, 2009.

Commercial revenue increased to $1,830,147 for the three months ended March 31, 2010, compared to $1,369,137 for the three months ended March 31, 2009. 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. The increase in commercial revenue was primarily due to the following:

- an increase of $287,698 in royalty revenue, which mainly represented royalties received under our patent license agreement with Samsung SMD Co., Ltd. (“Samsung SMD”);
- an increase of $106,760 in license fees, principally due to a license agreement we entered into with Showa Denko K.K. in December 2009 and license fees received in connection with increased sales of our materials to a customer; and
- an increase of $42,235 in commercial chemical revenue.

We cannot accurately predict how long our material sales to particular 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.

Developmental revenue increased to $2,416,503 for the three months ended March 31, 2010, compared to $1,464,721 for the three months ended March 31, 2009. Developmental revenue relates to OLED technology and material development and evaluation activities for which we are paid, and includes contract research revenue, development chemical revenue and technology development revenue. The increase in developmental revenue was primarily due to the following:

- an increase of $745,822 in development chemical revenue, mainly due to increased purchases of development chemicals by a customer; and
- an increase of $236,316 in contract research revenue, principally to the timing of work performed and costs incurred in connection with existing government contracts, as well as an overall increase in value of our government contracts.

Cost of chemicals sold increased to $460,786 for the three months ended March 31, 2010, compared to $170,987 for the three months ended March 31, 2009, based on the aforementioned increase in chemical sales.

We incurred research and development expenses of $4,466,631 for the three months ended March 31, 2010, compared to $5,219,062 for the three months ended March 31, 2009. The decrease was mainly due to:

- decreased costs of $941,820 incurred under our agreement with PPG Industries; and
- decreased costs of $91,649 under our sponsored research agreements; partially offset by
- increased employee costs of $215,596 and an overall increase in other operating costs of $65,442.

Selling, general and administrative expenses were $2,642,246 for the three months ended March 31, 2010, compared to $2,622,945 for the three months ended March 31, 2009. Selling, general and administrative expenses remained relatively consistent over these corresponding periods.

Interest income decreased to $75,655 for the three months ended March 31, 2010, compared to $253,400 for the three months ended March 31, 2009. The decrease was mainly attributable to decreased rates of return on investments during three months ended March 31, 2010, compared to rates of return during 2009. Due to current market conditions, we anticipate that these lower rates of return will continue for the foreseeable future.

At March 31, 2010, we had outstanding warrants to purchase 744,452 shares of common stock, which contain a “down-round” provision requiring liability classification. The change in fair value of these warrants as well as the expiration of warrants with a similar provision during the period resulted in a $713,243 non-cash gain on our statement of operations for the three months ended March 31, 2010, compared to a $173,242 non-cash gain for the three months ended March 31, 2009. We 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.

During the three months ended March 31, 2010, we sold approximately $3.8 million of our state-related income tax net operating losses (NOLs) and $194,088 of our research and development tax credits under the New Jersey Technology Tax Certificate Transfer Program. We received proceeds of $464,162 from our sale of these NOLs and research and development tax credits, and we recorded these proceeds as an income tax benefit. In past years, we completed our sales of state-related tax NOLs during the fourth quarter of the year.

### Liquidity and Capital Resources

As of March 31, 2010, we had cash and cash equivalents of $7,553,643 and short-term investments of $55,467,352, for a total of $63,020,995. This compares to cash and cash equivalents of $22,701,126 and short-term investments of $41,172,955, for a total of $63,874,081, as of December 31, 2009. The decrease in cash and cash equivalents and short-term investments of $853,086 was primarily due to the usage of cash in operations and financing activities.

Cash used in operating activities was $442,848 for the three months ended March 31, 2010, compared to $4,505,171 for the same period in 2009. The decrease in cash used in operating activities was mainly due to the following:

- a decrease in net loss of $2,064,384, which amount excludes the impact of non-cash items;
- the receipt of $925,000 in cash payments during the three months ended March 31, 2010 for license rights and as advanced payments under a government contract, compared to $66,667 in corresponding cash payments received during the three months ended March 31, 2009;
- the impact of the timing of payment of accounts payable and accrued expenses of $776,653; and
- the impact of the timing of receipt of accounts receivable of $307,872.

Cash used in investing activities was $14,373,589 for the three months ended March 31, 2010, compared to $16,920,046 for the same period in 2009. The decrease is mainly due to the use of cash to finance operations.

Cash used in financing activities was $331,046 for the three months ended March 31, 2010, compared to $831,877 for the same period in 2009. In the first three months of 2010, we used $1,116,387 for the payment of withholding taxes related to stock based compensation, compared $831,877 used for corresponding payments in the first three months of 2009. This was partially offset by the receipt of proceeds of $722,682 from the exercise of options and warrants to purchase shares of our common stock during the first three months of 2010 and $62,659 in proceeds related to our ESPP.

Working capital was $53,480,575 as of March 31, 2010, compared to $53,663,617 as of December 31, 2009. 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, 2009, for a discussion of our critical accounting policies. There have been no changes in critical accounting policies to date in 2010.

### Contractual Obligations

Refer to our Annual Report on Form 10-K for the year ended December 31, 2009, for a discussion of our contractual obligations. There have been no changes in our contractual obligations to date in 2010.

### Off-Balance Sheet Arrangements

Refer to our Annual Report on Form 10-K for the year ended December 31, 2009, for a discussion of off-balance sheet arrangements. As of March 31, 2010, we had no off-balance sheet arrangements.

## Market risk

As filed, 1,440 characters.

We do not utilize financial instruments for trading purposes and hold no derivative financial instruments, other financial instruments or derivative commodity instruments that could expose us to significant market risk other than our short-term investments and our stock warrant liability disclosed in Note 4 to the consolidated financial statements included herein. We invest in investment grade financial instruments to reduce our exposure. Our primary market risk exposure with regard to financial instruments is to changes in interest rates, which would impact interest income earned on investments.

We record as a liability the fair value of warrants to purchase 744,452 shares of our common stock. The fair value of the stock warrant liability is determined using the Black-Scholes option valuation model and is therefore sensitive to changes in the stock price and volatility of our common stock. Our primary market risk exposure to the stock warrant liability is to changes in the stock price, which would impact the valuation of the stock warrant liability. Increases in our stock price or the expected volatility of our common stock would increase the fair value of the stock warrant liability and therefore result in an additional loss on the statement of operations. Decreases in these items would decrease the fair value of the stock warrant liability and therefore result in an additional gain on the statement of operations.

## Controls and procedures

As filed, 1,539 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2010. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this report, are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. However, a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 182 characters.

There have been no material changes to the risk factors previously discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009.

Filed May 10, 2010.
Source: SEC EDGAR, the filing index for accession 0001005284-10-000041. Last ingested by Listed: Nov 5, 2026, 15:33 ET. No prices; not investment advice.