# Universal Display Corp \\pa\\: Form 10-Q for the period ended Sep 30, 2010

- Company: [Universal Display Corp \\pa\\](/companies/oled.md) (CIK 1005284)
- Form: 10-Q
- Filed: 2010-11-04
- Accepted by EDGAR: Nov 4, 2010, 20:07 ET
- Period: 2010-09-30
- Accession: 0001005284-10-000097
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1005284/000100528410000097/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005284/000100528410000097/

## Management's discussion and analysis

As filed, 21,633 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 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 and solid-state lighting 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. Over time, 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 $211,709,701 as of September 30, 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 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.

18

### RESULTS OF OPERATIONS

### Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

We had an operating loss of $3,882,545 for the three months ended September 30, 2010, compared to an operating loss of $3,792,776 for the three months ended September 30, 2009. The operating loss remained relatively consistent over these corresponding periods, however there was:

- an increase in operating expenses of $2,000,237; offset by
- an increase in revenue of $1,910,468.

We had a net loss of $7,186,570 (or $0.19 per basic and diluted share) for the three months ended September 30, 2010, compared to a net loss of $4,672,847 (or $0.13 per basic and diluted share) for the three months ended September 30, 2009. The increase in net loss was primarily due to an increase in loss on stock warrant liability of $2,360,829.

Our revenues were $7,055,861 for the three months ended September 30, 2010, compared to $5,145,393 for the three months ended September 30, 2009.

Commercial revenue increased to $2,836,587 for the three months ended September 30, 2010, compared to $1,621,416 for the three months ended September 30, 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 $834,400 in commercial chemical revenue; and
- an increase of $408,299 in royalty revenue, which mainly represented royalties received under our patent license agreement with Samsung SMD Co., Ltd. (“Samsung SMD”).

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.

In July 2010, we entered into an amendment to our patent license agreement with Samsung SMD. The amendment extended the term of this agreement for three months, through September 30, 2010. In October 2010, we entered into another amendment extending the term of the agreement through December 31, 2010. As of the date of this filing, we are continuing to negotiate with Samsung SMD on the terms of a new business arrangement.

Developmental revenue increased to $4,219,274 for the three months ended September 30, 2010, compared to $3,523,977 for the three months ended September 30, 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:

- an increase of $2,049,145 in development chemical revenue, due mostly to increased purchases of development chemicals by customers that are preparing for commercial production; offset by
- a decrease of $1,517,524 in technology development revenue, resulting primarily from the recognition of $1,500,000 of revenue previously deferred as a result of the dissolution of Kyocera Corporation’s (“Kyocera”) OLED subsidiary in the third quarter of 2009, for which no corresponding revenue was recognized in the third quarter of 2010.

Cost of chemicals sold increased to $1,258,435 for the three months ended September 30, 2010, compared to $277,218 for the three months ended September 30, 2009, due to the aforementioned increase in chemical sales.

Selling, general and administrative expenses were $3,452,815 for the three months ended September 30, 2010, compared to $2,656,005 for the three months ended September 30, 2009. The increase was mainly due to:

- increased employee costs of $419,218, due mainly to stock compensation to certain executive officers; and
- expenses of $342,082 related to net periodic benefit costs of the Universal Display Corporation Supplemental Executive Retirement Plan (“SERP”) for certain executive officers, which was implemented in 2010.

Interest income decreased to $64,373 for the three months ended September 30, 2010, compared to $121,927 for the three months ended September 30, 2009. The decrease was mainly attributable to decreased rates of return on investments during three months ended September 30, 2010, compared to rates of return during the same period in 2009. Due to current market conditions, we anticipate that these lower rates of return will continue for the foreseeable future.

At September 30, 2010, we had outstanding warrants to purchase 744,452 shares of common stock, which warrants contain a “down-round” provision requiring liability classification. The change in fair value of these warrants during the period resulted in a $3,362,441 non-cash loss on our statement of operations for the three months ended September 30, 2010, compared to a $1,001,612 non-cash loss for the three months ended September 30, 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 either exercised or expire in August 2011.

### Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

We had an operating loss of $10,016,021 for the nine months ended September 30, 2010, compared to an operating loss of $16,097,137 for the nine months ended September 30, 2009. The decrease in operating loss was due to:

- an increase in revenue of $8,813,735; offset by
- an increase in operating expenses of $2,732,619.

We had a net loss of $14,600,996 (or $0.39 per basic and diluted share) for the nine months ended September 30, 2010, compared to a net loss of $16,657,624 (or $0.46 per basic and diluted share) for the nine months ended September 30, 2009. The decrease in net loss was primarily due to:

- a decrease in operating loss of $6,081,116; and
- an income tax benefit of $464,162; offset by
- an increased loss on stock warrant liability of $4,110,546; and
- a decrease in interest income of $362,767.

Our revenues were $19,749,340 for the nine months ended September 30, 2010, compared to $10,935,605 for the nine months ended September 30, 2009.

Commercial revenue increased to $6,618,626 for the nine months ended September 30, 2010, compared to $4,229,609 for the nine months ended September 30, 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 $1,148,205 in commercial chemical revenue; and
- an increase of $1,029,561 in royalty revenue, which mainly represented royalties received under our patent license agreement with Samsung SMD.

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.

In July 2010, we entered into an amendment to our patent license agreement with Samsung SMD. The amendment extended the term of this agreement for three months, through September 30, 2010. In October 2010, we entered into another amendment extending the term of the agreement through December 31, 2010. As of the date of this filing, we are continuing to negotiate with Samsung SMD on the terms of a new business arrangement.

Developmental revenue increased to $13,130,714 for the nine months ended September 30, 2010, compared to $6,705,996 for the nine months ended September 30, 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 an increase of $5,065,839 in development chemical revenue, largely due to increased purchases of development chemicals by customers who are preparing for commercial production.

Cost of chemicals sold increased to $2,736,637 for the nine months ended September 30, 2010, compared to $766,396 for the nine months ended September 30, 2009, based on the aforementioned increase in chemical sales.

We incurred research and development expenses of $13,999,438 for the nine months ended September 30, 2010, compared to $15,482,462 for the nine months ended September 30, 2009. The decrease was primarily due to decreased costs of $1,644,226 incurred under our agreement with PPG Industries.

Selling, general and administrative expenses were $9,719,643 for the nine months ended September 30, 2010, compared to $7,994,021 for the nine months ended September 30, 2009. The increase was mainly due to:

- increased employee costs of $1,021,678, due primarily to increased salaries and stock compensation to certain executive officers; and
- expenses of $684,163 related to net periodic benefit costs of the SERP for certain executive officers, the SERP having been implemented in 2010.

Interest income decreased to $201,153 for the nine months ended September 30, 2010, compared to $563,920 for the nine months ended September 30, 2009. The decrease was mainly attributable to decreased rates of return on investments during the nine months ended September 30, 2010, compared to rates of return during the same period in 2009. Due to current market conditions, we anticipate that these lower rates of return will continue for the foreseeable future.

At September 30, 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 $5,231,626 non-cash loss on our statement of operations for the nine months ended September 30, 2010, compared to a $1,121,080 non-cash loss for the nine months ended September 30, 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 either exercised or expire in August 2011.

During the nine months ended September 30, 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 September 30, 2010, we had cash and cash equivalents of $8,202,740 and short-term investments of $56,804,462, for a total of $65,007,202. 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 increase in cash and cash equivalents and short-term investments of $1,133,121 was primarily due to the receipt of proceeds from the exercise of options and warrants, offset by cash used in operations and the payment of withholding taxes related to stock-based employee compensation.

Cash used in operating activities was $4,973,747 for the nine months ended September 30, 2010, compared to $11,831,763 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 $6,733,575, which amount excludes the impact of non-cash items;
- the impact of the timing of payment of accounts payable and accrued expenses of $938,232; and
- the impact of the SERP of $684,164; offset by
- the impact of the timing of receipt of accounts receivable of $1,916,184.

Cash used in investing activities was $15,736,297 for the nine months ended September 30, 2010, compared to $6,177,729 for the same period in 2009. The increase was mainly due to more investments purchased during the first nine months of 2010, compared to investments purchased during the same period in 2009.

Cash provided by financing activities was $6,211,658 for the nine months ended September 30, 2010, compared to $296,696 for the same period in 2009. For the nine months ended September 30, 2010, we received proceeds of $7,167,562 from the exercise of options and warrants to purchase shares of our common stock and $191,618 in proceeds related to our ESPP, compared to proceeds of $1,102,335 from the exercise of options and warrants to purchase shares of our common stock and $52,887 in proceeds related to our ESPP for the same period in 2009. These amounts were offset by the payment of $1,147,522 in withholding taxes related to stock-based compensation during the nine months ended September 30, 2010, compared to $858,526 used for the payment of withholding taxes for the same period in 2009.

Working capital was $49,667,468 as of September 30, 2010, which included a stock warrant liability of $8,951,791 compared to $53,663,617 as of December 31, 2009. The stock warrant liability will either expire or be exercised by August 2011, resulting in no cash outlay from the Company. Working capital, excluding the stock warrant liability, was $58,619,259 as of September 30, 2010. The increase in working capital, excluding the stock warrant liability, was mainly due to increased cash, cash equivalents and investments, an increase in accounts receivable and a reduction of the current portion of deferred license fees and deferred revenues as of September 30, 2010, as compared to 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 outstanding 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

### Retirement Plan

We have recorded a significant retirement plan benefit liability that is developed from actuarial valuations. The determination of our retirement plan benefit liability requires key assumptions regarding discount rates, as well as rates of compensation increases, retirement dates and life expectancies used to determine the present value of future benefit payments. We determine these assumptions in consultation with, and after input from, our actuaries and considering our experience and expectations for the future. Actual results for a given period will often differ from assumed amounts because of economic and other factors.

The discount rate reflects the estimated rate at which the benefit liabilities could be settled at the end of the year. The discount rate is determined by selecting a single rate that produces a result equivalent to discounting expected benefit payments from the plans using the Citigroup Above-Median Pension Discount Curve (the “Curve”). Based upon this analysis using the Curve, we used a discount rate to measure our retirement plan benefit liability of 6.13% at April 1, 2010. A change of 25 basis points in the discount rate would increase or decrease the expense on an annual basis by approximately $16,000.

Refer to our Annual Report on Form 10-K for the year ended December 31, 2009, as amended, for a discussion of our other critical accounting policies.

### Contractual Obligations

As of September 30, 2010, we had the following estimated future benefit payments related to the SERP:

|  | Payments due by period Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Estimated retirement plan benefit payments | $19,093,250 | $— | $545,250 | $934,000 | $17,614,000 |

Refer to our Annual Report on Form 10-K for the year ended December 31, 2009, as amended, for a discussion of our other contractual obligations.

### Off-Balance Sheet Arrangements

Refer to our Annual Report on Form 10-K for the year ended December 31, 2009, as amended, for a discussion of off-balance sheet arrangements. As of September 30, 2010, we had no off-balance sheet arrangements.

## Market risk

As filed, 1,445 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 our stock price and volatility of our common stock. Our primary market risk exposure to the stock warrant liability is to changes in our 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, 1,546 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 September 30, 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 nine months ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 194 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, as amended.

Filed Nov 4, 2010.
Source: SEC EDGAR, the filing index for accession 0001005284-10-000097. Last ingested by Listed: Nov 5, 2026, 15:33 ET. No prices; not investment advice.