# Universal Display Corp \\pa\\: Form 10-Q for the period ended Sep 30, 2011

- Company: [Universal Display Corp \\pa\\](/companies/oled.md) (CIK 1005284)
- Form: 10-Q
- Filed: 2011-11-08
- Accepted by EDGAR: Nov 8, 2011, 21:26 ET
- Period: 2011-09-30
- Accession: 0001005284-11-000102
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1005284/000100528411000102/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005284/000100528411000102/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-07-01 to 2011-09-30 | $21.8m | us-gaap:Revenues |
| Revenue | 9 months, 2011-01-01 to 2011-09-30 | $42.6m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2011-07-01 to 2011-09-30 | $2.4m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2011-01-01 to 2011-09-30 | $2.7m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2011-07-01 to 2011-09-30 | $6.1m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2011-01-01 to 2011-09-30 | $18.2m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2011-07-01 to 2011-09-30 | $5.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2011-01-01 to 2011-09-30 | $13.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2011-07-01 to 2011-09-30 | $5.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2011-01-01 to 2011-09-30 | $2.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2011-07-01 to 2011-09-30 | $13.3k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2011-01-01 to 2011-09-30 | $31.3k | us-gaap:InterestExpense |
| Income tax | 3 months, 2011-07-01 to 2011-09-30 | $535.6k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2011-01-01 to 2011-09-30 | $1.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-07-01 to 2011-09-30 | $6.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2011-01-01 to 2011-09-30 | −$2.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-07-01 to 2011-09-30 | $0.12 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2011-01-01 to 2011-09-30 | −$0.06 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-07-01 to 2011-09-30 | $0.13 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2011-01-01 to 2011-09-30 | −$0.06 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-07-01 to 2011-09-30 | 46,799,557 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2011-01-01 to 2011-09-30 | 43,101,933 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2011-01-01 to 2011-09-30 | $7.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2011-01-01 to 2011-09-30 | $2.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2011-09-30 | $67.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-09-30 | $353.7m | us-gaap:AssetsCurrent |
| Total assets | at 2011-09-30 | $365.2m | us-gaap:Assets |
| Current liabilities | at 2011-09-30 | $18.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-09-30 | $29.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2011-09-30 | $335.9m | us-gaap:StockholdersEquity |
| Shares outstanding | at 2011-09-30 | 46,026,058 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 38,877 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, 2010, as supplemented by any disclosures in Item 1A of Part II of our Quarterly Report for the quarter ended March 31, 2011, and 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 commercializing 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 and selling our proprietary materials will become the dominant elements of our revenue stream.

We have made significant progress over the past few years developing and commercializing our PHOLED™ and other OLED technologies and materials. Nevertheless, we have incurred significant losses since our inception, resulting in an accumulated deficit of $219,604,845 as of September 30, 2011.

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.

### RESULTS OF OPERATIONS

### Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

We had operating income of $5,935,069 for the three months ended September 30, 2011, compared to an operating loss of $3,882,545 for the three months ended September 30, 2010. The change to an operating profit from an operating loss was due to the following:

- an increase in revenue of $14,721,279; offset by
- an increase in operating expenses of $4,903,665.

We had net income of $5,989,426 (or $0.13 per basic share and $0.12 per diluted share) for the three months ended September 30, 2011, compared to a net loss of $7,186,570 (or $0.19 per basic and diluted share) for the three months ended September 30, 2010.

The change to net income from a net loss was due mainly to the increase in operating income of $9,817,614, as well as a gain on stock warrant liability of $239,562 for the three months ended September 30, 2011, compared to a loss on stock warrant liability of $3,362,441 for the same period in 2010.

Our revenues were $21,777,140 for the three months ended September 30, 2011, compared to $7,055,861 for the three months ended September 30, 2010.

Commercial revenue increased to $9,881,533 for the three months ended September 30, 2011, compared to $2,836,587 for the three months ended September 30, 2010. 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 $3,464,613 in commercial chemical revenue, of which $2,870,748 represents an increase in sales of our host materials, as discussed in further detail below; and
- an increase of $3,560,628 in royalty and license revenue, which mainly represents license fees received under our license agreement with Samsung Mobile Display Co., Ltd. (Samsung SMD) executed in August 2011.

On April 19, 2005, we entered into an OLED Patent License Agreement and an OLED Supplemental License Agreement with Samsung SDI Co., Ltd. (Samsung SDI). Under the license agreement, we granted Samsung SDI Co. license rights under various patents that we owned or controlled for Samsung SDI to make and sell specified OLED display products. In consideration of this license grant, Samsung SDI Co. agreed to pay us up front license fees and running royalties on its sales of these display products. The 2005 agreements had terms that ran through June 30, 2010.

Effective as of September 5, 2008, the 2005 agreements were assigned by Samsung SDI to Samsung SMD, a subsidiary of Samsung SDI, in connection with Samsung SDI’s transfer of all its OLED assets and liabilities to Samsung SMD. In July 2010, we entered into an amendment extending the terms of the 2005 agreements for three months. We subsequently entered into further amendments extending the terms of the 2005 agreements for additional three-month periods through September 30, 2011.

On August 22, 2011, we entered into a new OLED Patent License Agreement and a new Supplemental OLED Material Purchase Agreement with Samsung SMD. These agreements replaced the 2005 agreements in their entirety, effectively terminating the 2005 agreements. The 2011 agreements have terms that run through December 31, 2017.

Under the 2011 license agreement, we granted Samsung SMD license rights under various patents that we owned or controlled for Samsung SMD to manufacture and sell specified OLED display products. In consideration of the license grant, Samsung SMD agreed to pay us a fixed license fee, payable in installments over the agreement term. These installments increase on an annual basis over the term of the license agreement. The installment amounts were determined through negotiation based on a number of factors, including, without limitation, estimates of Samsung SMD’s OLED business growth as a percentage of published OLED market forecasts, the use of red and green phosphorescent materials in Samsung SMD’s OLED display products, and appropriate royalty rates relating to Samsung SMD’s practice under the licensed patents. For the three months and nine months ended September 30, 2011, we received and recognized as revenue $3,246,315 in license fees from Samsung SMD under the 2011 license agreement.

Pursuant to the 2011 supplemental agreement, Samsung SMD agreed to purchase from us a minimum dollar amount of phosphorescent materials for use in the manufacture of licensed products. This minimum purchase commitment is subject to us being able to supply Samsung SMD with sufficient material to meet its requirements over the agreement term. The minimum purchase amounts increase on an annual basis over the term of the supplemental agreement. The minimum purchase amounts were determined through negotiation based on a number of factors, including, without limitation, estimates of Samsung SMD’s OLED business growth as a percentage of published OLED market forecasts and Samsung SMD’s projected minimum usage of red and green phosphorescent emitter materials over the term of the agreement.

Commercial chemical revenue for the three months ended September 30, 2011 included revenue received from sales of both phosphorescent emitter and host materials. Host material sales were approximately 31% of our total commercial chemical revenue for this period, compared to no commercial chemical revenue from host material sales for the corresponding period in 2010. We believe that host material sales can enhance our phosphorescent emitter material sales business. However, the host material business is more competitive than the phosphorescent emitter material sales business, and 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.

Developmental revenue increased to $11,895,607 for the three months ended September 30, 2011, compared to $4,219,274 for the three months ended September 30, 2010. 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 due primarily to an increase of $7,512,138 in development chemical revenue, of which $4,275,236 represents an increase in sales of our host materials, mainly due to increased purchases of development chemicals by customers that are preparing for commercial production.

Cost of chemicals sold increased to $2,405,493 for the three months ended September 30, 2011, compared to $329,629 for the three months ended September 30, 2010. Cost of chemicals sold 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 commercial materials which costs have already been included in research and development expense. Cost of chemicals sold does not include costs associated with producing materials that have not yet been classified as commercial, which costs are included in research and development expenses. Depending on the timing and stage of materials being classified as commercial, we expect the cost of chemicals for these materials to fluctuate from quarter to quarter. As a result of these timing issues, and due to increased sales of commercial chemicals, cost of chemicals sold increased for the three months ended September 30, 2011 compared to the same period in 2010. During the quarter, costs associated with $4,146,800 of development chemical sales related to materials classified as commercial were included in cost of sales.

We incurred research and development expenses of $6,079,433 for the three months ended September 30, 2011, compared to $5,760,105 for the three months ended September 30, 2010. Although total expenses remained relatively consistent over the corresponding periods, the following significant changes occurred:

- employee costs increased by $599,918, due mainly to new employees, increased salaries and stock compensation for certain executive officers;
- development costs with PPG Industries decreased by $520,939; and
- amortization costs decreased by $372,082, due to certain acquired technology being fully amortized as of December 31, 2010.

Selling, general and administrative expenses were $4,957,085 for the three months ended September 30, 2011, compared to $3,452,815 for the three months ended September 30, 2010. The overall increase in these costs was driven in part by increased commercial activities and non-cash expenses related to stock compensation and in part by costs incurred to establish new subsidiaries in Hong Kong, Korea and Japan. Specifically, we incurred increased costs in the following areas:

- increased employee costs of $324,496, due mainly to increased salaries and stock compensation for certain executive officers;
- increased general legal fees of $305,629, due in large part to expanded licensing negotiations;
- increased international consulting fees of $267,008 related to increased revenues; and
- costs of $138,813 resulting from the incorporation and commencement of operations for certain of our foreign subsidiaries.

Patent costs increased to $1,938,143 for the three months ended September 30, 2011, compared to $1,177,383 for the three months ended September 30, 2010. The increase was mainly due to increased costs associated with our defense of certain ongoing and new patent challenges to our issued patents, as well as the timing of prosecution and maintenance costs associated with a number of patents and patent applications.

Interest income increased to $363,700 for the three months ended September 30, 2011, compared to $64,373 for the three months ended September 30, 2010. 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.

In August 2011, all remaining outstanding stock warrants to purchase shares of our common stock were exercised, and we received $2,948,463 in proceeds for issuing 214,746 common shares based on the exercise of these warrants. The warrants, which contained a “down-round” provision, were previously recorded as a liability. The change in fair value of the warrants during the period prior to the exercise date resulted in a $239,562 non-cash gain on our statement of operations for the three months ended September 30, 2011, compared to a $3,362,441 non-cash loss for the three months ended September 30, 2010.

For the three months ended September 30, 2011, we incurred an income tax expense of $535,642. No corresponding expense was incurred for the three months ended September 30, 2010. We filed for and were granted a five-year exemption from withholding tax on royalties and license fees received from Samsung SMD under our 2005 license agreement as part of a tax incentive program in Korea. The exemption was granted in May 2005 and remained in effect until May 2010. Since then, Samsung SMD has been required to withhold tax upon payment of royalties to us. This is also the case under the 2011 license agreement that we entered into with Samsung SMD in August 2011.

In 2011 and 2010, the withholding tax rate for royalties and license fees paid by Samsung SMD was 16.5%. For the three months ended September 30, 2011, foreign income taxes of $535,642 were withheld in connection with these payments. We anticipate the amount of withholding taxes to increase as license fees received from Samsung SMD increase in the future.

### Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

We had operating income of $2,120,293 for the nine months ended September 30, 2011, compared to an operating loss of $10,016,021 for the nine months ended September 30, 2010. The change from an operating loss to an operating profit was due to the following:

- an increase in revenue of $22,880,755; offset by
- an increase in operating expenses of $10,744,441.

We had a net loss of $2,578,730 (or $0.06 per basic and diluted share) for the nine months ended September 30, 2011, compared to a net loss of $14,600,996 (or $0.39 per basic and diluted share) for the nine months ended September 30, 2010. The decrease in net loss was mainly due to the following:

- the increase in operating income of $12,136,314;
- a decrease in loss on stock warrant liability of $1,041,343;
- an increase in interest income of $442,897; offset primarily by
- an increase in income tax expense of $1,585,621.

Our revenues were $42,630,095 for the nine months ended September 30, 2011, compared to $19,749,340 for the nine months ended September 30, 2010.

Commercial revenue increased to $19,904,312 for the nine months ended September 30, 2011, compared to $6,618,626 for the nine months ended September 30, 2010. 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 $6,161,658 in commercial chemical revenue, of which $2,870,748 represents an increase in sales of our host materials, and discussed in further detail below; and
- an increase of $7,064,914 in royalty and license revenue, which in substantial part represents royalty and license fee payments received under our patent license agreements with Samsung SMD, including our new agreement executed in August 2011, as discussed earlier.

Commercial chemical revenue for the nine months ended September 30, 2011 included revenue received from sales of both phosphorescent emitter and host materials. Host material sales were approximately 41% of our total commercial chemical revenue for this period, compared to no commercial chemical revenue from host material sales for the corresponding period in 2010. We believe that host material sales can enhance our phosphorescent emitter material sales business. However, the host material business is more competitive than the phosphorescent emitter material sales business, and 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.

Developmental revenue increased to $22,725,783 for the nine months ended September 30, 2011, compared to $13,130,714 for the nine months ended September 30, 2010. 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 due to:

- an increase of $10,539,025 in development chemical revenue, of which $5,693,331 represents an increase in sales of our host materials, mainly due to increased purchases of development chemicals by customers that are preparing for commercial production; and
- an increase in contract revenue of $929,417; offset in part by
- a decrease of $1,873,374 in technology development revenue, due to the recognition as revenue during the nine months ended September 30, 2010 of non-refundable payments totaling $2,100,000 that were received from a customer through the fourth quarter of 2006.

The $2,100,000 received from a customer referenced above was for technical assistance previously provided under an agreement to conduct OLED development, evaluation and sampling activities. These payments were made between the years 2001 and 2006, and the agreement itself expired at the end of 2006. We had previously classified these payments as deferred revenue because they were creditable against the license fee under a commercial license agreement in the event we entered into one with the customer. In May 2010, based on information received from the customer regarding its future OLED plans, we determined that the likelihood of us entering into a commercial license agreement was remote. As a result of this determination, we recorded the $2,100,000 payment as technology development revenue in the second quarter of 2010. No similar revenue was recognized during the nine months ended September 30, 2011.

Cost of chemicals sold increased to $2,650,695 for the nine months ended September 30, 2011, compared to $646,666 for the nine months ended September 30, 2010. Cost of chemicals sold 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 commercial materials which costs have already been included in research and development expense. Cost of chemicals sold does not include costs associated with producing materials that have not yet been classified as commercial, which costs are included in research and development expenses. Depending on the timing and stage of materials being classified as commercial, we expect the costs of chemicals for these materials to fluctuate from quarter to quarter. As a result of these timing issues, and due to increased sales of commercial chemicals, cost of chemicals sold increased for the nine months ended September 30, 2011 compared to the same period in 2010. During the period, costs associated with $9,138,435 of development chemical sales related to materials classified as commercial were included in cost of sales.

We incurred research and development expenses of $18,186,043 for the nine months ended September 30, 2011, compared to $16,089,409 for the nine months ended September 30, 2010. The increase was mainly due to:

- increased employee costs of $1,476,281, due primarily to new employees, increased salaries, costs associated with retirement benefits and stock compensation for certain executive officers;
- increased costs of $790,477, due to overall expanded research and development efforts to support the growth of our business;
- costs of $492,399 resulting from commencement of research and development activities at certain of our foreign subsidiaries;
- increased costs of $487,984 incurred under our agreement with PPG Industries; offset in part by
- decreased amortization costs of $1,200,078 due to part of our acquired technology being fully amortized as of December 31, 2010.

Selling, general and administrative expenses were $13,324,863 for the nine months ended September 30, 2011, compared to $9,719,643 for the nine months ended September 30, 2010. The overall increase in these costs was driven in part by increased commercial activities and non-cash expenses related to stock compensation, and in part by costs incurred to establish new subsidiaries in Hong Kong, Korea and Japan. Specifically, we incurred increased costs in the following areas:

- increased employee costs of $1,320,785, due primarily to increased salaries, costs associated with retirement benefits and stock compensation for certain executive officers;
- costs of $400,648 resulting from the incorporation and commencement of operations of certain of our foreign subsidiaries;
- increased costs of $388,108 related to stock compensation for members of our Board of Directors;
- increased general legal fees of $351,405, due in large part to expanded licensing negotiations; and
- increased international consulting fees related to increased revenues of $322,318.

Patent costs increased to $5,466,245 for the nine months ended September 30, 2011, compared to $2,802,549 for the nine months ended September 30, 2010. The increase was mainly due to increased costs associated with our defense of certain ongoing and new patent challenges to our issued patents, as well as the timing of prosecution and maintenance costs associated with a number of patents and patent applications.

Interest income increased to $644,050 for the nine months ended September 30, 2011, compared to $201,153 for the nine months ended September 30, 2010. 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.

In 2011, all remaining outstanding stock warrants to purchase shares of our common stock were exercised, and we received $7,397,710 in proceeds for issuing 586,972 common shares based on the exercise of these warrants. The warrants, which contained a “down-round” provision, were previously recorded as a liability. The change in fair value of these warrants during the period prior to the exercise date resulted in a $4,190,283 non-cash loss on our statement of operations for the nine months ended September 30, 2011, compared to a $5,231,626 non-cash loss for the nine months ended September 30, 2010.

For the nine months ended September 30, 2011, we incurred an income tax expense of $1,121,459, compared to an income tax benefit of $464,162 for the nine months ended September 30, 2010. We had previously filed for and were granted a five-year exemption from withholding tax on royalties and license fees received from Samsung SMD under our 2005 license agreement as part of a tax incentive program in Korea. The exemption was granted in May 2005 and remained in effect until May 2010. Since then, Samsung SMD has been required to withhold tax upon payment of royalties to us. This is also the case under the 2011 license agreement that we entered into with Samsung SMD in August 2011.

In 2011 and 2010, the withholding tax rate for royalties and license fees paid by Samsung SMD was 16.5%. For the nine months ended September 30, 2011, foreign income taxes of $1,121,459 were withheld in connection with these payments. We anticipate the amount of withholding taxes to increase as associated payments received from Samsung SMD increase in the future.

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. No corresponding sales have occurred during the nine months ended September 30, 2011.

### Liquidity and Capital Resources

As of September 30, 2011, we had cash and cash equivalents of $67,124,442 and short-term investments of $270,829,172, for a total of $337,953,614. This compares to cash and cash equivalents of $20,368,852 and short-term investments of $52,794,545, for a total of $73,163,397, as of December 31, 2010. The increase in cash and cash equivalents and short-term investments of $264,790,217 was primarily due to the completion in March 2011 of our public offering of 5,750,000 shares of our common stock at a price of $46.00 per share. The offering resulted in net proceeds to us of $249,628,814.

Cash provided from operating activities was $7,794,694 for the nine months ended September 30, 2011, compared to cash used of $4,973,747 for the same period in 2010. The increase in cash provided by operating activities was primarily due to the following:

- a decrease in net loss of $12,093,843, which amount excludes the impact of non-cash items;
- the impact of the timing of payment of accounts payable and accrued expenses of $2,971,637; and
- an increase of $2,641,377 in deferred revenue and licensing fees received; offset partially by
- the impact of the timing of receipt of accounts receivable of $3,161,322; and
- the impact of the timing of inventory purchases of $2,226,843.

Cash used in investing activities was $220,190,650 for the nine months ended September 30, 2011, compared to $15,736,297 for the same period in 2010. The increase in cash used in investing activities was mainly due to increased purchases of short-term investments as a result of the completion of our public offering described below.

Cash provided by financing activities was $259,151,546 for the nine months ended September 30, 2011, compared to $6,211,658 for the same period in 2010. The increase in cash provided by financing activities was due primarily to the completion of our March 2011 public offering. The offering resulted in proceeds to us of $249,628,814, which was net of $14,871,186 in underwriting discounts and commissions and other costs associated with completion of the offering. In addition, for the nine months ended September 30, 2010, we received proceeds of $13,282,797 from the exercise of options and warrants to purchase shares of our common stock, compared to proceeds of $7,167,562 from the exercise of options and warrants to purchase shares of our common stock for the same period in 2010.

Working capital was $335,424,056 as of September 30, 2011, compared to $57,354,822, which included a stock warrant liability of $10,659,755, as of December 31, 2010. The stock warrants associated with this liability were all exercised by August 2011, resulting in no cash outlay by us. Working capital, excluding the stock warrant liability, was $335,424,056 as of September 30, 2011 and $68,014,577 at December 31, 2010. Again, the increase in working capital was primarily due to proceeds from the common stock offering we completed in March 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

### Revenue Recognition and Deferred Revenue

We receive non-refundable cash payments under certain development and technology evaluation agreements with our customers. These payments are generally recognized as revenue over the term of the agreement. On occasion, however, these payments are creditable against license fees and/or royalties payable by the customer if a license agreement is subsequently executed with the customer. These payments are classified as deferred revenues, and are recorded as liabilities in the consolidated balance sheet until such time as revenue can be recognized. Revenue is deferred until a license agreement is executed or negotiations have ceased and there is no appreciable likelihood of executing a license agreement with the customer. If a license agreement is executed, these payments are recorded as revenue over the estimated useful life of the licensed technology and the revenue is classified based on the terms of the license. Otherwise, these payments are recorded as revenue at the time negotiations with the customer show that there is no appreciable likelihood of executing a license agreement. If we used different estimates for the useful life of the licensed technology, reported revenue during the relevant period would differ. As of September 30, 2011, $9,193,765 was recorded as deferred revenue, of which $3,366,667 may be recognized under license agreements that have not yet been executed or deemed effective. For the three and nine months ended September 30, 2010, $0 and $2,100,000, respectively, of revenue was recognized relating to cash payments received that were creditable against license fees and/or royalties for which we determined there was no appreciable likelihood of executing a license agreement with the customer. For the three and nine months ended September 30, 2011, no such revenue was recognized.

Contract research revenue represents reimbursements by the U.S. government for all or a portion of the research and development expenses we incur related to our government contracts. Revenue is recognized proportionally as research and development expenses are incurred or as defined milestones are achieved. In order to ascertain the revenue associated with these contracts for a period, we estimate the proportion of related research and development expenses incurred and whether defined milestones have been achieved. Different estimates would result in different revenues for the period.

### Valuation of Stock-Based Compensation

We recognize in the statement of operations the grant-date fair value of equity-based compensation issued to employees and directors (see Note 9 of the Notes to Consolidated Financial Statements). We also record an expense for equity-based compensation grants to non-employees, in exchange for goods or services, based on the fair value, which is remeasured over the vesting period of such awards.

We use the Black-Scholes option-pricing model to estimate the fair value of options and warrants we have granted for purposes of recording charges to the statement of operations. In order to calculate the fair value of the options and warrants, assumptions are made for certain components of the model, including expected volatility, expected dividend yield rate and expected option life. Expected volatilities utilized in the model are based mainly on the historical volatility of our stock price over a period commensurate with the expected life of the share option. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. In the case of stock options granted to employees, we estimate the expected term of options granted based on our historical experience with our employees’ exercise of stock options. In the case of stock options granted to non-employees, the contractual life is used. Although we use our best estimates when setting these assumptions, changes to the assumptions could cause significant adjustments to the valuation of future grants or the remeasurement of non-employee awards.

### Accounting for Warrants

On January 1, 2009, we adopted certain revised provisions of Accounting Standards Codification (ASC) 815, *Derivatives and Hedging.* These provisions apply to freestanding financial instruments or embedded features that have the characteristics of a derivative and to freestanding financial instruments that are potentially settled in an entity’s own common stock. As a result, certain of our warrants were considered to be derivatives since they contained “down-round” provisions and needed to be remeasured at fair value at the end of each period as they were recorded as liabilities. At September 30, 2011, there was no liability relating to such warrants, as a result of all the warrants having been exercised by such date.

The fair value of the stock warrant liability when the warrants were outstanding was determined by the Black-Scholes option pricing model using assumptions for certain components of the model, including expected volatility and expected annual dividend yield. Expected volatilities utilized in the model were based mainly on the historical volatility of our stock price over a period commensurate with the remaining contractual life of the warrant. The risk-free interest rate was derived from the U.S. Treasury yield curve. The expected term of the warrants was based on the remaining contractual life. Although we used our best estimates when setting these assumptions, changes in assumptions could have caused significant adjustments to our valuation of the stock warrant liability. The change in fair value of the stock warrant liability when the warrants were outstanding was recorded as a gain or loss on the statement of operations.

### 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 plan using the Citigroup Above-Median Pension Discount Curve (Curve). Based upon this analysis using the Curve, we used a discount rate to measure our retirement plan benefit liability of 5.44% at September 30, 2011. A change of 25 basis points in the discount rate would increase or decrease the expense on an annual basis by approximately $21,000.

### Contractual Obligations

Refer to our Annual Report on Form 10-K for the year ended December 31, 2010 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, 2010 for a discussion of off-balance sheet arrangements. As of September 30, 2011, we had no off-balance sheet arrangements.

## Market risk

As filed, 571 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 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.

## Controls and procedures

As filed, 1,533 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, 2011. 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 effective 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 September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 273 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, 2010, as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011.

Filed Nov 8, 2011.
Source: SEC EDGAR, the filing index for accession 0001005284-11-000102. Last ingested by Listed: Nov 5, 2026, 15:33 ET. No prices; not investment advice.