# Universal Display Corp \\pa\\: Form 10-Q for the period ended Jun 30, 2012

- Company: [Universal Display Corp \\pa\\](/companies/oled.md) (CIK 1005284)
- Form: 10-Q
- Filed: 2012-08-08
- Accepted by EDGAR: Aug 8, 2012, 21:30 ET
- Period: 2012-06-30
- Accession: 0001005284-12-000072
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1005284/000100528412000072/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005284/000100528412000072/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-04-01 to 2012-06-30 | $30.0m | us-gaap:Revenues |
| Revenue | 6 months, 2012-01-01 to 2012-06-30 | $42.6m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2012-04-01 to 2012-06-30 | $1.6m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2012-01-01 to 2012-06-30 | $2.7m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2012-04-01 to 2012-06-30 | $7.2m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2012-01-01 to 2012-06-30 | $13.9m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2012-04-01 to 2012-06-30 | $5.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2012-01-01 to 2012-06-30 | $9.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-04-01 to 2012-06-30 | $12.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2012-01-01 to 2012-06-30 | $11.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2012-04-01 to 2012-06-30 | −$18.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2012-01-01 to 2012-06-30 | −$38.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2012-04-01 to 2012-06-30 | −$2.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2012-01-01 to 2012-06-30 | $2.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 6 months, 2012-01-01 to 2012-06-30 | $9.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-04-01 to 2012-06-30 | $0.23 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2012-01-01 to 2012-06-30 | $0.21 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-04-01 to 2012-06-30 | $0.24 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2012-01-01 to 2012-06-30 | $0.21 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-04-01 to 2012-06-30 | 46,857,309 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2012-01-01 to 2012-06-30 | 46,896,898 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2012-01-01 to 2012-06-30 | $9.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2012-01-01 to 2012-06-30 | −$2.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-06-30 | $159.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-06-30 | $372.1m | us-gaap:AssetsCurrent |
| Total assets | at 2012-06-30 | $385.9m | us-gaap:Assets |
| Current liabilities | at 2012-06-30 | $20.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-06-30 | $33.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2012-06-30 | $352.9m | us-gaap:StockholdersEquity |
| Shares outstanding | at 2012-06-30 | 46,453,060 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 33,796 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 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 (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 (including our PHOLED, TOLED, and FOLED) and materials, we have incurred significant losses since our inception, resulting in an accumulated deficit of $204.1 million as of June 30, 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.

### RESULTS OF OPERATIONS

### Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

We had operating income of $12.9 million for the three months ended June 30, 2012, compared to an operating loss of $1.1 million for the three months ended June 30, 2011. The increase in operating income was due to the following:

- an increase in revenue of $18.7 million; offset by
- an increase in operating expenses of $4.8 million.

We had net income of $11.0 million (or $0.24 per basic and $0.23 per diluted share) for the three months ended June 30, 2012, compared to net income of $3.3 million (or income of $0.07 per basic and a loss of $0.03 per diluted share) for the three months ended June 30, 2011. In 2011, net income included a $4.5 million gain 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.

In July 2012, Samsung Mobile Display Co., Ltd (SMD) merged with Samsung Display Co., Ltd. (SDC). Following the merger, all agreements between us and SMD were assigned to SDC, and SDC will honor all preexisting agreements made between us and SMD.

Our revenues were $30.0 million for the three months ended June 30, 2012, compared to $11.3 million for the three months ended June 30, 2011. The increase in our overall revenue was primarily due to the receipt and therefore recognition of $15.0 million of royalty and license fees received under our patent license agreement with SDC, as well as an increase in OLED material sales.

Material sales increased to $12.8 million for the three months ended June 30, 2012, compared to $6.7 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. The increase in material sales was due to the expanded adoption of our technology and materials in the marketplace by display manufacturers, particularly from SDC.

Material sales included sales of both phosphorescent emitter and host materials. Phosphorescent emitter sales were 85% of our total material sales for the three months ended June 30, 2012, compared to 71% of our total material sales for the three months ended June 30, 2011. Host material sales were 15% of our total material sales for the three months ended June 30, 2012, compared to 29% of our total material sales for the three months ended June 30, 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 increased to $15.4 million for the three months ended June 30, 2012, compared to $2.7 million for the three months ended June 30, 2011. A substantial portion of the increase was due to the receipt and therefore recognition of $15.0 million of royalty and license fee payments under our patent license agreements with SDC. In August 2011 we entered into a patent license agreement with SDC which replaced and superseded the then existing patent license agreement. This patent license agreement with SDC runs through December 31, 2017.

Our new patent license agreement with SDC covers the manufacture and sale of specified OLED display products. Under the agreement, SDC 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 SDC’s OLED business growth as a percentage of published OLED market forecasts, the use of red and green phosphorescent materials in SDC’s OLED display products, and appropriate royalty rates relating to SDC’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, license fees under our new agreement with SDC will be recognized as they become due and payable, which is currently scheduled to be in the second and fourth quarter of each year; therefore our quarterly license fees will fluctuate accordingly, depending on the timing of such payments.

At the same time we entered into the August 2011 patent license agreement with SDC, we also entered into a new supplemental material purchase agreement with SDC. Under the August 2011 supplemental material purchase agreement, SDC agreed 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 SDC’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 SDC’s OLED business growth as a percentage of published OLED market forecasts and SDC’s projected minimum usage of red and green phosphorescent emitter materials over the term of the agreement.

Cost of material sales increased to $1.6 million for the three months ended June 30, 2012, compared to $142,000 for the three months ended June 30, 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 June 30, 2012, compared to the same period in 2011. For the three months ended June 30, 2012 and 2011, costs associated with $8.1 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 $7.2 million for the three months ended June 30, 2012, compared to $5.6 million for the three months ended June 30, 2011. The following significant changes occurred:

- increased costs of $637,000 primarily related to outsourced research and development efforts;
- increased costs of $562,000 primarily due to increased salaries, costs associated with retirement benefits and stock-based compensation for certain executive officers; and
- increased other costs of approximately $267,000 primarily related to the timing of costs incurred for raw materials and other lab related costs used for research and development.

Selling, general and administrative expenses were $5.2 million for the three months ended June 30, 2012, compared to $4.5 million for the three months ended June 30, 2011. The overall increase in these costs was primarily driven by increased employee costs due to increased costs associated with existing employees as well as increased costs due to new employees.

Patent costs increased to $2.3 million for the three months ended June 30, 2012, compared to $1.9 million for the three months ended June 30, 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 $786,000 for the three months ended June 30, 2012, compared to $218,000 for the three months ended June 30, 2011. The increase consisted mainly of royalties incurred under our amended license agreement with Princeton University (Princeton), the University of Southern California (USC), the University of Michigan (Michigan), resulting from higher material sales and increased royalty and license fees. See Note 5 in Notes to Consolidated Financial Statements for further discussion.

Interest income increased to $357,000 for the three months ended June 30, 2012, compared to $184,000 for the three months ended June 30, 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 June 30, 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 a $4.5 million non-cash gain on our statement of comprehensive income for the three months ended June 30, 2011. In August 2011, all remaining outstanding stock warrants to purchase shares of our common stock were exercised.

Income tax expense was $2.3 million and $289,000 for the three months ended June 30, 2012 and 2011, respectively. See “Provision for Income Tax” below for additional information.

### Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

We had operating income of $11.4 million for the six months ended June 30, 2012, compared to an operating loss of $3.8 million for the six months ended June 30, 2011. The increase in operating income was due to the following:

- an increase in revenue of $21.8 million; offset by
- an increase in operating expenses of $6.6 million.

We had net income of $9.7 million (or $0.21 per basic and diluted share) for the six months ended June 30, 2012, compared to a net loss of $8.6 million (or $0.20 per basic and diluted share) for the six months ended June 30, 2011. In 2011, the net loss included a $4.4 million loss on stock warrant liability. In August 2011, all remaining outstanding stock warrants to purchase shares of our common stock were exercised.

Our revenues were $42.6 million for the six months ended June 30, 2012, compared to $20.9 million for the six months ended June 30, 2011. The increase in our overall revenue was primarily due to increased OLED material sales, as well as increased royalty and license fees received and therefore recognized under our patent license agreement with SDC.

Material sales increased to $23.4 million for the six months ended June 30, 2012, compared to $11.2 million for the same period in 2011. Material sales relate to the sale of our OLED materials for incorporation into our customers’ commercial OLED products or for their OLED development and evaluation activities. The increase in material sales was due to the expanded adoption of our technology and materials in the marketplace by display manufacturers, particularly from SDC.

Material sales included sales of both phosphorescent emitter and host materials. Phosphorescent emitter sales were 83% of our total material sales for the six months ended June 30, 2012, compared to 81% of our total material sales for the six months ended June 30, 2011. Host material sales were 17% of our total material sales for the six months ended June 30, 2012, compared to 19% of our total material sales for the six months ended June 30, 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 increased to $15.9 million for the six months ended June 30, 2012, compared to $5.3 million for the six months ended June 30, 2011. A substantial portion of the increase was due to the receipt and therefore recognition of $15 million of royalty and license fee payments received under our patent license agreements with SDC. In August 2011 we entered into a patent license agreement with SDC which replaced and superseded the then existing patent license agreement. This patent license agreement with SDC runs through December 31, 2017.

Technology and development revenues decreased to $3.4 million for the six months ended June 30, 2012, compared to $4.3 million for the six months ended June 30, 2011. The decrease was due principally to the timing of work performed and costs incurred in connection with several new and completed government programs. However, the overall value of our government contracts remained relatively constant during both periods.

Our new patent license agreement with SDC covers the manufacture and sale of specified OLED display products. Under the license agreement, SDC 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 SDC’s OLED business growth as a percentage of published OLED market forecasts, the use of red and green phosphorescent materials in SDC’s OLED display products, and appropriate royalty rates relating to SDC’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, license fees under our new agreement with SDC will be recognized as they become due and payable, which is currently scheduled to be in the second and fourth quarter of each year; therefore our quarterly license fees will fluctuate accordingly, depending on the timing of such payments.

At the same time we entered into the August 2011 patent license agreement with SDC, we also entered into a new supplemental material purchase agreement. Under the August 2011 supplemental material purchase agreement, SDC agreed 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 SDC’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 SDC’s OLED business growth as a percentage of published OLED market forecasts and SDC’s projected minimum usage of red and green phosphorescent emitter materials over the term of the agreement.

Cost of material sales increased to $2.7 million for the six months ended June 30, 2012, compared to $245,000 for the six months ended June 30, 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 six months ended June 30, 2012, compared to the same period in 2011. For the six months ended June 30, 2012 and 2011, costs associated with $15.6 million and $6.2 million, respectively, of material sales relating to commercial materials were included in cost of material sales.

We incurred research and development expenses of $13.9 million for the six months ended June 30, compared to $12.1 million for the six months ended June 30, 2011. Research and development expenses increased overall due to increase research and development efforts. The following significant changes occurred:

- increased costs of $486,000 related to the timing of costs incurred under research and development contracts;
- increased costs of $482,000 primarily related to outsourced research and development efforts;
- increased employee costs of $312,000, primarily due to increased salaries, costs associated with retirement benefits and stock-based compensation for certain executive officers, and new employees; and
- increased costs of $251,000 related to lab-related expenses;

Research and development expenses for the six months ended June 30, 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 $9.5 million for the six months ended June 30, 2012, compared to $8.4 million for the six months ended June 30, 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 six months ended June 30, 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 $4.1 million for the six months ended June 30, 2012, compared to $3.5 million for the six months ended June 30, 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 $1.0 million for the six months ended June 30, 2012, compared to $420,000 for the six months ended June 30, 2011. The increase consisted mainly of royalties incurred under our amended license agreement with Princeton, USC and Michigan, resulting from higher material sales and increased royalty revenues. See Note 5 in Notes to Consolidated Financial Statements for further discussion.

Interest income increased to $714,000 for the six months ended June 30, 2012, compared to $280,000 for the six months ended June 30, 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 June 30, 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 a $4.4 million non-cash loss on our statement of comprehensive loss for the six months ended June 30, 2011. In August 2011, all remaining outstanding stock warrants to purchase shares of our common stock were exercised.

Income tax expense was $2.3 million and $586,000 for the six months ended June 30, 2012 and 2011, respectively. See “Provision for Income Taxes” below for additional information.

### Provision for Income Tax

We are subject to income taxes in both the U.S. and foreign jurisdictions. Judgment is required in evaluating our tax positions for future realization and determining our provision for income taxes. Income tax expense for the three and six months ended June 30, 2012 and 2011 is primarily comprised of foreign withholding taxes based upon income earned during the period. These foreign taxes are primarily related to foreign taxes withheld on royalty and license fees paid to us. SDC has been required to withhold tax upon payment of royalty and license fees to us at a rate of 16.5%. We can reasonably estimate the amount of withholding taxes based on anticipated license fee receipts from SDC. Any potential foreign tax credits to be received by us for these amounts on our United States tax returns are currently offset by a full valuation allowance as noted below. For the three months ended June 30, 2012 and 2011, total income tax expense was $2.3 million and $289,000, respectively, of which approximately $2.1 million and $289,999, respectively, were related to foreign income taxes.

For the six months ended June 30, 2012 and 2011, total income tax expense was $2.3 million and $586,000 respectively, of which approximately $2.1 million and $586,000, respectively, were related to foreign income taxes. Additionally, we recorded approximately $208,000 related to federal and state income taxes during both the three and six month periods ended June 30, 2012. The effective income tax rate was 17.2% for the three months ended June 30, 2012, and was 19.1% for the six months ended June 30, 2012.

Although we generated income before income taxes during the three and six months ended June 30, 2012, there was no provision for United States federal or state income taxes, excluding certain estimated alternative minimum taxes due to the utilization of net operating loss carryforwards which are offset by a full valuation allowance. At December 31, 2011, we had approximately $178 million of federal and $87 million of state net operating loss carryforwards. Our ability to use these net operating loss carryfowards could be subject to limitation because of certain ownership changes. The utilization of these tax attributes during the period results in a corresponding decrease in deferred tax assets and the related valuation allowance.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which the respective temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Our level of future profitability could cause us to conclude that all or a portion of our deferred tax assets will be realizable. We continue to assess our current and projected taxable income in the jurisdictions in which we operate on a quarterly basis and provided that we continue to sustain actual profitability and can demonstrate sustained forecasted profitability we could release all or a portion of our deferred tax valuation allowance to reflect the realizability of our deferred tax assets and would begin to provide for income taxes at a rate equal to our combined federal, state and foreign effective rates, at that time. Currently, a full valuation allowance has been established for all our net deferred tax assets because we incurred substantial operating losses from inception through 2010 and based on the aforementioned factors, we have assessed that the net deferred tax assets do not meet the criteria for realization.

At this time, the amount and timing of any future release of the deferred tax valuation allowance and resulting future effective tax rates cannot be determined, but could be material to both our financial position and results of operations. Also, due to the uncertainty inherent in projections of future earnings within the statutory carryforward periods, it cannot be assured there will be any adjustment to the valuation allowance in the future. Subsequent revisions to the estimated net realizable value of our deferred tax assets could also cause our provision for income taxes to vary significantly from period to period.

### Liquidity and Capital Resources

As of June 30, 2012, we had cash and cash equivalents of $159.6 million and short-term investments of $190.4 million, for a total of $350.0 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 provided from operating activities was $9.2 million for the six months ended June 30, 2012, compared to cash provided of $1.8 million for the same period in 2011. The increase in cash provided from operating activities was primarily due to the following:

- an increase in net income of $13.0 million when adjusted for non-cash items; offset partially by
- the impact of the timing of net inventory purchases of $4.3 million; and
- the impact of the timing of payments for other current assets $1.9 million.

Cash provided from investing activities was $41.0 million for the six months ended June 30, 2012, compared to cash used of $210.4 million for the same period in 2011. The increase in cash provided from investing activities was mainly due to the timing of maturities of investments as well as the timing of purchases of investments as a result of the completion of our public offering described below.

Cash used in financing activities was $2.4 million for the six months ended June 30, 2012, compared to cash provided of $253.4 million for the same period in 2011. In March 2011, the Company completed a public offering of its common stock resulting in net proceeds of $249.7 million. For the six months ended June 30, 2012, we received proceeds of $943,000 from the exercise of options to purchase shares of our common stock, compared to proceeds of $7.5 million from the exercise of options and warrants to purchase shares of our common stock for the same period in 2011. We made payments of $3.5 million in withholding taxes in connection with stock-based employee compensation including option exercises for the six months ended June 30, 2012, compared to $4.0 million for the same period in 2011.

Working capital was $351.2 million as of June 30, 2012, compared to $342.8 million as of December 31, 2011.

In July 2012, we entered into various agreements requiring cash expenditures of approximately $109.3 million. See Item 1. Notes to Consolidated Financial Statements – Note 16. Subsequent Events.

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.

### 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 June 30, 2012, we had no off-balance sheet arrangements.

## Market risk

As filed, 982 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 investments disclosed in Note 4 to the consolidated financial statements included herein. We invest in investment grade financial instruments to reduce our exposure related to investments. Our primary market risk exposure with regard to such financial instruments is to changes in interest rates, which would impact interest income earned on investments. However, based upon the conservative nature of our investment portfolio and current experience, we do not believe a decrease in investment yields would have a material negative effect on our interest income.

Substantially all our revenue is derived from outside of North America. All revenue is primarily denominated in U.S. dollars and therefore we bear no significant foreign exchange risk.

## Controls and procedures

As filed, 1,523 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 June 30, 2012. 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 June 30, 2012 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, 2011.

Filed Aug 8, 2012.
Source: SEC EDGAR, the filing index for accession 0001005284-12-000072. Last ingested by Listed: Nov 5, 2026, 15:33 ET. No prices; not investment advice.