OLED

Business Context and Reporting Period

Company: Universal Display Corporation (UDC)
Reporting Period: Quarterly period ended September 30, 2001 (Form 10-Q)
Business Stage: Development-stage company engaged in the research, development, and commercialization of organic light emitting diode (OLED) technology for flat panel displays.
Operations: The Company funds research at Princeton University and USC and operates a facility in Ewing, NJ. It has no significant operating activity to date and relies on contract research revenue and financing.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue for the three months ended September 30, 2001, increased to $569,233 from $124,812 in the same period in 2000. This was driven by contract research revenue rising to $436,801 (from $124,812) and the introduction of development chemical sales ($132,432).
• Expense Increases: Research and development (R&D) expenses decreased slightly for the quarter ($1.20M vs $1.57M) but increased significantly for the nine-month period ($8.53M vs $5.25M) due to facility expansion, patent costs, and non-cash charges related to development agreements and acquired technology amortization.
• Interest Expense: Interest expense was $509,236 for the quarter and nine months ended September 30, 2001, compared to zero in 2000. This is attributable to the amortization of original issuance discounts and beneficial conversion features on convertible promissory notes issued in August 2001.
• Financing Activity: In August 2001, the Company completed a $20 million private placement consisting of convertible promissory notes, Series C Convertible Preferred Stock, and warrants. Proceeds of $15 million from the notes are held as restricted cash.

Guidance, Outlook, and Risks

• Liquidity Outlook: Management anticipates sufficient cash, cash equivalents, and short-term investments to meet obligations through at least the end of the fiscal year (December 31, 2001). Substantial additional funds will be required thereafter for R&D and commercialization.
• Revenue Outlook: The Company does not expect to generate meaningful revenues until it successfully demonstrates commercial viability of OLED technology and enters into license agreements with third parties.
• Key Risks:
  • Development Risk: Success is dependent on the efforts of Princeton University and principal investigators; if research does not yield commercially viable applications, the Company will have no meaningful operations.
  • Financing Risk: No assurance that additional financing will be available when needed or on commercially reasonable terms.
  • Contractual Obligations: The 1997 Sponsored Research Agreement requires payments up to $4.4 million through July 2002. The Company also has obligations to issue stock or pay cash to a third-party development partner.
• Unusual Items: A beneficial conversion feature (BCF) treated as a dividend of $689,416 was recorded in the quarter due to the issuance of Series C Convertible Preferred Stock, increasing the net loss applicable to common shareholders.

Investor Verification Checklist

• Restricted Cash Status: Verify the conditions under which the $15.1 million in restricted cash (collateral for convertible notes) can be accessed.
• Convertible Note Terms: Review the conversion price ($13.97 initially, amended to $9.45 in November 2001) and prepayment triggers for the $15 million in convertible promissory notes.
• Princeton University Agreement: Confirm the status of the Sponsored Research Agreement and the risk of termination if principal investigators become unavailable.
• Accumulated Deficit: Note the accumulated deficit of nearly $40 million and the continued burn rate of cash despite revenue growth.
• Subsequent Events: Review the November 5, 2001 amendment to the private placement terms, which lowered conversion prices and extended warrant expiration dates.