Universal Display Corp. 10-Q Summary (Period Ended June 30, 2007)
Business Context and Reporting Period
Universal Display Corporation (Universal Display) is engaged in the research, development, and commercialization of organic light emitting diode (OLED) technologies and materials. The company primarily generates revenue through contract research, sales of development and commercial chemicals, and licensing of its proprietary technologies. This report covers the quarterly and six-month periods ended June 30, 2007.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenue | $2,315,170 | $5,329,800 |
| Net Loss | $(5,175,371) | $(9,759,172) |
| Net Loss Per Share (Basic/Diluted) | $(0.16) | $(0.30) |
| Operating Loss | $(5,998,505) | $(11,167,265) |
| Research & Development Expenses | $5,543,824 | $10,997,153 |
| Cash and Cash Equivalents (Balance Sheet) | $61,495,627 (as of June 30, 2007) | |
| Short-Term Investments | $22,747,530 (as of June 30, 2007) | |
| Working Capital | $74,154,235 (as of June 30, 2007) | |
| Accumulated Deficit | $(155,115,798) (as of June 30, 2007) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 23% in the quarter and 15% in the six-month period compared to the prior year. This was driven by a significant drop in royalty and license revenue (down 80% QoQ and 83% YoY) and technology development revenue, largely due to the discontinuation of commercial chemical sales to a major customer (AU Optronics) in late 2006.
- Increased Losses: Net loss increased to $5.18 million for the quarter and $9.76 million for the six months, compared to $4.31 million and $7.83 million in the prior year periods. The increase is attributed to lower revenues and higher operating expenses.
- Expense Growth: Research and development expenses increased due to facility expansion in New Jersey and higher legal costs for patent defense. General and administrative expenses rose due to increased personnel costs.
- Liquidity Improvement: Cash and cash equivalents more than doubled from $31.1 million at year-end 2006 to $61.5 million at June 30, 2007. This increase was primarily due to a public offering of 2.8 million shares in May 2007, which generated net proceeds of approximately $38 million.
Outlook, Risks, and Management Commentary
- Capital Resources: Management believes current cash, cash equivalents, and short-term investments are sufficient to meet obligations through at least the end of 2008. However, additional funding may be required in the future for R&D and commercialization.
- Customer Concentration: Two non-government customers accounted for 44% and 12% of consolidated revenue for the six months ended June 30, 2007. All contract research revenue is derived from U.S. government agencies.
- Legal Proceedings:
- Patent Interference (SEL): The company successfully defended its phosphorescent OLED technology against Semiconductor Energy Laboratory Co., Ltd. (SEL). The USPTO ruled in favor of the company's licensors (Princeton/USC), canceling all claims of the SEL patent.
- European Patent Oppositions: The company faces oppositions to its European patents regarding flexible OLED technology (EP '958) and PHOLED technology (EP '238) from Cambridge Display Technology, Sumation, Merck, and BASF. Management believes there is a substantial likelihood the patents will be upheld, but outcomes are uncertain.
- Forward-Looking Risks: The company anticipates fluctuations in results due to the timing of license fees, customer product introductions, and the early stage of the OLED industry.
Key Facts for Investor Verification
- Revenue Mix Shift: Verify the sustainability of revenue streams given the loss of the AU Optronics commercial chemical business and the heavy reliance on government contract research.
- Burn Rate vs. Cash: Confirm that the $38 million raised in May 2007 is sufficient to cover the current operating loss rate (approx. $10M per six months) through the end of 2008 without further dilution.
- Patent Validity: Monitor the status of the European patent oppositions (EP '958 and EP '238), as the company's licensing model depends heavily on the validity of these IP assets.
- New Customer Adoption: Track the progress of new commercial supply agreements signed with Chi Mei EL Corporation and LG.Philips LCD Co., Ltd. to determine if they can replace lost revenue from previous customers.