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| PANL > SEC Filings for PANL > Form 10-K on 12-Mar-2009 | All Recent SEC Filings |
12-Mar-2009
Annual Report
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section entitled "Selected Financial Data" in this report and our Consolidated Financial Statements and related notes to this report. This discussion and analysis contains forward-looking statements based on our current expectations, assumptions, estimates and projections. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully discussed in Section 1A of this report, entitled "Risk Factors."
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, 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. Our revenues are generated through contract research, sales of development and commercial chemicals, license fees and royalties, technology development and evaluation agreements, and commercialization assistance agreements. In the future, we anticipate that the revenues from licensing our intellectual property will become a more significant part of our revenue stream.
While we have made significant progress over the past few years developing and commercializing our family of OLED technologies (PHOLED, TOLED, FOLED, etc.) and materials, we have incurred significant losses and will likely continue to do so until our OLED technologies and materials become more widely adopted by product manufacturers. We
have incurred significant losses since our inception, resulting in an accumulated deficit of $180,470,203 as of December 31, 2008.
We anticipate fluctuations in our annual and quarterly results of operations due to uncertainty regarding:
· the timing of our receipt of license fees and royalties, as well as fees for future technology development and evaluation;
· 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.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ significantly from our estimates under other assumptions and conditions.
We believe that our accounting policies related to revenue recognition and deferred license fees, valuation of acquired technology and stock-based compensation, as described below, are our "critical accounting policies" as contemplated by the SEC. These policies, which have been reviewed with our Audit Committee, are discussed in greater detail below.
Revenue Recognition and Deferred License Fees
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.
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 license fees or 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 December 31, 2008, $12,632,594 was recorded as deferred license fees and deferred revenue, of which $6,966,667 may be recognized under license agreements that have not yet been executed or deemed effective.
Valuation of Acquired Technology
We regularly review our acquired OLED technologies for events or changes in circumstances that might indicate the value of these technologies may have been impaired. Factors considered important that could cause impairment include, among others, significant changes in our anticipated future use of these technologies and our overall business strategy as it pertains to these technologies, particularly in light of patents owned by others in the same field of use. When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted
cash flows in measuring whether the long-lived asset should be written down to fair value. Measurement of the amount of impairment would be based on generally accepted valuation methodologies, as deemed appropriate. As of December 31, 2008, we believe that no revision of the remaining useful lives or write-down of our acquired technology was required for 2008, nor was such a revision needed in 2007 or 2006. The net book value of our acquired technology was $2,929,344 as of December 31, 2008.
Valuation of Stock-Based Compensation
We account for our stock-based compensation (see Notes 2 and 10 of the Notes to Consolidated Financial Statements) under Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment. We recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and directors. We account for our stock option and warrant grants to non-employees in exchange for goods or services in accordance with SFAS No. 123(R) and Emerging Issues Task Force 96-18 (EITF 96-18). SFAS No. 123(R) and EITF 96-18 require that we record an expense for our option and warrant grants to non-employees based on the fair value of the options and warrants, 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 we have granted for purposes of recording charges to the statement of operations. In order to calculate the fair value of the options, assumptions are made for certain components of the model, including expected volatility, expected dividend yield rate and expected option life. Although we use available resources and information 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.
Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
We had a net loss of $19,139,736 (or $0.53 per diluted share) for the year ended December 31, 2008, compared to a net loss of $15,975,841 (or $0.47 per diluted share) for the year ended December 31, 2007. The increase in net loss was primarily due to:
· an increase in operating expenses of $2,060,373; and
· a decrease in interest income of $991,332.
Our revenues were $11,075,224 for the year ended December 31, 2008, compared to $11,305,907 for the same period in 2007. Commercial revenue increased to $5,630,758 for 2008 from $4,428,048 for 2007. Commercial revenue relates to the incorporation our OLED technologies and materials into our customers' commercial products, and includes commercial chemical revenue, royalty and license revenues, and commercialization assistance revenue. Developmental revenue decreased to $5,444,466 for 2008 from $6,877,859 for 2007. Developmental revenue relates to OLED technology and material development activities for which we are paid, and includes contract research revenue, development chemical revenue and technology development revenue. We believe these revenue categories, which now combine accounts previously reported separately, better reflect our business strategies and core business efforts.
Our commercial chemical revenue and our royalty and license revenues for the year ended December 31, 2008 were $3,751,890 and $1,711,970, respectively, compared to $3,599,677 and $828,371, respectively, for the same period in 2007. For the year ended December 31, 2008, the majority of our commercial chemical revenue and our royalty and license revenues were from Samsung SDI Co., Ltd., whose OLED business was transferred to Samsung Mobile Display Co., Ltd. (Samsung SMD) in September 2008. Samsung SMD represented approximately 68% of our commercial revenue and approximately 42% of our total revenue in 2008. We also recorded commercial chemical revenue and license revenue from sales of small quantities of our proprietary OLED materials to two other commercial chemical customers during the year. For the year ended December 31, 2007, the majority of our commercial chemical revenue and our royalty and license revenues were also from Samsung SMD. For 2007, we also recorded commercial chemical revenue and license revenue from sales of small quantities of our proprietary OLED materials to three other commercial chemical customers. We cannot accurately predict how long our material sales to Samsung SMD or other customers will continue, as they frequently update and alter their product offerings. Continued sales of our OLED materials to these customers will depend on several factors, including, pricing, availability, continued technical improvement and competitive product offerings.
We recorded royalty revenue of $796,838 for the year ended December 31, 2008, compared to $61,317 for the same period in 2007. The increase in royalty revenue was due mainly to increased sales of licensed products by Samsung SMD. For both 2008 and 2007, we received royalty revenue from Samsung SMD under a patent license agreement entered into in April 2005. Under this agreement, we receive royalty reports at a specified period of time after the end of the quarter during which royalty-bearing products are sold by Samsung SMD. Consequently, our royalty revenues from Samsung SMD for the years ended December 31, 2008 and 2007 represent royalties for licensed products sold by Samsung SMD during the 12-month periods ended September 30, 2008 and 2007, respectively. In addition, we recorded a small amount of royalty revenue from two other customers in 2008.
License revenue for the years ended December 31, 2008 and 2007 included license fees of $915,132 and $767,054, respectively. For both years, we received license revenue under our patent license agreement with Samsung SMD and under a cross-license agreement we executed with DuPont Displays, Inc. (DuPont) in December 2002. License revenue for the year ended December 31, 2008 also included amounts received under a patent license agreement we entered into with Konica Minolta Holdings, Inc. (Konica Minolta) in August 2008, a joint development agreement we previously entered into with a subsidiary of Konica Minolta, and two other agreements we entered into during the fourth quarter of 2008. Under our agreements with Samsung SMD, DuPont and Konica Minolta, we received upfront payments that have been classified as deferred license fees and deferred revenue. The deferred license fees are being recognized as license revenue over the term of the agreement with Samsung SMD and, based on current assumptions, over 10 years with DuPont and Konica Minolta.
Commercial revenue for the year ended December 31, 2008 also included $166,898 in commercialization assistance revenue that we received under a business support agreement executed during the fourth quarter of 2008. We received no such revenue for the year ended December 31, 2007.
We earned $2,815,062 in contract research revenue from agencies of the U.S. Government for the year ended December 31, 2008, compared to $4,600,693 in corresponding revenue for the same period in 2007. The decrease was due principally to the timing of work performed and costs incurred in connection with several new and completed government programs during 2008. However, the overall value of our government contracts remained relatively constant during both years.
We earned $2,047,823 in development chemical revenue for the year ended December 31, 2008, compared to $1,049,854 in corresponding revenue for the year ended December 31, 2007. Our development chemical customer base increased significantly during 2008, as did the average dollar value of development chemical sales per customer. We cannot accurately predict the timing and frequency of development chemical purchases by our customers due to participants in the OLED industry having differing OLED technology development and product launch strategies, which are subject to change at any time.
We recognized $581,581 in technology development revenue for the year ended December 31, 2008, compared to $1,227,312 in corresponding revenue for the same period in 2007. Technology development revenue for 2008 included amounts received under a new joint development agreement we entered into in August 2008. Payments received under this new agreement are classified as deferred revenue and are being recognized as technology development revenue over a period of three years. During 2007, we completed work on a major joint development program with another customer. Payments received under this agreement accounted for all of our technology development revenue for 2007. In 2008, we began work on two new joint development programs with this customer, but neither of these programs is as large as the program completed in 2007. Technology development revenue for 2008 also included amounts received for a technical assistance program that began in November 2008. The amount and timing of our receipt of fees for technology development and similar services is difficult to predict due to participants in the OLED industry having different technology development strategies, which are subject to change at any time.
We received $3,715,580 and $1,150,000 in cash payments during 2008 and 2007, respectively, from various customers for license rights granted to these customers, and/or for joint development work performed or technical assistance provided at the request of these customers. These payments were recorded as deferred revenue and deferred license fees and we are recognizing these over the life of the agreements to which they relate.
We incurred research and development expenses of $22,257,634 for the year ended December 31, 2008, compared to $20,909,262 for the year ended December 31, 2007. The increase was mainly due to:
· an increase in patent costs of $800,099;
· an increase of $396,885 attributable to higher operating costs associated with our Ewing facility; and
· an increase of $344,087 in personnel costs due mainly to increased personnel during 2008.
General and administrative expenses were $10,170,593 for the year ended December 31, 2008, compared to $9,569,381 for the same period in 2007. The increase was mainly due to an increase of $593,032 in personnel costs.
Interest income decreased to $2,607,897 for the year ended December 31, 2008, compared to $3,599,229 for the same period in 2007. The decrease was mainly attributable to decreased rates of return on investments during 2008, compared to rates of return during 2007. Due to current market conditions, we anticipate that these lower rates of return will continue for the foreseeable future.
During 2008, we sold approximately $12.5 million of our state-related income tax net operating losses (NOLs) under the New Jersey Technology Tax Certificate Transfer Program. In 2008, we received proceeds of $962,478 from our sale of these NOLs and research and development tax credits, and we recorded these proceeds as an income tax benefit. In 2007, we received proceeds of $804,980 from corresponding sales of approximately $7.8 million in NOLs and research and development tax credits. We expect to sell a similar quantity of NOLs and tax credits to New Jersey under the program in 2009, if approved.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
We had a net loss of $15,975,841 (or $0.47 per diluted share) for the year ended December 31, 2007, compared to a net loss of $15,186,804 (or $0.49 per diluted share) for the year ended December 31, 2006. The increase in net loss was primarily due to:
· a decrease in revenues of $615,385; and
· an increase in operating expenses of $1,866,356.
The increase in operating loss was offset to some extent by an increase of $1,430,296 in interest income. The decrease in net loss per diluted share, despite the increase in total net loss, resulted from an increase in the weighted average number of shares of our common stock outstanding in 2007, as compared to 2006.
Our revenues were $11,305,907 for the year ended December 31, 2007, compared to $11,921,292 for the year ended December 31, 2006. Commercial revenue increased to $4,428,048 for 2007 from $4,276,250 for 2006. Developmental revenue decreased to $6,877,859 in 2007 from $7,645,042 for 2006.
Our commercial chemical revenue and our royalty and license revenues for the year ended December 31, 2007 were $3,599,677 and $828,371, respectively, compared to $1,876,071 and $2,400,179, respectively, for the same period in 2006. The increase in commercial chemical revenue was due to increased purchases of our proprietary OLED materials for use in commercial OLED products. In the fourth quarter of 2006, we began supplying our proprietary OLED materials to Samsung SMD for use in a commercial active-matrix OLED display product. This activity continued in 2007, with Samsung SMD being responsible for the vast majority of our commercial chemical revenue for the year. As discussed further below, we also began recognizing royalty revenue from Samsung SMD in 2007.
In 2007, we began supplying our proprietary OLED materials to Chi Mei EL Corporation and LG Display Co., Ltd. (formerly LG.Philips Co., Ltd.), with whom we signed commercial supply agreements during the year. These agreements are similar to the agreement we had entered into with AU Optronics Corporation, in that we record both commercial chemical revenue and license revenue from our sales of OLED materials under these agreements. A small portion of our commercial chemical revenue and our license revenue for 2007 were from sales of our proprietary OLED materials to Chi Mei EL and LG Display.
For the first seven months of 2006, we supplied one of our proprietary OLED materials to AU Optronics for use in a commercial OLED display product. For 2006, we recognized commercial chemical revenue of $886,676 and license revenue of $1,773,324 on account of our sales of this material to AU Optronics. However, those sales ended when AU Optronics discontinued manufacturing its commercial OLED display product during the third quarter of 2006. Commercial chemical revenue and license revenue from sales of our proprietary OLED material to AU Optronics represented a substantial component of our revenues for 2006.
Our royalty and license revenues for 2007 decreased substantially from 2006 due in large part to the difference in our business agreements with Samsung SMD and AU Optronics. As previously indicated, under the terms of our agreement with AU Optronics we recognized license revenue at the time we sold our proprietary OLED material to AU Optronics. In contrast, under the terms of our agreement with Samsung SMD, we recognize royalty revenue when Samsung SMD reports to us the sale of licensed products that use our proprietary OLED materials or technologies. This can occur up to six months or more after the date on which we sell our OLED materials to Samsung SMD. For 2007, we recognized $61,317 in royalty revenue on account of sales of these licensed products reported to us by Samsung SMD for the first three quarters of the year. There was no corresponding royalty revenue reported to us by Samsung SMD for 2006.
Our royalty and license revenues for 2006 did, however, include license fees and upfront royalty payments received under our patent license agreement with Samsung SMD, as well as license fees received under our cross-license agreement executed with DuPont. All of these payments have been classified as deferred revenue. The deferred license fees are being recognized as license revenue over the life of our agreement with Samsung SMD, and over 10 years for our agreement with DuPont. The deferred royalties are being recognized as royalty revenue when sales of licensed products are reported to us by Samsung SMD.
We earned $4,600,693 in contract research revenue from agencies of the U.S. Government for the year ended December 31, 2007, compared to $3,821,903 in corresponding revenue for the same period in 2006. The increase was mainly attributable to increased work performed under our government contracts and the achievement of milestones as specified within certain of those contracts. We commenced work on 10 new government contracts during 2007 and completed work on eight government programs during the year.
We earned $1,049,854 in development chemical revenue for the year ended December 31, 2007, compared to $1,656,851 in corresponding revenue for the year ended December 31, 2006. The decrease was mainly due to a decreased volume of development chemical purchases as a result of Samsung SMD transitioning from exclusively development chemical purchases in 2006 to primarily commercial chemical purchases in 2007.
We recognized $1,227,312 in technology development revenue for the year ended December 31, 2007, compared to $2,166,288 in corresponding revenue for the same period in 2006. Technology development revenue for 2007 was derived from one technology development contract that we renewed and continued working under for the entire year. For 2006, we derived technology development revenue from this and three other contracts for technology development and similar services. Although in 2007 we continued working with all of the companies from which we derived technology development revenue for 2006, our business arrangements with these companies changed as the OLED industry evolved and our customers refined their technology development strategies. For example, we received a non-refundable payment for the continuation of one of these technology development agreements in the third quarter of 2006, which payment is creditable against future amounts payable under a commercial license agreement with the customer, if one is executed by a specified date. Due to this business arrangement, the payment has been recorded as deferred license fees rather than technology development revenue. The amount and timing of our receipt of fees for technology development and similar services is difficult to predict due to business changes such as this one, and participants in the OLED industry having different technology development strategies, which are subject to change at any time.
We incurred research and development expenses of $20,909,262 for the year ended December 31, 2007, compared to $19,562,004 for the year ended December 31, 2006. The increase was mainly due to:
· an increase of $1,916,862 attributable to higher operating costs associated with our Ewing facility;
· a refund received from Princeton University in 2006 for unspent research and development funds of $1,011,358; and
· an increase of $724,254 in personnel costs due mainly to increased salaries during 2007; and
· an increase of $242,281 relating to the recognition of expenses for stock issuances to non-employee members of our Scientific Advisory Board, and for the vesting of shares of restricted stock previously issued to these individuals.
The increase was offset to some extent by a decrease of $1,673,560 in amounts paid to PPG Industries under our OLED Materials Supply and Service Agreement, as we started performing at our Ewing facility certain the work previously performed for us by PPG Industries.
General and administrative expenses were $9,569,381 for the year ended December 31, 2007, compared to $8,902,462 for the same period in 2006. The increase was mainly due to:
· an increase of $465,243 in personnel costs due mainly to increased salaries during 2007; and
· an increase of $153,493 attributable to higher operating costs associated with our Ewing facility.
Royalty and license expenses were $305,846 for the year ended December 31, 2007, compared to $687,436 for the same period in 2006. The decrease was due to a reduction of $370,998 in royalties owed to Motorola. For 2006, we had a minimum royalty obligation to Motorola of $500,000. Beginning with 2007, however, we were no longer required to make minimum royalty payments to Motorola.
Interest income increased to $3,599,229 for the year ended December 31, 2007, compared to $2,168,933 for the same period in 2006. The increase was mainly attributable to increased cash for investment due to funds received from a common stock offering that we completed in May 2007, as well as higher rates of return on investments during 2007.
During 2007, we sold approximately $7.5 million of our state-related income tax NOLs and approximately $263,000 of our research and development tax credits under the New Jersey Technology Tax Certificate Transfer Program. In 2007, we received proceeds of $804,980 from our sale of these NOLs and research and development tax credits, and we recorded these proceeds as an income tax benefit. In 2006, we received proceeds of $544,567 from corresponding sales of approximately $7 million in NOLs and research and development tax credits.
Liquidity and Capital Resources
As of December 31, 2008, we had cash and cash equivalents of $28,321,581 and short-term investments of $49,132,619, for a total of $77,454,200. This compares to cash and cash equivalents of $33,870,696 and short-term investments of $49,788,961, for a total of $83,659,657, as of December 31, 2007. The decrease in cash and cash equivalents of $5,549,115 was primarily due to the usage of cash in operating activities.
Cash used in operating activities was $7,785,164 for 2008, compared to $10,439,279 for 2007. The decreased usage of cash in operating activities was mainly due to a net increase in deferred license fees and deferred revenue of $2,838,284 related to cash payments from various customers for license rights . . .
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