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| PANL > SEC Filings for PANL > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
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.
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, 2008, as amended, as supplemented 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, 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, technology development and evaluation agreements and license fees and royalties. In the future, we anticipate that 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 $193,261,009 as of September 30, 2009.
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;
· 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, 2009 Compared to Three Months Ended September 30, 2008
We had a net loss of $4,672,847 (or $0.13 per basic and diluted share) for the quarter ended September 30, 2009, compared to a net loss of $5,302,983 (or $0.15 per basic and diluted share) for the same period in 2008. The decrease in net loss was primarily due to an increase in revenues of $2,519,754, partially offset by:
· a loss on stock warrant liability of $1,001,612;
· an increase in operating expenses of $479,666; and
· a decrease in interest income of $423,634.
Our revenues were $5,145,393 for the quarter ended September 30, 2009, compared to $2,625,639 for the same period in 2008. Commercial revenue increased to $1,621,416 from $1,324,924 for the same period in 2008. 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. Developmental revenue increased to $3,523,977 for the quarter ended September 30, 2009, from $1,300,715 for the same period in 2008. 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.
Our commercial chemical revenue for the quarter ended September 30, 2009 was $808,200 compared to $1,025,000 for the corresponding period in 2008. For the quarter ended September 30, 2009, the majority of our commercial chemical revenue was from sales of our proprietary OLED materials to Samsung Mobile Display Co., Ltd. ("Samsung SMD"). We also sold small quantities of our proprietary OLED materials to two other customers for commercial usage during the quarter. We recorded commercial chemical revenue and license revenue on account of the sales to those customers. For the corresponding period in 2008, the majority of our commercial chemical revenue was from Samsung SDI Co., Ltd. ("Samsung SDI"), whose OLED business was transferred to Samsung SMD in September 2008 (Samsung SDI and Samsung SMD are collectively referred to herein as "Samsung"). We also sold small quantities of our proprietary OLED materials to two other customers for commercial usage during the third quarter of 2008, and we recorded commercial chemical revenue and license revenue on account of those sales.
The decrease in commercial chemical revenue from the third quarter of 2008 to the third quarter of 2009 resulted primarily from a lower volume of OLED material sales to Samsung. Our understanding is that this lower sales volume was due to Samsung's implementation of manufacturing process efficiencies, improved materials utilization and more efficient and improved device structures, offset in part by increased production volume. We cannot accurately predict how long our material sales to Samsung or other customers will continue, as they 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.
We recorded royalty revenue of $401,718 for the quarter ended September 30, 2009, compared to $148,261 for the same period in 2008. This revenue primarily represents royalties received under our patent license agreement with Samsung, which we 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. Royalty revenue for these sales is recognized when the report is received. Consequently, our royalty revenues from Samsung for the three months ended September 30, 2009 and 2008 represent royalties for licensed products sold by Samsung during the second quarters of 2009 and 2008, respectively.
License revenue for the quarters ended September 30, 2009 and 2008 included license fees of $244,600 and $151,663, respectively. These revenues were derived from our patent license agreement with Samsung, as well as a cross-license agreement we executed with DuPont Displays, Inc. ("DuPont") in December 2002. License revenue for the quarter ended September 30, 2009 also included amounts received under a patent license agreement we entered into with Konica Minolta Holdings, Inc. ("Konica Minolta") in August 2008, and a joint development agreement we previously entered into with a subsidiary of Konica Minolta. Under our agreements with Samsung, 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 and, based on current assumptions, over 10 years with DuPont and Konica Minolta. For each of the quarters ended September 30, 2009 and 2008, we also recorded license revenue from two other customers who purchased our proprietary OLED materials for commercial usage.
Commercial revenue for the quarter ended September 30, 2009 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 same period in 2008.
We earned $1,125,069 in contract research revenue from agencies of the U.S. Government for the quarter ended September 30, 2009, compared to $610,316 in corresponding revenue for the same period in 2008. The increase was due to the overall value of our government contracts increasing by approximately 50%, as well as the timing of expenses incurred under these contracts.
We earned $717,656 in development chemical revenue for the quarter ended September 30, 2009, compared to $628,033 in corresponding revenue for the same period in 2008. The increase was due primarily to increased development chemical sales to three customers, offset to some extent by decreased development chemical sales to two other customers. 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 $1,681,252 in technology development revenue for the quarter ended September 30, 2009, compared to $62,366 in corresponding revenue for the same period in 2008. Technology development revenue for the third quarter of 2009 included a non-refundable payment of $1,500,000 that we received from Kyocera Corporation ("Kyocera") during the third quarter of 2008. This payment was for technical assistance previously provided under an evaluation agreement with a subsidiary of Kyocera established by it to conduct OLED research, development, manufacturing and sales activities. We had previously classified this payment as deferred revenue because it was creditable against a portion of the upfront fee under our license agreement with Kyocera. The license agreement was to become effective upon notice from Kyocera given on or before December 31, 2009.
In September 2009, we received notification from Kyocera that it was terminating the evaluation agreement because its OLED subsidiary was being dissolved on September 30, 2009. Based on this notification, we determined and confirmed that Kyocera will not be sending us a notice declaring the license agreement effective. As a result of this development, we recorded the $1,500,000 payment as technology development revenue for the third quarter of 2009.
Technology development revenue for the third quarter of 2009 also included amounts received under two joint development agreements that we entered into during the second half of 2008. Payments received under these agreements were classified as deferred revenue and are recognized as revenue over the life of the applicable agreement. 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.
Total operating expenses were $8,938,169 for the quarter ended September 30, 2009, compared to $8,458,503 for the same period in 2008. Operating expenses remained relatively consistent over these corresponding periods.
Interest income decreased to $121,927 for the quarter ended September 30, 2009, compared to $545,561 for the same period in 2008. The decrease was mainly attributable to decreased rates of return on investments during the quarter, compared to rates for the same period in 2008, as well as a decrease in the amount of cash available for investment. Due to current market conditions, we anticipate that these lower rates of return will continue for the foreseeable future.
At January 1, 2009, the Company had warrants to purchase 838,446 shares of common stock outstanding containing a "down-round" provision. On January 1, 2009, the fair value of these warrants of $2,689,110 was reclassified from equity to a liability upon the adoption of certain revisions to ASC 815. The change in fair value of these warrants from June 30, 2009 to September 30, 2009 resulted in a $1,001,612 non-cash loss on the statement of operations for the three months ended September 30, 2009. There was no such loss for the same period of 2008. The Company will continue to report the warrants as a liability, with changes in fair value recorded in the statement of operations, until such time as these warrants are exercised or expire.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
We had a net loss of $16,657,624 (or $0.46 per basic and diluted share) for the nine months ended September 30, 2009, compared to a net loss of $14,702,158 (or $0.41 per basic and diluted share) for the same period in 2008. The increase in net loss was primarily due to:
· an increase in operating expenses of $2,674,965;
· a decrease in interest income of $1,638,203; and
· a loss on stock warrant liability of $1,121,080;
· partially offset by an increase in revenues of $3,447,549.
Our revenues were $10,935,605 for the nine months ended September 30, 2009, compared to $7,488,056 for the same period in 2008. Commercial revenue remained relatively consistent at $4,229,609, compared to $4,275,476 for the same period in 2008. 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. Developmental revenue increased to $6,705,996 for the nine months ended September 30, 2009, from $3,212,580 for the same period in 2008. 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.
Our commercial chemical revenue for the nine months ended September 30, 2009 was $2,063,965 compared to $2,948,890 for the corresponding period in 2008. For the nine months ended September 30, 2009, the majority of our commercial chemical revenue was from sales of our proprietary OLED materials to Samsung SMD. We also sold small quantities of our proprietary OLED materials to two other customers for commercial usage during the first nine months of 2009. We recorded commercial chemical revenue and license revenue on account of the sales to those customers. For the corresponding period in 2008, the majority of our commercial chemical revenue was from Samsung SDI. We also sold small quantities of our proprietary OLED materials to two other customers for commercial usage during the first nine months of 2008, and we recorded commercial chemical revenue and license revenue on account of those sales.
The decrease in commercial chemical revenue from the first nine months of 2008 to the first nine months of 2009 resulted primarily from a lower volume of OLED material sales to Samsung. Our understanding is that this lower sales volume was due to Samsung's implementation of manufacturing process efficiencies, improved materials utilization and more efficient and improved device structures, offset in part by increased production volume. We cannot accurately predict how long our material sales to Samsung or other customers will continue, as they 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.
We recorded royalty revenue of $937,856 for the nine months ended September 30, 2009, compared to $644,413 for the same period in 2008. This revenue primarily represents royalties received under our patent license agreement with Samsung. 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. Royalty revenue for these sales is recognized when the report is received. Consequently, our royalty revenues from Samsung for the nine months ended September 30, 2009 represent royalties for licensed products sold by Samsung during the first half of 2009 and the fourth quarter of 2008. For the nine months ended September 30, 2008, we also recorded a small amount of royalty income from AIXTRON AG for the sale of an OVPD tool. No such royalties were recorded for the same period in 2009.
License revenue for the nine months ended September 30, 2009 and 2008 included license fees of $727,095 and $682,173, respectively. These revenues were received under our patent license agreement with Samsung, as well as our cross-license agreement with DuPont. License revenue for the nine months ended September 30, 2009 also included amounts received under a patent license agreement we entered
into with Konica Minolta in August 2008, and a joint development agreement we previously entered into with a subsidiary of Konica Minolta. Under our agreements with Samsung, 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 and, based on current assumptions, over 10 years with DuPont and Konica Minolta. For each of the nine-month periods ended September 30, 2009 and 2008, we also recorded license revenue from two other customers who purchased our proprietary OLED materials for commercial usage.
Commercial revenue for the nine months ended September 30, 2009 included $500,693 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 same period in 2008.
We earned $2,928,880 in contract research revenue from agencies of the U.S. Government for the nine months ended September 30, 2009, compared to $1,841,368 in corresponding revenue for the same period in 2008. The increase was due to the overall value of our government contracts increasing by approximately 40%, as well as the timing of expenses incurred under these contracts.
We earned $1,625,653 in development chemical revenue for the nine months ended September 30, 2009, compared to $1,186,158 in corresponding revenue for the same period in 2008. The increase was due primarily to increased development chemical sales to three customers, offset to some extent by decreased development chemical sales to three other customers. 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 $2,151,463 in technology development revenue for the nine months ended September 30, 2009, compared to $185,054 in corresponding revenue for the same period in 2008. Technology development revenue for the first nine months of 2009 included a non-refundable payment of $1,500,000 that we received from Kyocera during the third quarter of 2008. This payment was for technical assistance previously provided under an evaluation agreement with a subsidiary of Kyocera established by it to conduct OLED research, development, manufacturing and sales activities. We had previously classified this payment as deferred revenue because it was creditable against a portion of the upfront fee under our license agreement with Kyocera. The license agreement was to become effective upon notice from Kyocera given on or before December 31, 2009.
In September 2009, we received notification from Kyocera that it was terminating the evaluation agreement because its OLED subsidiary was being dissolved on September 30, 2009. Based on this notification, we determined and confirmed that Kyocera will not be sending us a notice declaring the license agreement effective. As a result of this development, we recorded the $1,500,000 payment as technology development revenue for the third quarter of 2009.
Technology development revenue for the first nine months of 2009 also included amounts received under two joint development agreements and one technical assistance agreement that we entered into during the second half of 2008. Payments received under these agreements were classified as deferred revenue and are recognized as revenue over the life of the applicable agreement. 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.
Total operating expenses were $27,032,742 for the nine months ending September 30, 2009, compared to $24,357,777 for the same period in 2008.
We incurred research and development expenses of $15,482,462 for the nine months ended September 30, 2009, compared to $13,506,318 for the same period in 2008. The increase was mainly due to:
· increased employee costs of $603,790;
· an increase of $570,655 in costs incurred under our agreement with PPG Industries;
· increased costs of $477,314 associated with subcontractors under our government contracts;
· increased costs in operations of $190,038; and
· increased costs of $110,076 incurred in connection with stock compensation to members of our Scientific Advisory Board.
Selling, general and administrative expenses remained relatively consistent over the corresponding periods. These expenses were $7,994,021 for the nine months ended September 30, 2009, compared to $7,658,508 for the same period in 2008.
Patent costs increased to $2,510,379 for the nine months ended September 30, 2009, compared to $2,226,853 for the same period in 2008. The increase was mainly attributable to higher prosecution and maintenance costs associated with an increased number of patents and patent applications, as well as the timing of costs for certain ongoing patent matters.
Interest income decreased to $563,920 for the nine months ended September 30, 2009, compared to $2,202,123 for the same period in 2008. The decrease was mainly attributable to decreased rates of return on investments during the nine-month period, compared to rates for the same period in 2008, as well as a decrease in the amount of cash available for investment. Due to current market conditions, we anticipate that these lower rates of return will continue for the foreseeable future.
At January 1, 2009, the Company had warrants to purchase 838,446 shares of common stock outstanding containing a "down-round" provision. On January 1, 2009, the fair value of these warrants of $2,689,110 was reclassified from equity to a liability upon the adoption of certain revisions to ASC 815. The change in fair value of these warrants from January 1, 2009 to September 30, 2009 resulted in a $1,121,080 loss on the statement of operations for the nine months ended September 30, 2009. There was no such loss for the same period of 2008. The Company will continue to report the warrants as a liability, with changes in fair value recorded in the statement of operations, until such time as these warrants are exercised or expire.
Liquidity and Capital Resources
As of September 30, 2009, we had cash and cash equivalents of $10,608,785 and short-term investments of $55,415,258, for a total of $66,024,043. This compares to cash and cash equivalents of $28,321,581 and short-term investments of $49,132,619, for a total of $77,454,200, as of December 31, 2008. The decrease in cash and cash equivalents and short-term investments of $11,430,157 was primarily due to the usage of cash in operating activities.
Cash used in operating activities was $11,831,763 for the nine months ended September 30, 2009, compared to $6,034,956 for the same period in 2008. The increase in cash used in operating activities was mainly due to the following:
· additional net losses, excluding the impact of non-cash items, of $2,452,975;
· the receipt of an additional $2,033,333 in cash payments in 2008 compared to 2009 from various customers for license rights granted to these customers, and/or joint development work performed or technical assistance provided at the request of these customers; and
· the timing of payment of accounts payable and accrued expenses of $953,407.
Cash used in investing activities was $6,177,729 for the nine months ended September 30, 2009. For the same period in 2008, cash provided by investing activities was $24,958,453. The increase in cash used in investing activities was primarily due to the timing of short-term investment purchases and the fact that the Company's investment portfolio contained instruments with longer periods to maturity than in the past.
Cash provided by financing activities was $296,696 for the nine months ended September 30, 2009, compared to $1,620,939 for the same period in 2008. In the first nine months of 2009, we received proceeds of $1,102,335 from the exercise of options and warrants to purchase shares of our common stock, compared to $2,387,660 in the corresponding period of 2008.
Working capital was $55,434,918 as of September 30, 2009, compared to working capital of $64,600,256 as of December 31, 2008. Working capital decreased primarily due to the use of cash in operating activities. 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 warrants and 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 . . .
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