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sufferingproust (< 20)

The double edged sword: Stock warrant liability and increasing share price

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February 13, 2011 – Comments (5) | RELATED TICKERS: OLED

An interesting side effect of complex marketplaces is that information taken at face value can often result in misleading conclusions. Financial instruments can seemingly blur the line between equity and liabilities however, in most cases this process is regulated and done in a standardized manner. Although this subject is indeed as boring as the last few sentences it can have surprising and important implications regarding positions in a real life portfolio.

For example; share price is generally an important point of interest for investors and seemingly more positive when it is on its way up, or is it? This is just the dilemma that will be evaluated using Universal Display Corporation (PANL) as an illustration. Outstanding warrants to purchase shares of common stock can drastically change the face of a company's financial results, specifically EPS, and in turn alter short term share prices. As share price increases the fair value of these warrants also increases resulting in a liability via the down round provision. While Universal Display Corporation's (PANL) financials missed analysts EPS estimates last quarter the reasoning behind the missed projection makes a huge difference in evaluating a position or interpreting a company's financials.     

5 Comments – Post Your Own

#1) On February 22, 2011 at 3:55 PM, TMFSymington (98.89) wrote:

UDC has said in the past they would continue to report the warrants (outstanding warrants to purchase XXXXXX shares of common stock) as a liability until they are exercised or expire.  I'm assuming some of these warrants come as the result of employee compensation plans and the like, which would make any given quarters' outstanding warrants difficult to calculate without additional detail provided by the company.

In any case, you're certainly correct that the recent meteoric rise in share price should increase this liability...however, this assumes the outstanding warrants remain static or growing.  Perhaps I'm being naive, but does anyone know of a good resource to help us make this calculation in advance of each quarterly report, or are we at the mercy of UDC to report these numbers to us in each quarterly recorded statement of operations?

Relatedly, I should hope the growth in their commercial revenue will continue to accelerate...one of these days we'll undoubtedly see the effects of this added revenue offset their ongoing warrant liabilities (and put PANL into the black for good).

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#2) On February 23, 2011 at 11:31 AM, sufferingproust (< 20) wrote:

I think we may be at the mercey of their financial release. Its interesting to think about. Even if liability goes up they only owe as much money as they relatively have. The increased liability is supported by more available funds. The ratio is unchanged. Its just very misleading. 

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#3) On March 15, 2011 at 5:15 PM, TMFSymington (98.89) wrote:

Q4 earnings were released minutes ago, and we've been given some great information regarding these outstanding warrants liabilities.  Here are a few select paragraphs from the earnings report:

For the fourth quarter of 2010, the Company reported an operating loss of $210,276, which is an improvement of nearly $4 million compared to the operating loss of $4,169,657 for the fourth quarter of 2009. The net loss for the fourth quarter of 2010 was $5,316,414, or ($0.14) per basic and diluted share, compared to a net loss of $3,847,696 or ($0.10) per basic and diluted share, for the fourth quarter of 2009. The net loss for the fourth quarter of 2010 included a $4,845,439 non-cash loss on stock warrant liability, compared to a gain of $90,025 on stock warrant liability in the fourth quarter of 2009. Operating expenses for the fourth quarter of 2010 were $11,005,316, compared to $9,020,669 for the fourth quarter of 2009.

Then, later in the report, we learn the warrants will expire in the 3rd quarter of fiscal 2011:

The operating loss for 2010 was $10,226,297, down $10 million from an operating loss of $20,266,794 in 2009. The Company reported a net loss of $19,917,410, or ($0.53) per basic and diluted share, for the full year 2010, compared to a net loss of $20,505,320, or ($0.56) per basic and diluted share, for the full year 2009. The net losses for 2010 and 2009 included $10,077,065 and $1,031,055, respectively, of non-cash losses on stock warrant liability. The non-cash stock warrant liability, which will cease upon expiration of the related warrants in the third quarter of fiscal 2011, continues to adversely affect our net loss.

Their cash position and revenue continue to improve, and (at first glance) I'm pleased with the report.

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#4) On March 16, 2011 at 10:14 AM, sufferingproust (< 20) wrote:

Agreed I am very happy with what i've read. Also it appears we had a 10 minute window on tuesday to capitalize on our stock warrant liability suspicions for a 15% turnaround lol. Kidding 

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#5) On March 16, 2011 at 10:17 AM, sufferingproust (< 20) wrote:

Agreed I am very happy with what i've read. Also it appears we had a 10 minute window on tuesday to capitalize on our stock warrant liability suspicions for a 15% turnaround lol. Kidding 

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