# Universal Display Corp \\pa\\: Form 10-Q for the period ended Sep 30, 2013

- Company: [Universal Display Corp \\pa\\](/companies/oled.md) (CIK 1005284)
- Form: 10-Q
- Filed: 2013-11-07
- Accepted by EDGAR: Nov 7, 2013, 21:09 ET
- Period: 2013-09-30
- Accession: 0001005284-13-000066
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1005284/000100528413000066/panl-10q2013309.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005284/000100528413000066/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-07-01 to 2013-09-30 | $32.8m | us-gaap:Revenues |
| Revenue | 9 months, 2013-01-01 to 2013-09-30 | $97.2m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2013-07-01 to 2013-09-30 | $9.8m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2013-01-01 to 2013-09-30 | $21.2m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2013-07-01 to 2013-09-30 | $7.9m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2013-01-01 to 2013-09-30 | $24.1m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2013-07-01 to 2013-09-30 | $6.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2013-01-01 to 2013-09-30 | $17.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2013-07-01 to 2013-09-30 | $4.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2013-01-01 to 2013-09-30 | $18.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2013-07-01 to 2013-09-30 | $13.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2013-01-01 to 2013-09-30 | $31.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2013-07-01 to 2013-09-30 | −$1.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2013-01-01 to 2013-09-30 | $3.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-07-01 to 2013-09-30 | $5.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2013-01-01 to 2013-09-30 | $16.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-07-01 to 2013-09-30 | $0.12 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2013-01-01 to 2013-09-30 | $0.35 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-07-01 to 2013-09-30 | $0.12 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2013-01-01 to 2013-09-30 | $0.35 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-07-01 to 2013-09-30 | 46,594,843 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2013-01-01 to 2013-09-30 | 46,547,568 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2013-01-01 to 2013-09-30 | $22.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2013-01-01 to 2013-09-30 | $4.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2013-01-01 to 2013-09-30 | $5.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2013-09-30 | $67.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-09-30 | $280.3m | us-gaap:AssetsCurrent |
| Total assets | at 2013-09-30 | $400.0m | us-gaap:Assets |
| Current liabilities | at 2013-09-30 | $21.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-09-30 | $34.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2013-09-30 | $365.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,117 characters.

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.

### CAUTIONARY STATEMENT

### CONCERNING FORWARD-LOOKING STATEMENTS

This discussion and analysis contains some “forward-looking statements.” Forward-looking statements concern 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, 2012, as supplemented by disclosures, if any, 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 and materials for use in displays for smartphones, tablets and televisions as well as solid-state lighting 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 attempting to commercialize these technologies and materials. We derive our revenue from the following:

- intellectual property and technology licensing;
- sales of OLED materials for evaluation, development and commercial manufacturing; and
- technology development and support, including government contract work and support provided to third parties for commercialization of their OLED products.

While we have made significant progress over the past few years developing and commercializing our family of OLED technologies (including our PHOLED, TOLED, FOLED technologies) and materials, we have incurred significant losses since our inception, resulting in an accumulated deficit of $188.0 million as of September 30, 2013.

We anticipate fluctuations in our annual and quarterly results of operations due to uncertainty regarding, among other factors:

- the timing, cost and volume of sales of our OLED materials;
- the timing of our receipt of license fees and royalties, as well as fees for future technology development and evaluation;
- the timing and magnitude of expenditures we may incur in connection with our ongoing research and development and patent-related activities; and
- the timing and financial consequences of our formation of new business relationships and alliances.

### RESULTS OF OPERATIONS

### Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

We had operating income of $4.2 million for the three months ended September 30, 2013, compared to an operating loss of $6.1 million for the three months ended September 30, 2012. The increase in operating income was due to the following:

- an increase in revenue of $20.3 million, which includes increases in both material sales and royalty and license fees, offset by
- an increase in operating expenses of $10.0 million, which includes a $8.7 million increase in the cost of material sales and a $1.1 million increase in selling, general and administrative expenses, both of which are described below.

We had net income of $5.5 million (or $0.12 per basic and diluted share) for the three months ended September 30, 2013, compared to a net loss of $5.5 million (or $(0.12) per basic and diluted share) for the three months ended September 30, 2012.

Our revenues were $32.8 million for the three months ended September 30, 2013, compared to $12.5 million for the three months ended September 30, 2012. The increase in our overall revenue was primarily due to increases in material sales. The increase includes a $21.9 million increase in commercial material sales, offset by a $2.6 million decrease in development chemical sales, due to changes in sales mix.

Material sales increased to $30.3 million for the three months ended September 30, 2013, compared to $11.0 million for the same period in 2012. Material sales relate to the sale of our OLED materials for our customers' evaluation, manufacture and development activities, and for incorporation into their commercial OLED products. The increase in material sales resulted primarily from increased commercial chemical sales due to the increased adoption of our technology and materials in the marketplace by display manufacturers, particularly from SDC.

Material sales included sales of both phosphorescent emitter and host materials. Phosphorescent emitter sales were 62% of our total material sales for the three months ended September 30, 2013, compared to 83% of our total material sales for the three months ended September 30, 2012. Host material sales were 38% of our total material sales for the three months ended September 30, 2013, compared to 17% of our total material sales for the three months ended September 30, 2012.

Phosphorescent emitter sales increased by approximately $9.7 million due to an increase in commercial phosphorescent emitter sales, offset by a decrease in development phosphorescent emitter sales. Commercial green emitter sales increased by approximately $12.5 million due to expanded use of our green emitter in customer products. Commercial red emitter sales decreased slightly due to a decrease in the average price per gram of red emitter based on the cumulative volume of purchases; however, the number of grams sold increased.

Host material sales increased by $9.6 million due to an increase in the number of grams sold, offset by a decrease in the average price per gram sold. Host material sales are mainly related to the use of commercial host materials with our green emitter materials. We believe we can participate in the host materials business due to our long experience in developing emitter materials, which are used together with host materials in the emissive layer of an OLED. However, our customers are not required to purchase our host materials in order to utilize our phosphorescent emitter materials, and the host material sales business is more competitive than the phosphorescent emitter material sales business. Thus, our long-term prospects for host material sales are uncertain.

We cannot accurately predict how long our phosphorescent emitter material sales or host material sales to particular customers will continue, as our customers 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.

Royalty and license fees increased to $1.5 million for the three months ended September 30, 2013, compared to $396,000 for the three months ended September 30, 2012. The increase was related to an increase in license fees attributable to material sales to certain customers, which increased during the three months ended September 30, 2013, as compared to the three months ended September 30, 2012.

In August 2011, we entered into a patent license agreement with SDC which runs through December 31, 2017. The patent license agreement with SDC covers the manufacture and sale of specified OLED display products. Under the agreement, SDC has agreed to pay us a fixed license fee, payable in semi-annual installments over the agreement term. These installments, which are due in the second and fourth quarter of each annual period, increase on an annual basis over the term of the license agreement. Based upon the extended payment arrangement, such amounts are not considered fixed and determinable for revenue recognition purposes until such time the installments become due and payable. As a result, license fees under our new agreement with SDC will be recognized as they become due and payable, which is currently scheduled to be in the second and fourth quarter of each year; therefore our quarterly license fees, will fluctuate accordingly, depending on the timing of such payments.

At the same time we entered into the current patent license agreement with SDC, we also entered into a new supplemental material purchase agreement with SDC. Under the current supplemental material purchase agreement, SDC agrees to purchase from us a minimum dollar amount of phosphorescent emitter materials for use in the manufacture of licensed products. This minimum purchase commitment is subject to SDC’s requirements for phosphorescent emitter materials and our ability to meet these requirements over the term of the supplemental agreement. The minimum purchase amounts increase on an annual basis over the term of the supplemental agreement. These amounts were determined through negotiation based on a number of factors, including, without limitation, estimates of SDC’s OLED business growth as a percentage of published OLED market forecasts and SDC’s projected minimum usage of red and green phosphorescent emitter materials over the term of the agreement.

Technology development and support revenue was $1.1 million for both the three months ended September 30, 2013 and 2012.

Cost of material sales increased to $9.8 million for the three months ended September 30, 2013, compared to $1.1 million for the three months ended September 30, 2012, mainly due to the aforementioned 176% increase in material sales as well as the product mix of materials sold. Cost of material sales includes the cost of producing materials that have been classified as commercial and shipping costs for such materials, but excludes the cost of producing certain materials, which have already been included in research and development expense. Commercial materials are materials that have been validated by us for use in commercial OLED products.

During the three months ended September 30, 2012, cost of materials related to our green emitter material sales excluded costs that had been previously included in research and development expenses; however, during the three months ended September 30, 2013, cost of materials related to sales of our green emitter materials included all costs to produce the materials sold.

Depending on the amounts, timing and stage of materials being classified as commercial, we expect cost of materials sales to fluctuate from quarter to quarter. As a result of these fluctuations, and due to increased sales of commercial materials, cost of material sales increased for the three months ended September 30, 2013, compared to the same period in 2012. For the three months ended September 30, 2013 and 2012, costs associated with $28.3 million and $6.4 million, respectively, of material sales relating to commercial materials were included in cost of material sales.

We incurred research and development expenses of $7.9 million for the three months ended September 30, 2013, compared to $8.2 million for the three months ended September 30, 2012. The decrease was primarily due to a decrease in subcontract costs of $209,000.

Selling, general and administrative expenses were $6.4 million for the three months ended September 30, 2013, compared to $5.3 million for the three months ended September 30, 2012. The increase was primarily due to increased costs associated with bonus and stock-based compensation for certain executive officers as well as increased salaries and salary-related expenses associated with new employees.

Patent costs and amortization of acquired technology increased to $3.9 million for the three months ended September 30, 2013, compared to $3.7 million for the three months ended September 30, 2012. We have increased our number of patents, including those of the newly acquired technology, and the increase reflects the additional maintenance costs of these new patents.

Royalty and license expense increased to $624,000 for the three months ended September 30, 2013, compared to $283,000 for the three months ended September 30, 2012. The increase was mainly due to increased royalties incurred under our amended license agreement with Princeton, USC, and Michigan, resulting from higher material sales and increased royalty and license fees. See Note 5 in Notes to Consolidated Financial Statements for further discussion.

Interest income decreased to $206,000 for the three months ended September 30, 2013, compared to $272,000 for the three months ended September 30, 2012.

We recorded an income tax benefit of $1.1 million and $326,000 for the three months ended September 30, 2013 and 2012, respectively. See "Provision for Income Tax" below for additional information.

### Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

We had operating income of $18.8 million for the nine months ended September 30, 2013, compared to operating income of $5.3 million for the nine months ended September 30, 2012. The increase in operating income was due to the following:

- an increase in revenue of $42.1 million, which includes increases in both material sales and royalty and license fees, offset by
- an increase in operating expenses of $28.5 million, which includes a $17.4 million increase in the cost of material sales, a $5.2 million increase in patent costs and amortization of acquired technology, a $3.2 million increase in selling, general and administrative costs, and a $2.0 million increase in research and development costs, described below.

We had net income of $16.2 million (or $0.35 per basic and diluted share) for the nine months ended September 30, 2013, compared to net income of $4.3 million (or $0.09 per basic and diluted share) for the nine months ended September 30, 2012.

Our revenues were $97.2 million for the nine months ended September 30, 2013, compared to $55.1 million for the nine months ended September 30, 2012. The increase in our overall revenue was primarily due to increases in both material sales and royalty and license fees, which included a $42.5 million increase in commercial material sales as well as an increase in royalty and license fees of $7.7 million, offset by a $6.7 million decrease in development chemical sales due to changes in sales mix, as well as a $1.5 million decrease in technology development and support revenue.

Material sales increased to $70.2 million for the nine months ended September 30, 2013, compared to $34.4 million for the same period in 2012. Material sales relate to the sale of our OLED materials for our customers' evaluation, manufacture and development activities, and for incorporation into their commercial OLED products. The increase in material sales resulted primarily from increased commercial chemical sales due to the overall expanded adoption of our technology and materials in the marketplace by display manufacturers, particularly from SDC.

Material sales included sales of both phosphorescent emitter and host materials. Phosphorescent emitter sales were 65% of our total material sales for the nine months ended September 30, 2013, compared to 83% of our total material sales for the nine months ended September 30, 2012. Host material sales were 35% of our total material sales for the nine months ended September 30, 2013, compared to 17% of our total material sales for the nine months ended September 30, 2012.

Phosphorescent emitter sales increased by approximately $17.2 million due to an increase in commercial phosphorescent emitter sales, offset by a decrease in development phosphorescent emitter sales. Commercial green emitter sales increased by approximately

$27.2 million due to expanded use of our green emitter in customer products. Commercial red emitter sales decreased by approximately $3.7 million mainly due to a decrease in the average price per gram of red emitter based on the cumulative volume of purchases as well as a reduction in the number of grams sold, as we believe our customers utilized our materials more efficiently.

Host material sales increased by $18.7 million, due to an increase in the number of grams sold, which was offset by a decrease in the average price per gram sold. Host material sales are mainly related to the use of commercial host materials with our green emitter materials. We believe we can participate in the host materials business due to our long experience in developing emitter materials, which are used together with host materials in the emissive layer of an OLED. However, our customers are not required to purchase our host materials in order to utilize our phosphorescent emitter materials, and the host material sales business is more competitive than the phosphorescent emitter material sales business. Thus, our long-term prospects for host material sales are uncertain.

We cannot accurately predict how long our phosphorescent emitter material sales or host material sales to particular customers will continue, as our customers 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.

Royalty and license fees increased to $24.0 million for the nine months ended September 30, 2013, compared to $16.3 million for the nine months ended September 30, 2012. The increase was mainly related to the receipt and therefore recognition of $20.0 million of royalty and license fee payments under our patent license agreement with SDC in the second quarter of 2013, compared to $15.0 million in the prior period. The increase was also related to an increase in license fees attributable to material sales to certain customers, which increased during the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012.

In August 2011, we entered into a patent license agreement with SDC which runs through December 31, 2017. The patent license agreement with SDC covers the manufacture and sale of specified OLED display products. Under the agreement, SDC has agreed to pay us a fixed license fee, payable in semi-annual installments over the agreement term. These installments, which are due in the second and fourth quarter of each annual period, increase on an annual basis over the term of the license agreement. Based upon the extended payment arrangement, such amounts are not considered fixed and determinable for revenue recognition purposes until such time the installments become due and payable. As a result, license fees under our new agreement with SDC will be recognized as they become due and payable, which is currently scheduled to be in the second and fourth quarter of each year; therefore our quarterly license fees, will fluctuate accordingly, depending on the timing of such payments.

At the same time we entered into the current patent license agreement with SDC, we also entered into a new supplemental material purchase agreement with SDC. Under the current supplemental material purchase agreement, SDC agrees to purchase from us a minimum dollar amount of phosphorescent emitter materials for use in the manufacture of licensed products. This minimum purchase commitment is subject to SDC’s requirements for phosphorescent emitter materials and our ability to meet these requirements over the term of the supplemental agreement. The minimum purchase amounts increase on an annual basis over the term of the supplemental agreement. These amounts were determined through negotiation based on a number of factors, including, without limitation, estimates of SDC’s OLED business growth as a percentage of published OLED market forecasts and SDC’s projected minimum usage of red and green phosphorescent emitter materials over the term of the agreement.

Technology development and support revenue decreased to $3.0 million for the nine months ended September 30, 2013, compared to $4.5 million for the same period in 2012 due to fewer outstanding contracts in the current period when compared to the prior period.

Cost of material sales increased to $21.2 million for the nine months ended September 30, 2013, compared to $3.8 million for the nine months ended September 30, 2012, partially due to the aforementioned 104% increase in material sales and partially due to the product mix of materials sold. Cost of material sales includes the cost of producing materials that have been classified as commercial and shipping costs for such materials, but excludes the cost of producing certain materials, which have already been included in research and development expense. Commercial materials are materials that have been validated by us for use in commercial OLED products.

During the nine months ended September 30, 2012, costs of materials related to a majority of our green emitter material sales excluded costs that had been previously included in research and development expenses; however, during the nine months ended September 30, 2013, costs of materials related to sales of our green emitter materials included all costs to produce the materials sold.

Depending on the amounts, timing and stage of materials being classified as commercial, as well as changes in the market price of certain raw materials, we expect cost of materials sales to fluctuate from quarter to quarter. As a result of these fluctuations and raw material cost increases, and due to increased sales of commercial materials, cost of material sales increased for the nine months ended September 30, 2013, compared to the same period in 2012. For the nine months ended September 30, 2013 and 2012, costs associated with $64.4 million and $22.0 million, respectively, of material sales relating to commercial materials were included in cost of material sales.

We incurred research and development expenses of $24.1 million for the nine months ended September 30, 2013, compared to $22.1 million for the nine months ended September 30, 2012. The overall increase was primarily due to:

- increased costs of $1.3 million associated with sponsored research and development contracts;
- increased costs of $919,000 incurred under our agreement with PPG Industries, which represents the cost of scaling up of a new red emitter material and validating the new material to commercial status, as well as to supply us with those materials for evaluation purposes; and
- increased costs of $702,000 due to increased employee costs related to bonus compensation, as well as salaries and salary related expenses for new employees; offset by
- decreased subcontract costs of $678,000.

Selling, general and administrative expenses were $17.9 million for the nine months ended September 30, 2013, compared to $14.8 million for the nine months ended September 30, 2012. The increase was primarily due to increased costs associated with bonus and stock-based compensation for certain executive officers as well as increased salaries and salary-related expenses associated with new and existing employees.

Patent costs and amortization of acquired technology increased to $13.0 million for the nine months ended September 30, 2013, compared to $7.9 million for the nine months ended September 30, 2012. The increase was mainly due to increased amortization costs of $6.1 million due to the amortization expense associated with technology acquired in July 2012 (see Note 6 in Notes to Consolidated Financial Statements for further discussion).

Royalty and license expense increased to $2.1 million for the nine months ended September 30, 2013, compared to $1.3 million for the nine months ended September 30, 2012. The increase was mainly due to increased royalties incurred under our amended license agreement with Princeton, USC, and Michigan, resulting from higher material sales and increased royalty and license fees. See Note 5 in Notes to Consolidated Financial Statements for further discussion.

Interest income decreased to $594,000 for the nine months ended September 30, 2013, compared to $986,000 for the nine months ended September 30, 2012. The decrease was mainly attributable to interest earned on lower average cash and investment balances as a result of the purchase of acquired technology in July 2012 (see Note 6 in Notes to Consolidated Financial Statements for further discussion).

We recorded income tax expense of $3.2 million and $2.0 million for the nine months ended September 30, 2013 and 2012, respectively. See "Provision for Income Tax" below for additional information.

### Provision for Income Tax

The effective income tax rate was (24.8)% and 16.6% for the three and nine months ended September 30, 2013, respectively. For the three and nine months ended September 30, 2013, income tax benefit of $1.1 million and an expense of $3.2 million, respectively, was recorded based on the Company's estimated annual effective tax rate for 2013 applied to the Company's income before income taxes. For the three and nine months ended September 30, 2012, an income tax benefit of $326,000 and an expense of $2.0 million were recorded, respectively. Our estimated effective tax rate is primarily related to foreign taxes on South Korean royalty and license fee income. The income tax benefit for the three months ended September 30, 2013, was primarily the result of an increase in the projected estimated income not subject to withholding taxes reducing the estimated annual effective tax rate for the year-to-date period and to a lesser extent the recording of $225,000 of discrete income tax items.

Based on previous earnings history, evaluation of expected future taxable income and other evidence, we determined it is not more likely than not that certain deferred tax assets will be realized. Therefore we have established a full valuation allowance for significantly all of our net deferred tax assets.

The ultimate realization of deferred tax assets is dependent upon the continued generation of taxable income to obtain benefit from the reversal of temporary differences, net operating loss carryforwards and tax credits. We consider the scheduled reversal of deferred tax liabilities, historic earnings, projected future taxable income, and tax planning strategies in making this assessment. Our level of future profitability could cause us to conclude that all or a portion of our deferred tax assets will be realizable. We continue to assess our current and projected taxable income in the jurisdictions in which we operate on a quarterly basis and provided that we sustain actual profitability and can demonstrate sustained forecasted profitability and/or upon the implementation of certain tax planning strategies, we could release all or a portion of our deferred tax valuation allowance to reflect the realizability of our deferred tax assets and would begin to provide for income taxes at a rate equal to our combined federal, state and foreign effective rates, at that time.

Currently, a full valuation allowance continues to be established for significantly all our net deferred tax assets because we incurred substantial consolidated operating losses from inception through 2010, as well as continuing losses in certain jurisdictions, and based on the aforementioned factors, we have assessed that the net deferred tax assets did not meet the criteria for realization as of September 30, 2013.

At this time, the amount and timing of any future release of the deferred tax valuation allowance, if any, and resulting future effective tax rates cannot be determined, but could be material to both our financial position and results of operations and may occur in the near term, including the fourth quarter of 2013, if expected operating trends continue.

### Liquidity and Capital Resources

As of September 30, 2013, we had cash and cash equivalents of $67.1 million and short-term investments of $181.2 million, for a total of $248.3 million. This compares to cash and cash equivalents of $85.9 million and short-term investments of $158.0 million, for a total of $243.9 million, as of December 31, 2012.

Cash provided by operating activities was $22.6 million for the nine months ended September 30, 2013, compared to cash provided by operating activities of $7.2 million for the same period in 2012. The increase in cash provided by operating activities was primarily due to the following:

- an increase in pretax net income of approximately $19.1 million, which excludes the impact of non-cash items; and
- the impact of the timing of inventory purchases of $8.8 million; offset by
- the impact of the timing of receipts of accounts receivable of $12.0 million; and
- the timing of payments of accounts payable and accrued expenses of $1.3 million.

Cash used in investing activities was $34.1 million for the nine months ended September 30, 2013, compared to cash used in investing activities of $42.2 million for the same period in 2012. The decrease in cash used in investing activities was mainly due to the purchase of intangibles during the nine months ended September 30, 2012, offset by the timing of maturities of investments, and purchases of investments and equipment.

Cash used in financing activities was $7.3 million for the nine months ended September 30, 2013, compared to cash used of $2.6 million for the same period in 2012. The increase in cash used in financing activities was primarily due to repurchases of common stock of $5.5 million, as well as a decrease in the proceeds from the exercise of stock options of $433,000. This was offset by a decrease in the payment of taxes related to stock-based employee compensation of $1.1 million.

Working capital was $258.9 million as of September 30, 2013, compared to $245.2 million as of December 31, 2012, mainly due to the increase in short-term investments of $23.2 million, accounts receivable of $9.1 million and other current assets of $2.5 million. This was offset by a decrease in cash and cash equivalents of $18.8 million primarily from increases in cash used in investing and financing activities as well as a decrease in inventory of $3.2 million resulting from increased material sales.

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.

It should be noted that additional funding may be required in the future for research, development and commercialization of our OLED technologies and materials, to obtain, maintain and enforce patents respecting these technologies and materials, and for working capital and other purposes, the timing and amount of which are difficult to ascertain. 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 outstanding stock options. There can be no assurance that additional funds will be available to us when needed, on commercially reasonable terms or at all, particularly in the current economic environment.

### Critical Accounting Policies

We have various share-based compensation awards under the Equity Compensation Plan, which include stock options, restricted stock awards, restricted stock units and performance-based units. On March 7 and 8, 2013, the Board, upon the recommendation of the Compensation Committee of the Board, granted restricted stock units and performance units under the Equity Compensation Plan to its executive officers. See Note 10 in the Notes to Consolidated Financial Statements in Item 1. Financial Statements for further detail.

Refer to our Annual Report on Form 10-K for the year ended December 31, 2012, for additional discussion of our critical accounting policies.

### Contractual Obligations

Effective June 1, 2013, the Company amended its Research Agreement with the University of Southern California (USC) to extend the term of the agreement for an additional four years. As of September 30, 2013, the Company was obligated to pay USC up to $8.2 million for work actually performed during the remaining extended term, which expires April 30, 2017.

Refer to our Annual Report on Form 10-K for the year ended December 31, 2012 for a discussion of our other contractual obligations.

### Off-Balance Sheet Arrangements

Refer to our Annual Report on Form 10-K for the year ended December 31, 2012 for a discussion of off-balance sheet arrangements. As of September 30, 2013, we had no off-balance sheet arrangements.

## Market risk

As filed, 992 characters.

We do not utilize financial instruments for trading purposes and hold no derivative financial instruments, other financial instruments or derivative commodity instruments that could expose us to significant market risk other than our investments disclosed in Note 4 to the consolidated financial statements included herein. We generally invest in investment grade financial instruments to reduce our exposure related to investments. Our primary market risk exposure with regard to such financial instruments is to changes in interest rates, which would impact interest income earned on investments. However, based upon the conservative nature of our investment portfolio and current experience, we do not believe a decrease in investment yields would have a material negative effect on our interest income.

Substantially all our revenue is derived from outside of North America. All revenue is primarily denominated in U.S. dollars and therefore we bear no significant foreign exchange risk.

## Controls and procedures

As filed, 1,533 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2013. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this report, are effective to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. However, a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 182 characters.

There have been no material changes to the risk factors previously discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012.

Filed Nov 7, 2013.
Source: SEC EDGAR, the filing index for accession 0001005284-13-000066. Last ingested by Listed: Nov 5, 2026, 15:33 ET. No prices; not investment advice.