Universal Display Corp \pa\: Form 10-Q for the period ended Jun 30, 2017

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 that 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, 2016, 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 mobile phones, televisions, tablets, wearables, portable media devices, notebook computers, personal computers and automotive interiors, as well as specialty and general lighting products. Since 1994, we have been exclusively engaged, and expect to continue to be primarily engaged, in funding and performing research and development activities relating to OLED technologies and materials, and commercializing these technologies and materials. We derive our revenue from the following:

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

Material sales relate to our sale of OLED materials for incorporation into our customers’ commercial OLED products or for their OLED development and evaluation activities. Material sales are recognized at the time title passes, which is typically at the time of shipment or at the time of delivery, depending upon the contractual agreement between the parties.

We receive license and royalty payments under certain commercial, development and technology evaluation agreements, some of which are non-refundable advances. These payments may include royalty and license fees made pursuant to license agreements and also license fees included as part of certain commercial supply agreements. For arrangements with extended payment terms where the fee is not fixed or determinable, we recognize revenue when the payment is due and payable. Royalty revenue and license fees included as part of commercial supply agreements are recognized when earned and the amount is fixed and determinable.

Our commercial license agreement with Samsung Display Co., Ltd. (SDC) currently runs through the end of 2017 and covers the manufacture and sale of specified OLED display products. Under this agreement, we are being paid a license fee, payable in semi-annual installments over the agreement term of 6.4 years. The installments, which are due in the second and fourth quarter of each year, increase on an annual basis over the term of the agreement. The agreement conveys to SDC the non-exclusive right to use certain of our intellectual property assets for a limited period of time that is less than the estimated life of the assets. Ratable recognition of revenue is impacted by the agreement's extended increasing payment terms in light of our limited history with similar agreements. As a result, revenue is recognized at the lesser of the proportional performance approach (ratable) and the amount of due and payable fees from SDC. Given the increasing contractual payment schedule, license fees under the agreement are recognized as revenue when they become due and payable, which is currently scheduled to be in the second and fourth quarter of each year.

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.

In 2015, we entered into an OLED patent license agreement and an OLED commercial supply agreement with LG Display Co., Ltd. (LG Display), which were effective as of January 1, 2015 and superseded the existing 2007 commercial supply agreement between the parties. The new agreements have a term that is set to expire by the end of 2022. The patent license agreement provides LG Display a non-exclusive, royalty bearing portfolio license to make and sell OLED displays under the Company's patent portfolio. The patent license calls for license fees, prepaid royalties and running royalties on licensed products. The prepaid royalty amount is included in deferred revenue and a portion of this amount can be credited against total royalties due over the life of the contract. The agreements include customary provisions relating to warranties, indemnities, confidentiality, assignability and business terms. The agreements provide for certain other minimum obligations relating to the volume of material sales anticipated over the term of the agreements as well as minimum royalty revenue to be generated under the patent license agreement. We expect to generate revenue under these agreements that are predominantly tied to LG Display's sales of OLED licensed products. The OLED commercial supply agreement provides for the sales of materials for use by LG Display, which may include phosphorescent dopants and host materials.

In 2016, we entered into an OLED Technology License Agreement and Commercial Material Supply Agreement with Tianma Micro-electronics Co., Ltd. (Tianma) which were both effective July 21, 2016 and run for five years. Under the license agreement, we have granted Tianma non-exclusive license rights under various patents owned or controlled by us to manufacture and sell OLED display products. The license agreement calls for license fees and running royalties on licensed products. Additionally, we expect to supply phosphorescent OLED materials to Tianma for use in its licensed products.

In 2016, we entered into and consummated the transactions contemplated by an IP Transfer Agreement with BASF SE (BASF). Under the IP Transfer Agreement, BASF sold to us certain of its rights, title and interest to its owned and co-owned intellectual property rights relating to the composition, development, manufacture and use of OLED materials, including OLED lighting and display stack technology, as well as certain tangible assets. The intellectual property includes knowhow and more than 500 issued and pending patents in the area of phosphorescent materials and technologies.

In 2016, we entered into an agreement to acquire Adesis, Inc. (Adesis), a privately held contract research organization with 43 employees specializing in organic and organometallic synthetic research, development, and commercialization. Adesis is a technology vendor to companies in the pharmaceutical, fine chemical, biomaterials, and catalyst industries, and has worked with us over the last few years to help advance and accelerate a number of our product offerings. The transaction closed on July 11, 2016. Under the terms of the agreement, our subsidiary, UDC, Inc., acquired all outstanding shares of Adesis in a merger for $33.7 million in cash, and up to an additional $2.4 million in cash contingent upon Adesis’ achievement of certain milestones within two years of acquisition. The acquisition was funded through use of existing cash and investments.

Contract research services revenue is revenue earned by performing organic and organometallic synthetics research, development and commercialization on a contractual basis for our customers. We also generate technology development and support revenue earned from government contracts, development and technology evaluation agreements and commercialization assistance fees, which include reimbursements by government entities for all or a portion of the research and development costs we incur in relation to our government contracts. Revenues are recognized as services are performed, proportionally as research and development costs are incurred, or as defined milestones are achieved.

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

Comparison of the Three Months Ended June 30, 2017 and 2016

We had operating income of $60.5 million for the three months ended June 30, 2017, compared to operating income of $34.0 million for the three months ended June 30, 2016. The increase in operating income was primarily due to the following:

• an increase in material sales of $24.5 million partially offset by an increase in the cost of material sales of $4.5 million;
• an increase in royalties and license fees of $11.6 million; partially offset by
• an increase in operating expenses of $6.0 million.

We had net income of $47.2 million or $0.99 per basic and diluted share for the three months ended June 30, 2017 as compared to net income of $21.8 million or $0.46 per basic and diluted share for the three months ended June 30, 2016. The increase in net income was due to an increase in operating income of $26.5 million and interest income, net, of $143,000, partially offset by an increase in income tax expense of $3.1 million.

Revenue

The following table details our revenues for the three months ended June 30, 2017 and 2016 (in thousands):

Total revenue for the three months ended June 30, 2017 increased by $38.1 million as compared to the three months ended June 30, 2016. The increase in revenue was the result of an increase in material sales, royalty and license fees, and contract research services.

Material sales

The following table details our revenues derived from material sales for the three months ended June 30, 2017 and 2016 (in thousands):

Commercial material sales include sales of phosphorescent emitter material that we have validated for high-volume commercial production. Commercial material sales for the three months ended June 30, 2017 increased by $10.1 million as compared to the three months ended June 30, 2016 due to an increase in sales volume resulting from higher phosphorescent emitter demand.

Development material sales include sales of new materials for customer evaluation, and sales of materials that are being scaled up for high volume commercial production. Developmental material sales for the three months ended June 30, 2017 increased by $14.4 million as compared to the three months ended June 30, 2016 due to the timing of materials in the development cycle. In the three months ended June 30, 2017, we had several emitters that were being scaled up, compared to minimal such activity in the three months ended June 30, 2016.

Material sales included sales of both phosphorescent emitter and host materials comprised of the following for the three months ended June 30, 2017 and 2016 (in thousands):

Phosphorescent emitter sales for the three months ended June 30, 2017 increased $23.9 million as compared to the three months ended June 30, 2016 due to an increase in sales volume resulting from higher demand for both red and green phosphorescent emitters.

Host material sales for the three months ended June 30, 2017 increased by $632,000 as compared to the three months ended June 30, 2016. Based on our current sales forecast, we anticipate that sales of existing host material will continue to be minimal. Our customers are not required to purchase our host materials in order to utilize our phosphorescent emitter materials and the host material sales business continues to be more competitive than the phosphorescent emitter material sales business.

Royalty and license fees

Royalty and license fees were as follows for the three months ended June 30, 2017 and 2016 (in thousands):

Royalty and license fees for the three months ended June 30, 2017 increased by $11.6 million as compared to the three months ended June 30, 2016. The increase was primarily related to the receipt and recognition of $45.0 million of royalty and license fee payments under our patent license agreement with SDC compared to $37.5 million in the prior period, as well as by higher licensed sales from our customers.

Contract research services

Contract research services were as follows for the three months ended June 30, 2017 and 2016 (in thousands):

Contract research services include revenue earned by our subsidiary, Adesis, which performs organic and organometallic synthetics research, development and commercialization on a contractual basis for our customer. Contract research services also include technology development and support revenue earned on government contracts, development and technology evaluation agreements and commercialization assistance fees, which includes reimbursement by the U.S. government for all or a portion of the research development expenses we incur related to our government contracts.

Contract research services revenue for the three months ended June 30, 2017 increased by $2.0 million as compared to the three months ended June 30, 2016. The increase in contract research services revenue was related to contract research sales activities associated with Adesis, which was acquired on July 11, 2016.

Cost of material sales

Cost of material sales for the three months ended June 30, 2017 and 2016 were as follows (in thousands):

Cost of material sales for the three months ended June 30, 2017 increased by $4.2 million as compared to the three months ended June 30, 2016 and was primarily due to an increase in the level of material sales.

Cost of commercial material sold for the three months ended June 30, 2017 and 2016 were as follows (in thousands):

Cost of commercial material sold for the three months ended June 30, 2017 increased by $1.7 million as compared to the three months ended June 30, 2016 and was due to an increase in the level of commercial material sales. Gross margin on commercial material sales for the three months ended June 30, 2017 increased by $8.4 million as compared to the three months ended June 30, 2016.

Cost of commercial material sold includes the cost of producing materials, shipping costs for such materials and inventory write-downs, but excludes the cost of producing certain early development material. Depending on the amount, timing and stage of production of such materials, we expect the cost of commercial materials sold to fluctuate from quarter to quarter.

Cost of development material sold for the three months ended June 30, 2017 and 2016 were as follows (in thousands):

Cost of development material sold for the three months ended June 30, 2017 increased by $2.5 million as compared to the three months ended June 30, 2016 and was due to the timing of emitters in the development cycle. In the three months ended June 30, 2017, we had several emitters that were in the latter stages of the development cycle prior to transitioning through commercial validation, compared to minimal such activity in the three months ended June 30, 2016. This resulted in higher material costs and improved gross margin as a percentage of development material sales in the three months ended June 30, 2017 as compared to the same three-month period in the prior year.

Research and development

Research and development expenses decreased to $10.7 million for the three months ended June 30, 2017, as compared to $11.0 million for the three months ended June 30, 2016.

Selling, general and administrative

Selling, general and administrative expenses increased to $9.8 million for the three months ended June 30, 2017, as compared to $7.7 million for the three months ended June 30, 2016. The increase in selling, general and administrative expenses was primarily due to incremental costs associated with the addition of Adesis activity, as well as higher employee-related and other operating costs.

Amortization of acquired technology and other intangible assets

Amortization of acquired technology and other intangible assets increased to $5.5 million for the three months ended June 30, 2017, as compared to $2.8 million for the three months ended June 30, 2016. The increase was due to higher amortization expense of $2.7 million associated with the acquisitions of the BASF patent portfolio and intangible assets associated with the Adesis acquisition.

Patent costs

Patent costs increased to $1.7 million for the three months ended June 30, 2017, as compared to $1.2 million for the three months ended June 30, 2016.

Royalty and license expense

Royalty and license expense increased to $3.0 million for the three months ended June 30, 2017, as compared to $2.0 million for the three months ended June 30, 2016. The increase was due to increased royalties incurred under our amended license agreement with Princeton, USC, and Michigan, resulting from an increase in qualifying material sales. See Note 8 in Notes to Consolidated Financial Statements for further discussion.

Interest income, net and other income (expense), net

Interest income, net was $796,000 for the three months ended June 30, 2017, as compared to $653,000 for the three months ended June 30, 2016. Other income (expense), net primarily consisted of net exchange gains and losses on foreign currency transactions. We recorded other income of $6,000 for the three months ended June 30, 2017, as compared to other expense of $1.8 million for the three months ended June 30, 2016. Other expense for the 2016 period primarily consisted of exchange losses on foreign currency associated with the BASF OLED patent acquisition.

Income tax expense

On January 1, 2017, we adopted ASU No. 2016-09, Improvements to Employee Share-Based Accounting, which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Under the previous guidance, tax effects of deductions for employee share awards in excess of compensation cost ("windfalls") were recorded in equity in the period in which the deductions actually reduced income taxes payable and any unrecognized tax benefits were tracked separately off the balance sheet. Under the new guidance, excess tax benefits and deficiencies are recorded in the income statement in the period in which stock awards vest or are settled, and any excess tax benefits not previously recognized because the related tax deduction had not reduced current taxes payable, are recorded through a cumulative-effect adjustment to retained earnings at the beginning of the period of adoption

We are subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was 23.0% and 33.6%, for the three months ended June 30, 2017 and 2016, respectively, and we recorded income tax expense of $14.1 million and $11.0 million, respectively. The effective income tax rate for the three months ended June 30, 2017 reflected a benefit from the utilization of a valuation allowance at UDC Ireland.

Without the adoption of ASU No. 2016-09, for the three months ended June 30, 2017, the effective income tax rate and income tax expense would have been 24.2% and $14.8 million.

Comparison of the Six Months Ended June 30, 2017 and 2016

We had operating income of $72.6 million for the six months ended June 30, 2017, as compared to operating income of $36.7 million for the six months ended June 30, 2016. The increase in operating income was primarily due to the following:

• an increase in material sales of $46.8 million partially offset by an increase in the cost of material sales of $11.3 million;
• an increase in royalties and license fees of $13.3 million; partially offset by
• an increase in operating expenses of $14.5 million.

We had net income of $57.6 million or $1.21 per basic and diluted share for the six months ended June 30, 2017, compared to net income of $23.8 million or $0.51 per basic and diluted share for the six months ended June 30, 2016. The increase in net income was due to an increase in operating income of $35.9 million and interest income, net, of $489,000, partially offset by an increase in income tax expense of $4.5 million.

Revenue

The following table details our revenues for the six months ended June 31, 2017 and 2016 (in thousands):

Total revenue for the six months ended June 30, 2017 increased by $64.0 million compared to the six months ended June 30, 2016. The increase in revenue was the result of an increase in material sales, royalty and license fees, and contract research services.

Material sales

The following table details our revenues derived from material sales for the six months ended June 30, 2017 and 2016 (in thousands):

Commercial material sales for the six months ended June 30, 2017 increased by $23.8 million as compared to the six months ended June 30, 2016 due to an increase in sales volume resulting from higher phosphorescent emitter demand.

Developmental material sales for the six months ended June 30, 2017 increased by $23.0 million compared to the six months ended June 30, 2016 due the timing of materials in the development cycle. In the six months ended June 30, 2017, we had several emitters that were being scaled up, compared to minimal such activity in the six months ended June 30, 2016.

Material sales included sales of both phosphorescent emitter and host materials comprised of the following for the six months ended June 30, 2017 and 2016 (in thousands):

Phosphorescent emitter sales for the six months ended June 30, 2017 increased $46.2 million compared to the six months ended June 30, 2016 due to an increase in sales volume resulting from higher demand for both red and green phosphorescent emitters.

Host material sales for the six months ended June 30, 2017 increased by $646,000 compared to the six months ended June 30, 2016. Based on our current sales forecast, we anticipate that sales of existing host material will continue to be minimal. Our customers are not required to purchase our host materials in order to utilize our phosphorescent emitter materials and the host material sales business continues to be more competitive than the phosphorescent emitter material sales business.

Royalty and license fees

Royalty and license fees were as follows for the six months ended June 30, 2017 and 2016 (in thousands):

Royalty and license fees for the six months ended June 30, 2017 increased by $13.3 million compared to the six months ended June 30, 2016. The increase was primarily related to the receipt and recognition of $45.0 million of royalty and license fee payments under our patent license agreement with SDC compared to $37.5 million in the prior period, as well as to higher licensed sales from our customers.

Contract research services

Contract research services were as follows for the six months ended June 30, 2017 and 2016 (in thousands):

Contract research services include revenue earned by our subsidiary, Adesis, which performs organic and organometallic synthetics research, development and commercialization on a contractual basis for our customer. Contract research services also include technology development and support revenue earned on government contracts, development and technology evaluation agreements and commercialization assistance fees, which includes reimbursement by the U.S. government for all or a portion of the research development expenses we incur related to our government contracts.

Contract research services revenue for the six months ended June 30, 2017 increased by $3.8 million compared to the six months ended June 30, 2016. The increase in contract research services revenue was related to contract research sales activities associated with Adesis, which was acquired on July 11, 2016.

Cost of material sales

Cost of material sold for the six months ended June 30, 2017 and 2016 were as follows (in thousands):

Cost of material sold for the six months ended June 30, 2017 increased by $11.3 million as compared to the six months ended June 30, 2016 and was primarily due to an increase in the level of material sales. As a result, gross margin on material sales for the six months ended June 30, 2017 increased by $35.6 million as compared to the six months ended June 30, 2016 with gross margin as a percentage of material sales declining to 76% from 77%, respectively.

Cost of commercial material sold for the six months ended June 30, 2017 and 2016 were as follows (in thousands):

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Cost of commercial material sold for the six months ended June 30, 2017 increased by $7.7 million as compared to the six months ended June 30, 2016 and was primarily due to an increase in the level of commercial material sales. Gross margin as a percentage of commercial material sales for the six months ended June 30, 2017 increased by $16.1 million as compared to the six months ended June 30, 2016. The decrease in the gross margin as a percentage of commercial material sales was primarily due to unfavorable product mix and a decrease in the average selling prices per gram sold.

Cost of commercial material sold includes the cost of producing materials, shipping costs for such materials, and inventory write-downs, but excludes the cost of producing certain early development material. Depending on the amounts, timing and stage of production of materials, we expect the cost of commercial material sold to fluctuate from quarter to quarter.

Cost of development material sold for the six months ended June 30, 2017 and 2016 were as follows (in thousands):

Cost of development material sold for the six months ended June 30, 2017 increased by $3.5 million as compared to the six months ended June 30, 2016 and was due to the timing of emitters in the development cycle. In the six months ended June 30, 2017, we had several emitters that were in the latter stages of the development cycle prior to transitioning through commercial validation, compared to minimal such activity in the six months ended June 30, 2016. This resulted in higher material costs and improved gross margin as a percentage of development material sales in the six months ended June 30, 2017 as compared to the same six-month period in the prior year.

Research and development

Research and development expenses increased to $22.5 million for the six months ended June 30, 2017, as compared to $21.4 million for the six months ended June 30, 2016. The increase in research and development expenses was primarily due to higher third-party contract research services activities.

Selling, general and administrative

Selling, general and administrative expenses increased to $19.9 million for the six months ended June 30, 2017, as compared to $14.3 million for the six months ended June 30, 2016. The increase in selling, general and administrative expenses was primarily due to incremental costs associated with the addition of Adesis activity, as well as higher employee-related costs and other operating expenses.

Amortization of acquired technology and other intangible assets

Amortization of acquired technology and other intangible assets increased to $11.0 million for the six months ended June 30, 2017, as compared to $5.6 million for the six months ended June 30, 2016. The increase was due to higher amortization expense of $5.3 million associated with the acquisitions of the BASF patent portfolio and intangible assets associated with the Adesis acquisition.

Patent costs

Patent costs increased to $3.2 million for the six months ended June 30, 2017, as compared to $2.6 million for the six months ended June 30, 2016.

Royalty and license expense

Royalty and license expense increased to $4.6 million for the six months ended June 30, 2017, as compared to $2.8 million for the six months ended June 30, 2016. The increase was due to increased royalties incurred under our amended license agreement with Princeton, USC, and Michigan, resulting from an increase in qualifying material sales. See Note 8 in Notes to Consolidated Financial Statements for further discussion.

Interest income, net and other income (expense), net

Interest income, net was $1.5 million for the six months ended June 30, 2017, as compared to $1.0 million for the six months ended June 30, 2016. Other income (expense), net primarily consisted of net exchange gains and losses on foreign currency transactions. We recorded other expense of $13,000 for the six months ended June 30, 2017, as compared to other expense of $1.8 million for the three months ended June 30, 2016. Other expense for the 2016 period primarily consisted of exchange losses on foreign currency associated with the BASF OLED patent acquisition.

Income tax expense

On January 1, 2017, we adopted ASU No. 2016-09, Improvements to Employee Share-Based Accounting, which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Under the previous guidance, tax effects of deductions for employee share awards in excess of compensation cost ("windfalls") were recorded in equity in the period in which the deductions actually reduced income taxes payable and any unrecognized tax benefits were tracked separately off the balance sheet. Under the new guidance, excess tax benefits and deficiencies are recorded in the income statement in the period in which stock awards vest or are settled, and any excess tax benefits not previously recognized because the related tax deduction had not reduced current taxes payable, are recorded through a cumulative-effect adjustment to retained earnings at the beginning of the period of adoption

We are subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was 22.3% and 33.5%, for the six months ended June 30, 2017 and 2016, respectively, and the Company recorded income tax expense of $16.5 million and $12.0 million, respectively. The effective income tax rate for the six months ended June 30, 2017 reflected a benefit from the utilization of a valuation allowance at UDC Ireland.

Without the adoption of ASU No. 2016-09, for the six months ended June 30, 2017, the effective income tax rate and income tax expense would have been 24.8% and $18.4 million.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash and cash equivalents and our short-term investments. As of June 30, 2017, we had cash and cash equivalents of $109.4 million and short-term investments of $256.1 million, for a total of $365.5 million. This compares to cash and cash equivalents of $139.4 million and short-term investments of $188.6 million, for a total of $328.0 million, as of December 31, 2016.

Cash provided by operating activities was $56.6 million for the six months ended June 30, 2017, compared to cash provided by operating activities of $36.2 million for the six months ended June 30, 2016. The increase in cash provided by operating activities of $20.4 million was due to an increase in net income of $33.8 million and an increase in non-cash adjustments to net income of $7.8 million, partially offset by an increase in cash used in operating assets and liabilities of $21.2 million primarily due to an increase in accounts receivable and inventory.

Cash used in investing activities was $75.6 million for the six months ended June 30, 2017, as compared to cash used in investing activities of $59.4 million for the six months ended June 30, 2016. The increase in cash used in investing activities of $16.2 million was primarily due to the timing of maturities and purchases of investments resulting in net purchases of $65.9 million for the six months ended June 30, 2017, as compared to net sales of $38.8 million for the six months ended June 30, 2016, as well as an increase in purchases of property, plant and equipment of $7.6 million, partially offset by the addition of intangible assets associated with the BASF OLED patent acquisition of $96.0 million purchased in the six months ended June 30, 2016. The increase in property, plant and equipment included the purchase of a previously leased manufacturing facility in Delaware by Adesis, as well as expansion of our OLED manufacturing capacity managed by our subcontractor, PPG, in Ohio.

Cash used in financing activities was $11.0 million for the six months ended June 30, 2017, as compared to $4.4 million for the six months ended June 30, 2016. The increase in cash used in financing activities of $6.6 million was due primarily to an increase in the payment of withholding taxes related to stock-based compensation to employees of $3.7 million as well as the cash payment of dividends in the current year of $2.8 million.

Working capital was $395.5 million as of June 30, 2017, compared to $345.2 million as of June 30, 2016. The increase in working capital was primarily due to an increase in accounts receivable and inventory, partially offset by an increase in accounts payable.

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 twelve 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 outstanding stock 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 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. 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 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 revenue, the valuation of certain investments, the valuation and recoverability of acquired technology and inventories, stock-based compensation, income taxes and our Supplemental Executive Retirement Plan, are our “critical accounting policies” as contemplated by the SEC.

Refer to our Annual Report on Form 10-K for the year ended December 31, 2016, for additional discussion of our critical accounting policies.

Contractual Obligations

Refer to our Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of our contractual obligations.

Off-Balance Sheet Arrangements

As of June 30, 2017, we had no off-balance sheet arrangements in the nature of guarantee contracts, retained or contingent interests in assets transferred to unconsolidated entities (or similar arrangements serving as credit, liquidity or market risk support to unconsolidated entities for any such assets), or obligations (including contingent obligations) arising out of variable interests in unconsolidated entities providing financing, liquidity, market risk or credit risk support to us, or that engage in leasing, hedging or research and development services with us.

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 “Fair Value Measurements” in Note 6 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.

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 June 30, 2017. 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 quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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, 2016.