# Universal Display Corp \\pa\\: Form 10-Q for the period ended Sep 30, 2018

- Company: [Universal Display Corp \\pa\\](/companies/oled.md) (CIK 1005284)
- Form: 10-Q
- Filed: 2018-11-01
- Accepted by EDGAR: Nov 1, 2018, 16:02 ET
- Period: 2018-09-30
- Accession: 0001564590-18-026211
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1005284/000156459018026211/oled-10q_20180930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005284/000156459018026211/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2018-07-01 to 2018-09-30 | $16.1m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2018-01-01 to 2018-09-30 | $35.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2018-07-01 to 2018-09-30 | $61.4m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-01-01 to 2018-09-30 | $142.1m | us-gaap:GrossProfit |
| Research and development | 3 months, 2018-07-01 to 2018-09-30 | $13.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2018-01-01 to 2018-09-30 | $38.9m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2018-07-01 to 2018-09-30 | $12.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-01-01 to 2018-09-30 | $34.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | $26.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | $41.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2018-07-01 to 2018-09-30 | $5.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-01-01 to 2018-09-30 | $7.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | $22.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | $39.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | $0.48 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | $0.83 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-07-01 to 2018-09-30 | $0.48 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-01-01 to 2018-09-30 | $0.83 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-07-01 to 2018-09-30 | 46,914,553 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-01-01 to 2018-09-30 | 46,893,768 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | $95.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $20.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2018-07-01 to 2018-09-30 | $2.8m | us-gaap:PaymentsOfDividendsCommonStock |
| Dividends paid | 9 months, 2018-01-01 to 2018-09-30 | $8.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2018-01-01 to 2018-09-30 | $477.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-09-30 | $101.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $617.8m | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $883.7m | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $114.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-09-30 | $208.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2018-09-30 | $675.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 27,920 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 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, 2017, 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 applications, 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 primarily 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. These payments are included in the estimate of total contract consideration by customer and recognized as revenue over the contract term based on material units sold at the estimated per unit fee over the life of the contract.

Our most significant commercial license agreement is with Samsung Display Co., Ltd. (SDC) covering the manufacture and sale of specified OLED display products. The agreement, originally entered into in 2011, expired at the end of 2017 and has been replaced with a new five year license agreement with a further two-year extension option.

At the same time we entered into the 2011 patent license agreement with SDC, we also entered into a supplemental material purchase agreement with SDC which also expired in 2017 and was also replaced with a new five-year supply agreement with a two-year extension option.

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 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. The Company expects 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 emitters and host materials.

In 2016, we entered into long-term, multi-year OLED patent license and material purchase agreements with Tianma Micro-electronics Co. Ltd. (Tianma). 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 2017, we entered into long-term, multi-year agreements with BOE Technology Group Co., Ltd. (BOE). Under these agreements, we have granted BOE non-exclusive license rights under various patents owned or controlled by us to manufacture and sell OLED display products. We have also agreed to supply phosphorescent OLED materials to BOE.

In 2018, we entered into long-term, multi-year OLED patent license and material purchase agreements with Visionox Technology, Inc. (Visionox). Under the license agreement, we have granted Visionox 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 Visionox for use in its licensed products.

In 2016, we acquired Adesis, Inc. (Adesis) with operations in New Castle, Delaware. Adesis is a contract research organization (CRO) that provides support services to the OLED, pharma, biotech, catalysis and other industries. As of September 30, 2018, Adesis employed a team of 70 chemists. Prior to our acquisition in 2016, we utilized more than 50% of Adesis’ technology service and production output. We continue to utilize a significant portion of its technology research capacity for the benefit of our OLED technology development, and Adesis uses the remaining capacity to operate as a CRO in the above-mentioned industries providing contract research services to those third party customers. Contract research services revenue is 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 September 30, 2018 and 2017

|  | Three Months Ended September 30, 2018 | 2017 | Increase (Decrease) |
| --- | ---: | ---: | ---: |
| REVENUE | $77,550 | $61,683 | $15,867 |
| COST OF SALES | 16,123 | 13,465 | 2,658 |
| Gross margin | 61,427 | 48,218 | 13,209 |
| OPERATING EXPENSES: |  |  |  |
| Research and development | 13,616 | 11,596 | 2,020 |
| Selling, general and administrative | 12,120 | 11,695 | 425 |
| Amortization of acquired technology and other intangible assets | 5,493 | 5,498 | (5) |
| Patent costs | 1,937 | 1,875 | 62 |
| Royalty and license expense | 2,229 | 1,764 | 465 |
| Total operating expenses | 35,395 | 32,428 | 2,967 |
| OPERATING INCOME | 26,032 | 15,790 | 10,242 |
| Interest income, net | 2,118 | 861 | 1,257 |
| Other (expense) income, net | (7) | 6 | (13) |
| Interest and other (expense) income, net | 2,111 | 867 | 1,244 |
| INCOME BEFORE INCOME TAXES | 28,143 | 16,657 | 11,486 |
| INCOME TAX EXPENSE | (5,325) | (3,137) | (2,188) |
| NET INCOME | $22,818 | $13,520 | $9,298 |

### Revenue

During the three months ended September 30, 2018, we recognized revenue of $77.6 million, an increase of $15.9 million from $61.7 million in the three months ended September 30, 2017. The increase in revenue was primarily the result of higher material sales, offset by the impact of ASC 606. Revenue for the three months ended September 30, 2018 was $14.1 million lower than what would have been recorded under ASC 605. Under ASC 606, we recognize license fee revenue on a material units sold basis in contrast to our recognizing license fee revenue either upon a straight-line basis or upon receipt of payment that was required under ASC 605.

Revenue derived from OLED sales comprised 96% of total revenue for both three month periods ended September 30, 2018 and 2017. The remaining portion of our revenue was derived from contract research services. 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 customers.

### Cost of sales

Cost of sales for the three months ended September 30, 2018 increased by $2.7 million as compared to the three months ended September 30, 2017 primarily due to an increase in the average cost of sales per unit resulting from a slower than anticipated increase in customer demand and an excess and obsolete inventory charge of $1.0 million.

As a result of the impact of ASC 606 and the increase in material sales, gross margin for the three months ended September 30, 2018 increased by $13.2 million as compared to the three months ended September 30, 2017 with gross margin as a percentage of sales increasing to 79.2% from 78.2%, respectively. The increase in the gross margin as a percentage of sales was primarily due to the recognition of SDC license revenue in the three months ended September 30, 2018 per the new standard, as compared to none being recognized in the three months ended September 30, 2017.

### Research and development

Research and development expenses increased to $13.6 million for the three months ended September 30, 2018, as compared to $11.6 million for the three months ended September 30, 2017. The increase in research and development expenses was primarily due to higher operating costs, including increased contract research activity.

### Selling, general and administrative

Selling, general and administrative expenses increased to $12.1 million for the three months ended September 30, 2018, as compared to $11.7 million for the three months ended September 30, 2017. The increase in selling, general and administrative expenses was primarily due to higher employee-related, including higher stock compensation expense, and other routine operating costs.

### Amortization of acquired technology and other intangible assets

Amortization of acquired technology and other intangible assets was $5.5 million for both of the three-month periods ended September 30, 2018 and 2017.

### Patent costs

Patent costs were $1.9 million for both of the three-month periods ended September 30, 2018 and 2017.

### Royalty and license expense

Royalty and license expense increased to $2.2 million for the three months ended September 30, 2018, as compared to $1.8 million for the three months ended September 30, 2017. 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 7 in Notes to Consolidated Financial Statements for further discussion.

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

Interest income, net was $2.1 million for the three months ended September 30, 2018, as compared to $861,000 for the three months ended September 30, 2017. The increase in interest income, net was primarily due to the increase in available-for-sale investments held in the current quarter. Other (expense) income, net primarily consisted of net exchange gains and losses on foreign currency transactions. We recorded other expense, net of $7,000 for the three months ended September 30, 2018, as compared to other income, net of $6,000 for the three months ended September 30, 2017.

### Income tax expense

We are subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was 18.9% and 18.8% for the three months ended September 30, 2018 and 2017, respectively, and we recorded income tax expense of $5.3 million and $3.1 million, respectively, for those periods. The recorded amounts include deductions for employee share awards in excess of compensation costs (“windfalls”) under ASU No. 2016-09.

Without the $29,000 benefit of ASU No. 2016-09, for the three months ended September 30, 2018, the effective income tax rate and income tax expense would have been 19.0% and $5.4 million, respectively, and for the three months ended September 30, 2017 the effective income tax rate and income tax expense would have been 21.6% and $3.6 million, respectively.

### Comparison of the Nine Months Ended September 30, 2018 and 2017

|  | Nine Months Ended September 30, 2018 | 2017 | Increase (Decrease) |
| --- | ---: | ---: | ---: |
| REVENUE | $177,271 | $219,762 | $(42,491) |
| COST OF SALES | 35,216 | 37,762 | (2,546) |
| Gross margin | 142,055 | 182,000 | (39,945) |
| OPERATING EXPENSES: |  |  |  |
| Research and development | 38,922 | 34,099 | 4,823 |
| Selling, general and administrative | 34,473 | 31,611 | 2,862 |
| Amortization of acquired technology and other intangible assets | 16,479 | 16,485 | (6) |
| Patent costs | 5,691 | 5,096 | 595 |
| Royalty and license expense | 5,028 | 6,342 | (1,314) |
| Total operating expenses | 100,593 | 93,633 | 6,960 |
| OPERATING INCOME | 41,462 | 88,367 | (46,905) |
| Interest income, net | 5,155 | 2,328 | 2,827 |
| Other (expense) income, net | (66) | (7) | (59) |
| Interest and other (expense) income, net | 5,089 | 2,321 | 2,768 |
| INCOME BEFORE INCOME TAXES | 46,551 | 90,688 | (44,137) |
| INCOME TAX EXPENSE | (6,960) | (19,616) | 12,656 |
| NET INCOME | $39,591 | $71,072 | $(31,481) |

### Revenue

During the nine months ended September 30, 2018, we recognized revenue of $177.3 million, a decrease of $42.5 million from $219.8 in the nine months ended September 30, 2017. The decrease in revenue was primarily the result of the impact of ASC 606 and lower material sales. Revenue for the nine months ended September 30, 2018 was $56.2 million lower than what would have been recorded under ASC 605. Under ASC 606, we recognize license fee revenue on a material units sold basis in contrast to our recognizing license fee revenue either upon a straight-line basis or upon receipt of payment that was required under ASC 605. The decrease in revenue was also the result of near-term weakness in the mobile display segment of the OLED display market that primarily impacted our first quarter results. Despite the near-term weakness in this segment, we believe the overall OLED display market will continue to grow as expected.

Revenue derived from OLED sales comprised 95% of total revenue in the nine months ended September 30, 2018 as compared to 97% in the nine months ended September 30, 2017. The remaining portion of our revenue was derived from contract research services. 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 customers.

### Cost of sales

Cost of sales for the nine months ended September 30, 2018 decreased by $2.5 million as compared to the nine months ended September 30, 2017 primarily due to the decline in the level of material sales. Included in the cost of sales for the nine months ended September 30, 2018 was an excess and obsolete inventory charge of $1.0 million due to lower than anticipated customer demand. As a result of the impact of ASC 606 and the decline in material sales, gross margin for the nine months ended September 30, 2018 decreased by $39.9 million as compared to the nine months ended September 30, 2017 with gross margin as a percentage of sales decreasing to 80.1% from 82.8%.

### Research and development

Research and development expenses increased to $38.9 million for the nine months ended September 30, 2018, as compared to $34.1 million for the nine months ended September 30, 2017. The increase in research and development expenses was primarily due to higher operating costs, including increased contract research activity.

### Selling, general and administrative

Selling, general and administrative expenses increased to $34.5 million for the nine months ended September 30, 2018, as compared to $31.6 million for the nine months ended September 30, 2017. The increase in selling, general and administrative expenses was primarily due to higher employee-related, including higher stock compensation expense, and other routine operating costs.

### Amortization of acquired technology and other intangible assets

Amortization of acquired technology and other intangible assets was $16.5 million for both of the nine-month periods ended September 30, 2018 and 2017.

### Patent costs

Patent costs increased to $5.7 million for the nine months ended September 30, 2018 as compared to $5.1 million for the nine months ended September 30, 2017.

### Royalty and license expense

Royalty and license expense decreased to $5.0 million for the nine months ended September 30, 2018, as compared to $6.3 million for the nine months ended September 30, 2017. The decrease was due to decreased royalties incurred under our amended license agreement with Princeton, USC, and Michigan, resulting from a decrease in qualifying material sales. See Note 7 in Notes to Consolidated Financial Statements for further discussion.

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

Interest income, net was $5.2 million for the nine months ended September 30, 2018, as compared to $2.3 million for the nine months ended September 30, 2017. The increase in interest income, net was primarily due to the increase in available-for-sale investments held in the first nine months of 2018 over amounts held in the comparable period in 2017. Other (expense) income, net primarily consisted of net exchange gains and losses on foreign currency transactions. We recorded other expense, net of $66,000 for the nine months ended September 30, 2018, as compared to other expense, net of $7,000 for the nine months ended September 30, 2017.

### Income tax expense

We are subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was 15.0% and 21.6% for the nine months ended September 30, 2018 and 2017, respectively, and we recorded income tax expense of $7.0 million and $19.6 million, respectively. The recorded amounts include deductions for employee share awards in excess of compensation costs (“windfalls”) under ASU No. 2016-09.

Without the $1.8 million benefit of ASU No. 2016-09, for the nine months ended September 30, 2018, the effective income tax rate and income tax expense would have been 18.8% and $8.8 million, respectively, and for the nine months ended September 30, 2017 the effective income tax rate and income tax expense would have been 24.3% and $22.0 million, respectively.

### Liquidity and Capital Resources

Our principal sources of liquidity are our cash and cash equivalents and our investments. As of September 30, 2018, we had cash and cash equivalents of $101.6 million and short-term investments of $392.0 million, for a total of $493.6 million. This compares to cash and cash equivalents of $132.8 million, short-term investments of $287.5 million and long-term investments of $14.8 million, for a total of $435.1 million, as of December 31, 2017.

Cash provided by operating activities was $95.0 million for the nine months ended September 30, 2018, compared to cash provided by operating activities of $71.3 million for the nine months ended September 30, 2017. The increase in cash provided by operating activities of $23.7 million was primarily due to a change in net operating assets and liabilities of $87.7 million, which included an increase in deferred revenue and other liabilities and a decrease in accounts receivable, partially offset by an increase in inventory and other assets. The increase in the balances of other liabilities and other assets is due to the anticipated favorable settlement with the Korean tax authorities. This increase was partially offset by a decrease in net income of $31.5 million and a decrease in non-cash adjustments to net income of $32.5 million.

Cash used in investing activities was $106.2 million for the nine months ended September 30, 2018, as compared to cash used in investing activities of $128.5 million for the nine months ended September 30, 2017. The decrease in cash used by investing activities of $22.3 million was primarily due to the timing of maturities and purchases of investments resulting in net purchases of $85.3 million for the nine months ended September 30, 2018, as compared to net purchases of $105.2 million for the nine months ended September 30, 2017, and a decrease in purchases of property, plant and equipment of $2.3 million from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. The decrease in property, plant and equipment purchases was primarily due to the expansion of our OLED manufacturing facility managed by our subcontractor PPG, in Ohio, during 2017, partially offset by the purchase of research and development lab equipment as well as expansion of our Adesis manufacturing facility in Delaware during 2018.

Cash used in financing activities was $19.9 million for the nine months ended September 30, 2018, as compared to $13.0 million for the nine months ended September 30, 2017. The increase in cash used in financing activities of $6.9 million was due to an increase in the cash payment of dividends in the current year of $4.2 million, an increase in the payment of withholding taxes related to stock-based compensation to employees of $2.3 million and repurchase of common stock of $477,000, partially offset by an increase in proceeds from the issuance of common stock of $87,000.

Working capital was $503.5 million as of September 30, 2018, compared to $455.4 million as of December 31, 2017. The increase in working capital was primarily due to an increase in short-term investments and inventory, partially offset by an increase in deferred revenue and a decrease in cash and cash equivalents and accounts receivable.

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, inventories, and income taxes 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, 2017, 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, 2017 for a discussion of our contractual obligations.

### Off-Balance Sheet Arrangements

As of September 30, 2018, 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.

## Market risk

As filed, 1,021 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 “Fair Value Measurements” 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, 1,528 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, 2018. 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 September 30, 2018 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, 2017.

Filed Nov 1, 2018.
Source: SEC EDGAR, the filing index for accession 0001564590-18-026211. Last ingested by Listed: Oct 31, 2026, 14:02 ET. No prices; not investment advice.