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 in the areas of organic and organometallic materials 
synthesis research, development and commercialization; 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.

In 2018, the Company entered into a commercial license agreement with Samsung 
Display Co., Ltd. (SDC). This agreement, which covers the manufacture and sale 
of specified OLED display materials, was effective as of January 1, 2018 and 
lasts through the end of 2022 with an additional two-year extension option. 
Under this agreement, the Company is being paid a license fee, payable in 
quarterly installments over the agreement term of five years. The agreement 
conveys to SDC the non-exclusive right to use certain of the Company's 
intellectual property assets for a limited period of time that is less than the 
estimated life of the assets.

At the same time the Company entered into the current patent license agreement 
with SDC, the Company also entered into a supplemental material purchase 
agreement with SDC. Under the supplemental material purchase agreement, SDC 
agrees to purchase from the Company a minimum amount of phosphorescent emitter 
materials for use in the manufacture of licensed products. This minimum 
commitment is subject to SDC’s requirements for phosphorescent emitter 
materials and the Company’s ability to meet these requirements over the term of 
the supplemental agreement.

In 2015, the Company 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 
generates 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, the Company entered into long-term, multi-year OLED patent license and 
material purchase agreements with Tianma Micro-electronics Co. Ltd. (Tianma). 
Under the license agreement, the Company has granted Tianma non-exclusive 
license rights under various patents owned or controlled by the Company to 
manufacture and sell OLED display products. The license agreement calls for 
license fees and running royalties on licensed products. Additionally, the 
Company supplies phosphorescent OLED materials to Tianma for use in its 
licensed products.

In 2017, the Company entered into long-term, multi-year agreements with BOE 
Technology Group Co., Ltd. (BOE). Under these agreements, the Company has 
granted BOE non-exclusive license rights under various patents owned or 
controlled by the Company to manufacture and sell OLED display products. The 
Company also supplies phosphorescent OLED materials to BOE.

In 2018, the Company entered into long-term, multi-year OLED patent license and 
material purchase agreements with Visionox Technology, Inc. (Visionox). Under 
the license agreement, the Company has granted Visionox non-exclusive license 
rights under various patents owned or controlled by the Company to manufacture 
and sell OLED display products. The license agreement calls for license fees 
and running royalties on licensed products. Additionally, the Company supplies 
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, 2019, Adesis employed a team of 91 research scientists, 
chemists, engineers, and laboratory technicians. 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.

Revenue

During the three months ended September 30, 2019, we recognized revenue of 
$97.5 million, an increase of $19.9 million from $77.6 million in the three 
months ended September 30, 2018. The increase in revenue was due to higher 
material sales as a result of stronger demand in the OLED display market.

Revenue derived from OLED sales comprised 97% of total revenue for the three 
months ended September 30, 2019 as compared to 96% for the three months ended 
September 30, 2018. 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, 2019 increased by $1.2 
million as compared to the three months ended September 30, 2018, primarily due 
to an increase in the level of material sales. Included in the cost of sales 
for the three months ended September 30, 2018, was an increase in inventory 
reserve of $1.0 million due to excess inventory levels in certain products. 
There was no increase in inventory reserve for the three months ended September 
30, 2019. As a result of the increase in material sales, gross margin for the 
three months ended September 30, 2019 increased by $18.8 million as compared to 
the three months ended September 30, 2018, with gross margin as a percentage of 
revenue increasing to 82% from 79%.

Research and development

Research and development expenses increased to $16.8 million for the three 
months ended September 30, 2019, as compared to $13.6 million for the three 
months ended September 30, 2018. The increase in research and development 
expenses was primarily due to higher employee-related compensation expenses and 
operating costs, including increased contract research activity.

Selling, general and administrative

Selling, general and administrative expenses increased to $12.6 million for the 
three months ended September 30, 2019, as compared to $12.1 million for the 
three months ended September 30, 2018. The increase in selling, general and 
administrative expenses was primarily due to higher employee-related 
compensation expenses.

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, 2019 and 2018.

Patent costs

Patent costs decreased to $1.7 million for the three months ended September 30, 
2019, as compared to $1.9 million for the three months ended September 30, 
2018.

Royalty and license expense

Royalty and license expense increased to $2.8 million for the three months 
ended September 30, 2019, as compared to $2.2 million for the three months 
ended September 30, 2018. 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 9 to the Consolidated 
Financial Statements for further discussion.

Interest and other income, net

Interest income, net was $2.7 million for the three months ended September 30, 
2019, as compared to $2.1 million for the three months ended September 30, 
2018. The increase in interest income, net was primarily due to the increase in 
available-for-sale investments held in the current quarter over amounts held in 
the comparable period in 2018. Other income (expense), net primarily consisted 
of net exchange gains and losses on foreign currency transactions and rental 
income. We recorded other income, net of $53,000 for the three months ended 
September 30, 2019 as compared to other expense, net of $7,000 for the three 
months ended September 30, 2018.

Income tax expense

We are subject to income taxes in both the United States and foreign 
jurisdictions. The effective income tax rate was an expense of 15.3% and 18.9% 
for the three months ended September 30, 2019 and 2018, respectively, and we 
recorded income tax expense of $6.7 million and $5.3 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. For 
the three months ended September 30, 2019, without the $693,000 benefit of ASU 
No. 2016-09, the effective income tax rate and income tax expense would have 
been 16.9% and $7.4 million, respectively, and for the three months ended 
September 30, 2018, without the $29,000 benefit of ASU No. 2016-09, the 
effective income tax rate and income tax expense would have been 19.0% and $5.4 
million, respectively.

During the three months ended September 30, 2019, the Company released a 
deferred tax liability of $1.9 million due to the expiration of the statute of 
limitations for the 2015 Federal tax return. Without the release of the 
deferred tax liability, the effective income tax rate and income tax expense 
would have been 19.6% and $8.6 million, respectively for the three months ended 
September 30, 2019.


Nine Months Ended September 30,

Revenue

During the nine months ended September 30, 2019, we recognized revenue of 
$303.4 million, an increase of $126.1 million from $177.3 million in the nine 
months ended September 30, 2018. The increase in revenue was due to higher 
material sales as a result of stronger demand in the OLED display market.

Revenue derived from OLED sales comprised 97% of total revenue for the nine 
months ended September 30, 2019 as compared to 95% for the nine months ended 
September 30, 2018. 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, 2019 increased by $22.0 
million as compared to the nine months ended September 30, 2018, primarily due 
to an increase in the level of material sales. Included in the cost of sales 
for the nine months ended September 30, 2019 and 2018, was an increase in 
inventory reserve of $4.2 million and $1.0 million, respectively, due to excess 
inventory levels in certain products. As a result of the increase in material 
sales, gross margin for the nine months ended September 30, 2019 increased by 
$104.2 million as compared to the nine months ended September 30, 2018, with 
gross margin as a percentage of revenue increasing to 81% from 80%.

Research and development

Research and development expenses increased to $51.4 million for the nine 
months ended September 30, 2019, as compared to $38.9 million for the nine 
months ended September 30, 2018. The increase in research and development 
expenses was primarily due to higher employee-related compensation expenses and 
operating costs, including increased contract research activity.

Selling, general and administrative

Selling, general and administrative expenses increased to $40.5 million for the 
nine months ended September 30, 2019, as compared to $34.5 million for the nine 
months ended September 30, 2018. The increase in selling, general and 
administrative expenses was primarily due to higher employee-related 
compensation expenses.

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, 2019 and 2018.

Patent costs

Patent costs decreased to $5.1 million for the nine months ended September 30, 
2019, as compared to $5.7 million for the nine months ended September 30, 2018.

Royalty and license expense

Royalty and license expense increased to $8.8 million for the nine months ended 
September 30, 2019, as compared to $5.0 million for the nine months ended 
September 30, 2018. 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.

Interest and other income, net

Interest income, net was $8.3 million for the nine months ended September 30, 
2019, as compared to $5.2 million for the nine months ended September 30, 2018. 
The increase in interest income, net was primarily due to the increase in 
available-for-sale investments held in the current year over amounts held in 
the comparable period in 2018. Other income (expense), net primarily consisted 
of net exchange gains and losses on foreign currency transactions and rental 
income. We recorded other income, net of $740,000 for the nine months ended 
September 30, 2019 as compared to other expense, net of $66,000 for the nine 
months ended September 30, 2018.

Income tax expense

We are subject to income taxes in both the United States and foreign 
jurisdictions. The effective income tax rate was an expense of 15.8% and 15.0% 
for the nine months ended September 30, 2019 and 2018, respectively, and we 
recorded income tax expense of $21.1 million and $7.0 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. For 
the nine months ended September 30, 2019, without the $3.5 million benefit of 
ASU No. 2016-09, the effective income tax rate and income tax expense would 
have been 18.5% and $24.6 million, respectively, and for the nine months ended 
September 30, 2018, without the $1.8 million benefit of ASU No. 2016-09, the 
effective income tax rate and income tax expense would have been 18.8% and $8.8 
million, respectively

During the nine months ended September 30, 2019, the Company released a 
deferred tax liability of $1.9 million due to the expiration of the statute of 
limitations for the 2015 Federal tax return. Without the release of the 
deferred tax liability, the effective income tax rate and income tax expense 
would have been 17.2% and $23.0 million, respectively for the nine months ended 
September 30, 2019.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash and cash equivalents and our 
short-term investments. As of September 30, 2019, we had cash and cash 
equivalents of $235.5 million and short-term investments of $361.5 million, for 
a total of $597.0 million. This compares to cash and cash equivalents of $211.0 
million and short-term investments of $304.3, for a total of $515.3 million, as 
of December 31, 2018.

Cash provided by operating activities for the nine months ended September 30, 
2019 was $137.7 million resulting from $111.9 million of net income and $88.3 
million due to changes in our operating assets and liabilities, partially 
offset by a $62.5 million reduction due to non-cash items including 
amortization of deferred revenue, amortization of intangibles and stock-based 
compensation. Changes in our operating assets and liabilities related to an 
increase in deferred revenue of $113.8 million, a reduction of inventory of 
$8.1 million and an increase in other liabilities of $5.7 million, partially 
offset by an increase in accounts receivable of $22.6 million, an increase in 
other assets of $14.9 million, and a reduction of accounts payable and accrued 
expenses of $1.8 million.

Cash provided by operating activities for the nine months ended September 30, 
2018 was $95.0 million resulting from $39.6 million of net income and $56.1 
million due to changes in our operating assets and liabilities. This increase 
was partially offset by a $769,000 decrease due to non-cash items including 
amortization of deferred revenue, amortization of intangibles and deferred 
income taxes. Changes in our operating assets and liabilities related to an 
increase in deferred revenue of $99.9 million, an increase in other liabilities 
of $18.3 million, a decrease in accounts receivable of $9.2 million, and an 
increase in accounts payable and accrued expenses of $439,000, partially offset 
by an increase in other assets of $37.9 million and an increase in inventory of 
$33.8 million.

Cash used in investing activities was $83.2 million for the nine months ended 
September 30, 2019, as compared to $106.2 million for the nine months ended 
September 30, 2018. The decrease in cash used in investing activities of $23.0 
million was primarily due to the timing of maturities and purchases of 
investments resulting in net purchases of $57.5 million for the nine months 
ended September 30, 2019, as compared to $85.3 million for the nine months 
ended September 30, 2018, partially offset by an increase in purchases of 
intangibles and property, plant and equipment of $4.8 million for the nine 
months ended September 30, 2019 compared to the nine months ended September 30, 
2018. The increase in property, plant and equipment purchases during 2019 was 
primarily due to the purchase of additional property in Ewing, New Jersey as 
part of our plan to expand operations.

Cash used in financing activities was $30.1 million for the nine months ended 
September 30, 2019, as compared to $19.9 million for the nine months ended 
September 30, 2018. The increase in cash used in financing activities of $10.2 
million was due to an increase in the cash payment of dividends in the current 
year of $5.7 million, an increase in the payment of withholding taxes related 
to stock-based compensation to employees of $4.3 million and an increase in the 
repurchase of common stock of $172,000, partially offset by an increase in 
proceeds from the issuance of common stock of $42,000.

Working capital was $582.6 million as of September 30, 2019, compared to $501.7 
million as of December 31, 2018. The increase in working capital was primarily 
due to an increase in short-term investments, cash and cash equivalents and 
accounts receivable, partially offset by a decrease in inventory and an 
increase in deferred revenue.

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.

Off-Balance Sheet Arrangements

As of September 30, 2019, 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.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.