2018
Annual Report
TO OUR SHAREHOLDERS:
2018 set the stage for the OLED industry’s next growth phase.
With new OLED capacity announcements, an expanding list of
panel manufacturers entering commercial OLED produc(cid:415)on, and
a broadening landscape of consumer OLED products, we believe
that the founda(cid:415)on for growth – both ours and the industry’s –
is well for(cid:415)fied.
During the year, we con(cid:415)nued to make significant progress with
our internal roadmaps. This included new customer agreements,
new infrastructure plans, expansion of our cri(cid:415)cal mass and
advancements in our R&D programs. These ini(cid:415)a(cid:415)ves and
programs further solidify our leadership posi(cid:415)on in the OLED
ecosystem and bu(cid:425)ress our long-term plans to enable this
growing industry.
In 2018, we announced new, long-term customer agreements
with Samsung Display and Visionox. We also reported an
extended evalua(cid:415)on agreement with Sharp. In early 2019, we
executed agreements with Chinese panel makers, Seeya
Technology and China Star Optoelectronics.
We are also expanding our global footprint. In Asia, as our
customer base con(cid:415)nues to grow, we are broadening our local
technical resources to further accelerate our customers’ (cid:415)me to
market. In the U.S., our subsidiary Adesis, Inc. opened new,
state-of-the-art chemistry laboratories in Wilmington, Delaware in
the first quarter of 2018, and in New Castle, Delaware during the
fourth quarter of 2018. In Ewing, New Jersey, we acquired
addi(cid:415)onal space to expand our corporate headquarters’ square
footage. This is all to meet the future needs of the OLED industry,
our customers, our R&D programs, and our employees.
2018 was another year of con(cid:415)nued recogni(cid:415)on for our
Company. Fortune Magazine ranked Universal Display
Corpora(cid:415)on 60th on its list of 100 Fastest-Growing Public
Companies. We also received the 2018 Supplier Award for
Outstanding Strategic Partner from BOE Technology Group. This
pres(cid:415)gious award recognizes suppliers for their outstanding
performance, technology innova(cid:415)on, collabora(cid:415)on and supply
chain excellence. Also during the year, we achieved cer(cid:415)fica(cid:415)on
under ISO 14001:2015, highligh(cid:415)ng our commitment to
environmental stewardship.
On the financial front, 2018 revenues, under ASC Topic 606,
were $247 million, and net income was $59 million, or $1.24 per
diluted share. Under ASC Topic 605 (the prior accoun(cid:415)ng
standard), our 2018 revenues would have been $326 million,
with net income of $130 million, or $2.77 per diluted share. We
generated over $120 million in opera(cid:415)ng cash flow and ended
the year with approximately $11.00 of cash per share.
From a research and development standpoint, we are con(cid:415)nually
discovering, developing and delivering the best OLED emissive
layer materials, including new reds, greens, yellows, and hosts, to
meet the ever-growing and ever-evolving requirements for our
expanding customer base. Our approach to our OLED por(cid:414)olio
includes our computa(cid:415)onal and experimental chemistry
exper(cid:415)se, coupled with physicists, engineers and technicians
advancing our PHOLED technology performance for displays and
ligh(cid:415)ng. We work closely with each customer to tailor design
proprietary phosphorescent materials and device architectures
that can meet their demanding specifica(cid:415)ons for color, efficiency
and life(cid:415)me. With respect to blue, we con(cid:415)nue to make
excellent progress in our ongoing development work for a
commercial display phosphorescent blue emissive system. In
addi(cid:415)on to our phosphorescent core competencies, one of our
major R&D ini(cid:415)a(cid:415)ves is OVJP (organic vapor jet prin(cid:415)ng) targeted
for OLED TV manufacturing. OVJP is our novel solvent-less, mask-
less deposi(cid:415)on technology, which we expect will allow panel
manufacturers to combine the benefits of using small- molecule
materials with a prin(cid:415)ng process that enables cost- effec(cid:415)ve,
high performance, side-by-side RGB (red, green, blue) pa(cid:425)erning
for large area substrates.
In displays, the development and commercializa(cid:415)on of OLEDs is
accelera(cid:415)ng across the consumer electronics market, including
augmented reality/virtual reality (AR/VR), smartwatches,
smartphones, tablets, laptops, automo(cid:415)ve and TVs. An emerging
focal point in the industry is form factor. We expect the ramp of
plas(cid:415)c OLED produc(cid:415)on to usher in new design possibili(cid:415)es.
From conformable to foldable, then to rollable, OLEDs are the
only current display technology that can commercially enable
these exci(cid:415)ng and groundbreaking form factors. In the coming
years, new ideas, new concepts and new products are expected
to showcase the endless possibili(cid:415)es that OLEDs can engender.
We con(cid:415)nue to believe that there is a strong poten(cid:415)al for OLED
ligh(cid:415)ng due to its numerous benefits, however, it is s(cid:415)ll at an
early stage of commercializa(cid:415)on. These benefits include energy
efficiency (because of our proprietary phosphorescent materials
and technology), novel and innova(cid:415)ve forms, beau(cid:415)ful natural
colors that create a spectral distribu(cid:415)on that is the closest to
natural sunlight, cool opera(cid:415)ng temperatures, and low-cost
poten(cid:415)al.
For 25 years, our Company has stood for vision, innova(cid:415)on and
reality. We are proud of that reputa(cid:415)on. As a fast moving,
forward-thinking Company, we con(cid:415)nue to target new
opportuni(cid:415)es as we leverage our intellectual property, materials
and technology, and growing product por(cid:414)olio. With our ability
to leverage the breadth and depth of our know-how and
experience into novel materials and new technologies, coupled
with our expanding infrastructure that is designed to drive
compe(cid:415)(cid:415)ve speed and cost-effec(cid:415)veness, we believe that we are
well posi(cid:415)oned to con(cid:415)nue to enable the growth of the OLED
industry for the near-term, mid-term and long-term.
We thank our employees around the world for their drive, desire,
dedica(cid:415)on, and heart in eleva(cid:415)ng and shaping Universal Display’s
accomplishments and advancements. To our customers and
partners, we thank you for collabora(cid:415)ons that create bright,
beau(cid:415)ful, brilliant products for displays and ligh(cid:415)ng. And to our
shareholders, we thank you for your con(cid:415)nued support as we
deliver on our vision turning innova(cid:415)on into reality.
Sherwin I. Seligsohn
Founder & Chairman of the Board
Steven V. Abramson
President & Chief Execu(cid:415)ve Officer
(cid:56)(cid:49)(cid:44)(cid:55)(cid:40)(cid:39)(cid:3)(cid:54)(cid:55)(cid:36)(cid:55)(cid:40)(cid:54)(cid:3)
(cid:54)(cid:40)(cid:38)(cid:56)(cid:53)(cid:44)(cid:55)(cid:44)(cid:40)(cid:54)(cid:3)(cid:36)(cid:49)(cid:39)(cid:3)(cid:40)(cid:59)(cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40)(cid:3)(cid:38)(cid:50)(cid:48)(cid:48)(cid:44)(cid:54)(cid:54)(cid:44)(cid:50)(cid:49)(cid:3)
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:1800)(cid:1800)(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
(cid:1798)(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission File Number 1-12031
UNIVERSAL DISPLAY CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of
incorporation or organization)
375 Phillips Boulevard, Ewing, New Jersey
(Address of principal executive offices)
23-2372688
(I.R.S. Employer
Identification No.)
08618
(Zip Code)
(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)telephone number, including area code: (609) 671-0980
Securities registered pursuant to Section 12(b) of the Act:
(cid:55)(cid:76)(cid:87)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:40)(cid:68)(cid:70)(cid:75)(cid:3)(cid:38)(cid:79)(cid:68)(cid:86)(cid:86)(cid:3)
(cid:38)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:15)(cid:3)(cid:7)(cid:19)(cid:17)(cid:19)(cid:20)(cid:3)(cid:83)(cid:68)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:49)(cid:68)(cid:80)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:40)(cid:68)(cid:70)(cid:75)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)(cid:58)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)
(cid:55)(cid:75)(cid:72)(cid:3)(cid:49)(cid:36)(cid:54)(cid:39)(cid:36)(cid:52)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:47)(cid:47)(cid:38)(cid:3)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:1800) No (cid:1798)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:1798) No (cid:1800)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes (cid:1800) No (cid:1798)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes (cid:1800) No (cid:1798)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:78)(cid:81)(cid:82)(cid:90)(cid:79)(cid:72)(cid:71)(cid:74)(cid:72)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:71)(cid:72)(cid:73)(cid:76)(cid:81)(cid:76)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:91)(cid:92)(cid:3)(cid:82)(cid:85)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)rence in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:1800)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging
growth company. (cid:54)(cid:72)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:72)(cid:73)(cid:76)(cid:81)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:179)(cid:79)(cid:68)(cid:85)(cid:74)(cid:72)(cid:3)(cid:68)(cid:70)(cid:70)(cid:72)(cid:79)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:76)(cid:79)(cid:72)(cid:85)(cid:15)(cid:180)(cid:3)(cid:179)(cid:68)(cid:70)(cid:70)(cid:72)(cid:79)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:76)(cid:79)(cid:72)(cid:85),(cid:180)(cid:3)(cid:179)(cid:86)(cid:80)(cid:68)(cid:79)(cid:79)(cid:72)(cid:85)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92),(cid:180)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:179)(cid:72)(cid:80)(cid:72)(cid:85)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:87)(cid:75)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:180)(cid:3)in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
Non-accelerated filer
(cid:95)
(cid:134)
Accelerated filer
Smaller reporting company
Emerging growth company
(cid:134)
(cid:134)
(cid:134)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes (cid:1798)(cid:3)(cid:3)No (cid:1798)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:1798) No (cid:1800)
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the closing sale price
(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:49)(cid:36)(cid:54)(cid:39)(cid:36)(cid:52)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:68)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:45)(cid:88)(cid:81)(cid:72)(cid:3)(cid:22)(cid:19)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)8, was $3,632,483,050. Solely for purposes of this calculation, all executive officers
(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:82)(cid:90)(cid:81)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:20)(cid:19)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:11)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:76)(cid:85)(cid:3)(cid:68)(cid:73)(cid:73)(cid:76)(cid:79)(cid:76)ates) were considered affiliates.
As of February 18, 2019, the registrant had outstanding 47,110,375 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
(cid:51)(cid:82)(cid:85)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:51)(cid:85)(cid:82)(cid:91)(cid:92)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)9 Annual Meeting of Shareholders, which is to be filed with the Securities and Exchange Commission no
later than April 30, 2019, are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS ..................................................................................................................................................................
ITEM 1A. RISK FACTORS .........................................................................................................................................................
ITEM 1B. UNRESOLVED STAFF COMMENTS ......................................................................................................................
PROPERTIES .............................................................................................................................................................
ITEM 2.
ITEM 3.
LEGAL PROCEEDINGS ...........................................................................................................................................
ITEM 4. MINE SAFETY DISCLOSURES ...............................................................................................................................
PART II
ITEM 5. (cid:48)(cid:36)(cid:53)(cid:46)(cid:40)(cid:55)(cid:3)(cid:41)(cid:50)(cid:53)(cid:3)(cid:53)(cid:40)(cid:42)(cid:44)(cid:54)(cid:55)(cid:53)(cid:36)(cid:49)(cid:55)(cid:182)(cid:54)(cid:3)(cid:38)(cid:50)(cid:48)(cid:48)(cid:50)(cid:49)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)(cid:15)(cid:3)(cid:53)(cid:40)(cid:47)(cid:36)(cid:55)(cid:40)(cid:39)(cid:3)(cid:54)(cid:55)(cid:50)(cid:38)(cid:46)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:3)(cid:48)(cid:36)(cid:55)(cid:55)(cid:40)(cid:53)(cid:54)(cid:3)(cid:36)(cid:49)(cid:39)(cid:3)
ISSUER PURCHASES OF EQUITY SECURITIES ..................................................................................................
SELECTED FINANCIAL DATA ..............................................................................................................................
ITEM 6.
ITEM 7. MANA(cid:42)(cid:40)(cid:48)(cid:40)(cid:49)(cid:55)(cid:182)(cid:54)(cid:3)(cid:39)(cid:44)(cid:54)(cid:38)(cid:56)(cid:54)(cid:54)(cid:44)(cid:50)(cid:49)(cid:3)(cid:36)(cid:49)(cid:39)(cid:3)(cid:36)(cid:49)(cid:36)(cid:47)(cid:60)(cid:54)(cid:44)(cid:54)(cid:3)(cid:50)(cid:41)(cid:3)(cid:41)(cid:44)(cid:49)(cid:36)(cid:49)(cid:38)(cid:44)(cid:36)(cid:47)(cid:3)(cid:38)(cid:50)(cid:49)(cid:39)(cid:44)(cid:55)(cid:44)(cid:50)(cid:49)(cid:3)(cid:36)(cid:49)(cid:39)(cid:3)(cid:53)(cid:40)(cid:54)(cid:56)(cid:47)(cid:55)(cid:54)(cid:3)(cid:50)(cid:41)(cid:3)
OPERATIONS ............................................................................................................................................................
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............................................
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................................................................
ITEM 8.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE ............................................................................................................................................................
ITEM 9A. CONTROLS AND PROCEDURES ...........................................................................................................................
ITEM 9B. OTHER INFORMATION ...........................................................................................................................................
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ....................................................
ITEM 11. EXECUTIVE COMPENSATION ..............................................................................................................................
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS ....................................................................................................................................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE .........
PRINCIPAL ACCOUNTANT FEES AND SERVICES ............................................................................................
ITEM 14.
PART IV
2
15
24
24
24
27
28
30
31
39
39
39
39
39
40
40
40
40
40
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ..................................................................................
FORM 10-K SUMMARY ...........................................................................................................................................
ITEM 16.
41
44
i
CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS
This report and the documents incorporated by (cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:86)(cid:82)(cid:80)(cid:72)(cid:3)(cid:179)(cid:73)(cid:82)(cid:85)(cid:90)(cid:68)(cid:85)(cid:71)-(cid:79)(cid:82)(cid:82)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:180)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:72)(cid:68)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements concern
possible or assumed future events, (cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3) (cid:82)(cid:88)(cid:87)(cid:70)(cid:82)(cid:80)(cid:72)(cid:86)(cid:17)(cid:3) (cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3) (cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:82)(cid:73)(cid:87)(cid:72)(cid:81)(cid:3) (cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3) (cid:90)(cid:82)(cid:85)(cid:71)(cid:86)(cid:3) (cid:86)(cid:88)(cid:70)(cid:75)(cid:3) (cid:68)(cid:86)(cid:3) (cid:179)(cid:69)(cid:72)(cid:79)(cid:76)(cid:72)(cid:89)(cid:72)(cid:15)(cid:180)(cid:3) (cid:179)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:15)(cid:180)(cid:3)
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assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions,
expected future developments and other factors we believe are appropriate under the circumstances.
As you read and consider this report, 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 under Item 1A (Risk Factors) below, including:
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successful commercialization by organic light emitting diode (OLED) manufacturers of products incorporating our
OLED technologies and materials and their continued willingness to utilize our OLED technologies and materials;
the adequacy of protections afforded to us by the patents that we own or license and the cost to us of maintaining,
enforcing and defending those patents;
our ability to obtain, expand and maintain patent protection in the future, and to protect our non-patented intellectual
property;
our exposure to and ability to defend third-party claims and challenges to our patents and other intellectual property
rights;
our ability to maintain and improve our competitive position following the expiration of certain of our fundamental
phosphorescent organic light-emitting diode (PHOLED) patents;
our ability to form and continue strategic relationships with manufacturers of OLED products;
the payments that we expect to receive under our existing contracts with OLED manufacturers and the terms of
contracts that we expect to enter into with OLED manufacturers in the future;
the potential commercial applications of and future demand for our OLED technologies and materials, and of OLED
products in general;
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restrictions resulting from international trade disputes;
our customers' development and use of more efficient manufacturing processes and material processing protocols that
result in the more efficient utilization of our materials, and therefore reduce their requirements for our materials;
the comparative advantages and disadvantages of our OLED technologies and materials versus competing
technologies and materials currently in the market;
the nature and potential advantages of any competing technologies that may be developed in the future;
the outcomes of our ongoing and future research and development activities, and those of others, relating to OLED
technologies and materials;
our ability to access future OLED technology developments of our academic and commercial research partners;
our ability to acquire and supply OLED materials at cost competitive pricing;
our ability to compete against third parties with resources greater than ours;
our ability to respond to and address malicious cybersecurity and IT infrastructure attacks;
our future capital requirements and our ability to obtain additional financing if and when needed;
our quarterly cash dividend policy;
our future OLED technology licensing and OLED material revenues and results of operations, including supply and
demand for our OLED materials; and
general economic and market conditions.
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 by any 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, correct, modify, or supplement 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.
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ITEM 1.
BUSINESS
Our Company
PART I
We are a leader in the research, development and commercialization of organic light emitting diode, or OLED, technologies and
materials for use in display and solid-state lighting applications. OLEDs are thin, lightweight and power-efficient solid-state devices
that emit light that can be manufactured on both flexible and rigid substrates, making them highly suitable for use in full-color displays
and as lighting products. OLED displays are capturing a growing share of the display market, especially in the mobile phone, television,
augmented reality, virtual reality and automotive markets. We believe that this is because OLEDs offer potential advantages over
competing display technologies with respect to power efficiency, contrast ratio, viewing angle, video response time, form factor and
manufacturing cost. We also believe that OLED lighting products have the potential to replace many existing light sources in the future
because of their high power efficiency, excellent color rendering index, low operating temperature and novel form factor. Our technology
leadership and intellectual property position should enable us to share in the revenues from OLED displays and lighting products as they
continue to be more broadly adopted.
Our primary business strategy is to (1) further develop and license our proprietary OLED technologies to manufacturers of
products for display applications, such as mobile phones, wearable electronic devices, tablets, notebook computers and televisions, and
specialty and general lighting products; and (2) develop new OLED materials and sell the materials to those product manufacturers. We
have established a significant portfolio of proprietary OLED technologies and materials, primarily through our internal research and
development efforts and acquisitions of patents and patent applications, as well as maintaining our relationships with world-class
universities and other partners such as Princeton University (Princeton), the University of Southern California (USC), the University of
Michigan (Michigan) and PPG Industries, Inc. (PPG). We currently own, exclusively license or have the sole right to sublicense more
than 5,000 patents issued and pending worldwide.
We sell our proprietary OLED materials to customers for evaluation and use in commercial OLED products. We also enter into
agreements with manufacturers of OLED display and lighting products under which we grant them licenses to practice under our patents
and to use our proprietary know-how. At the same time, we work with these and other companies who are evaluating our OLED
technologies and materials for possible use in commercial OLED display and lighting products.
Market Overview
The Display Panel Market
Thin, energy efficient display panels that can be manufactured on glass or flexible substrates are essential for a wide variety of
portable consumer electronics products, such as mobile phones, AR/VR headsets, digital cameras, wearables, tablets and notebook
computers. Due to their narrow profile and light weight, flat panel displays have also become the display of choice for larger product
applications, such as computer monitors and televisions.
Liquid crystal displays, or LCDs, continue to dominate the flat panel display market. However, we believe that OLED displays
are an attractive alternative to LCDs because they offer a number of potential advantages, including:
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higher power efficiencies, thereby reducing energy consumption;
a thinner profile and lighter weight;
higher contrast ratios, leading to sharper picture images and graphics;
wider viewing angles;
deposition on non-rigid substrates which enable conformable and flexible displays;
faster response times for video; and
lower cost manufacturing methods and materials.
Based on these characteristics, product manufacturers have adopted small-area OLED displays for use in a wide variety of
electronic devices, such as smartphones, wearables and tablets. Manufacturers are increasingly commercializing large area OLED
displays for use in televisions. We believe that if these efforts are successful, they could result in sizeable markets for OLED displays.
In addition, due to the inherent transparency of organic materials and through the use of transparent electrode technology, OLEDs
eventually may enable the production of transparent displays for use in products such as automotive windshields and windows with
embedded displays. Organic materials also make technically possible the development of flexible displays for use in an entirely new set
of product applications. Such applications include display devices that can be folded or conformed to various shapes for wearable,
industrial and ruggedized applications.
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The Solid-State Lighting Market
Traditional incandescent light bulbs are inefficient because they convert only about 5% of the energy they consume into visible
light, with the rest emerging as heat. Fluorescent lamps use excited gases, or plasmas, to achieve a higher energy conversion efficiency
of about 20%. However, the color rendering index, or CRI, of most fluorescent lamps (cid:177) in other words, the quality of their color
compared to an ideal light source (cid:177) is inferior to that of an incandescent bulb. Fluorescent lamps also pose environmental concerns
because they typically contain mercury.
Solid-state lighting relies on the direct conversion of electricity to visible light using semiconductor materials. By avoiding the
heat and plasma-producing processes of incandescent bulbs and fluorescent lamps, respectively, solid-state lighting products can have
substantially higher energy conversion efficiencies.
There are currently two basic types of solid-state lighting devices: inorganic light emitting diodes, or LEDs, and OLEDs. Current
LEDs are very small in size (about one square millimeter) and are extremely bright. Having been developed about 25 years before
OLEDs, LEDs are already employed in a variety of lighting products, such as traffic lights, billboards, replacements for incandescent
lighting, backlights for smartphones, computer monitors and televisions, and as border or accent lighting. However, the high operating
temperatures and intense brightness of LEDs may make them less desirable for many general illumination and diffuse lighting
applications.
OLEDs, on the other hand, are larger in size and can be viewed directly, without using diffusers that are required to temper the
intense brightness of LEDs. OLEDs can be fabricated onto any suitable surface, including glass, plastic or metal foil, and could be cost-
effective to manufacture in high volume. Given these characteristics, product manufacturers are working and have introduced limited
product applications of OLEDs for diffuse specialty lighting applications and ultimately general illumination. If these efforts are
successful, we believe that OLED lighting products could begin to be used for applications currently addressed by incandescent bulbs
and fluorescent lamps, as well as for new applications that take advantage of the OLED form factor. In particular, the ability of OLED
technology to produce uniform illumination over arbitrary shapes is making OLED lighting very attractive to the automobile industry.
Our Competitive Strengths
We believe our position as one of the leading technology developers in the OLED industry is the direct result of our technological
innovation. We have built an extensive intellectual property portfolio around our OLED technologies and materials, and are working
diligently to enable our manufacturing partners to adopt our OLED technologies and materials for expanding commercial usage. Our
key competitive strengths include:
Technology Leadership
We are a recognized technology leader in the OLED industry. Along with our research partners, we have pioneered the
development of our UniversalPHOLED® phosphorescent OLED technologies, which can be used to produce OLEDs that are up to four
times more efficient than fluorescent OLEDs and significantly more efficient than current LCDs, which are illuminated using backlights.
We believe that our phosphorescent OLED technologies and materials are well-suited for industry usage in the commercial production
of OLED displays and lighting products. Through our relationships with companies such as PPG and our academic partners, we have
also developed other important OLED technologies, as well as novel OLED materials that we believe will facilitate the adoption of our
various OLED technologies by product manufacturers.
Broad Portfolio of Intellectual Property
We believe that our extensive portfolio of patents, trade secrets and non-patented know-how provides us with a competitive
advantage in the OLED industry. Through our internal development efforts, acquisitions, and our relationships with world-class partners
such as Princeton, USC, Michigan and PPG, we own, exclusively license or have the sole right to sublicense more than 5,000 patents
issued and pending worldwide. In 2011, we purchased 74 issued U.S. patents from Motorola Solutions, Inc. (f/k/a Motorola, Inc.)
(Motorola), together with foreign counterparts in various countries, which patents we had previously licensed from Motorola, and in
2012, we acquired the entire worldwide patent portfolio of more than 1,200 OLED patents and patent applications of Fujifilm
Corporation (Fujifilm). In 2016, we acquired more than 500 issued and then pending patents in the area of phosphorescent materials and
technologies from BASF SE (BASF). We also continue to accumulate valuable non-patented technical know-how relating to our OLED
technologies and materials.
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Leading Supplier of UniversalPHOLED® Emitter Materials
We are the leading supplier of phosphorescent emitter materials to OLED product manufacturers. The emitter material, which is
designed to efficiently convert electrical energy to a desired wavelength of light, is the key component in an OLED device. We develop,
supply, and offer for sale proprietary phosphorescent emitter materials. PPG currently manufactures our materials for us, which we then
qualify and resell to OLED product manufacturers. We record revenues based on our sales of these materials to OLED product
manufacturers. Our sales allow us to maintain close technical and business relationships with the OLED product manufacturers
purchasing our proprietary materials, which in turn further supports our technology licensing business.
Established Material Supply Relationships
We have established relationships with well-known manufacturers that are using, or are evaluating for use, our OLED materials
in commercial products. In 2018, our customers for such materials included Samsung Display Co., Ltd. (SDC), LG Display Co., Ltd.
(LG Display), AU Optronics Corporation (AU Optronics), BOE Technology Group Co., Ltd. (BOE), Konica Minolta Holdings Inc.
(Konica Minolta), Tianma Micro-electronics Co., Ltd. (Tianma), Tohoku Pioneer Corporation, Innolux Corporation (Innolux) (formerly
Chimei Innolux Corporation), Kaneka Corporation (Kaneka), EverDisplay Optronics (Shanghai) Limited and Visionox Technology,
Inc. (Visionox), among others.
Licensing Our OLED Technologies and Patents
We license our proprietary OLED technologies and patents to product manufacturers on a non-exclusive basis. We do not directly
manufacture or sell OLED display or lighting products. Instead, we enter into licensing arrangements with OLED product manufacturers
who pay us license fees and/or royalties based on their sales of licensed products. We believe this business model allows us to concentrate
on our core strengths of technology development and innovation, while at the same time providing significant operating leverage. We
also believe that this approach may reduce potential competitive conflicts with our customers.
Licenses with Key Product Manufacturers
We have licensed our OLED technologies and patents to manufacturers for use in commercial products. In 2018, we had license
agreements for the manufacture and sale of certain display products with SDC (as successor to Samsung Mobile Display Co. Ltd.), LG
Display, BOE, Tianma, and Visionox. We also have license agreements with Konica Minolta, Sumitomo Chemical Company, Ltd.
(Sumitomo), Pioneer Corporation (Pioneer), Kaneka and OLEDWorks L.L.C. (OLEDWorks) for the manufacture of OLED lighting
products. Additionally, we have a license agreement with DuPont Displays for its manufacture of solution-processed OLED display
products using proprietary OLED materials obtained through us.
Complementary UniversalPHOLED® Host Material Business
We develop, supply and offer for sale certain of our proprietary phosphorescent host materials to OLED product manufacturers.
In one design, the emitter material is disbursed into a host material, with the resulting mixture consisting of predominantly host material.
We believe that host material sales can be complementary to our phosphorescent emitter material sales business; however, our OLED
product manufacturing customers are not required to purchase our host materials in order to utilize our phosphorescent emitter materials.
In addition, the host material business is more competitive than the phosphorescent emitter material sales business. This means our long-
term prospects for host material sales are uncertain.
Experienced Management and Scientific Advisory Team
Our management team has significant experience in developing business models focused on licensing disruptive technologies in
high growth industries. In addition, our management team has assembled a Scientific Advisory Board that includes some of the leading
researchers in the OLED industry, such as Professor Stephen R. Forrest of Michigan (formerly of Princeton) and Professor Mark E.
Thompson of USC.
Our Business Strategy
Our current business strategy is to promote and continue to expand our portfolio of OLED technologies and materials for
widespread use in OLED displays and lighting products. We generate revenues primarily by selling our proprietary OLED materials
and licensing our OLED technologies to display and lighting product manufacturers. We are presently focused on the following steps
to implement our business strategy:
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Target Leading Product Manufacturers and Developers
We are targeting leading manufacturers of displays and lighting products as potential commercial licensees of our OLED
technologies and purchasers of our OLED materials. We also supply our proprietary OLED materials to manufacturers and developers
of OLED displays and lighting products for evaluation and for use in product development and for pre-commercial activities, and we
provide technical assistance and support to these manufacturers and developers. We concentrate on working closely with OLED product
manufacturers and developers because we believe that the successful incorporation of our technologies and materials into commercial
products is critical to their widespread adoption.
Enhance Our Existing Portfolio of PHOLED Technologies and Materials
We believe that a strong portfolio of proprietary OLED technologies and materials for both displays and lighting products is
critical to our success. Consequently, we are continually seeking to expand this portfolio through our internal development efforts, our
collaborative relationships with academic and other research partners, and other strategic opportunities. One of our primary goals is to
develop new and improved phosphorescent OLED (PHOLED) technologies and materials with increased efficiencies, enhanced color
gamut and extended lifetimes, which are compatible with different manufacturing methods, so that they can be used by various
manufacturers in a broad array of OLED display and lighting products.
Develop Next-Generation Organic Technologies
We continue to conduct research and development activities relating to next-generation OLED technologies for both displays and
lighting products. We also are funding research by our academic partners on the use of organic thin-film technology in other applications.
Our focus on next-generation technologies is designed to enable us to maintain our position as a leading provider of OLED and other
organic electronics technologies and materials as new markets emerge.
Business and Geographic Markets
We derive revenue from the following:
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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.
Most manufacturers of displays and lighting products who are or might potentially be interested in our OLED technologies and
materials are currently located outside of the United States, particularly in the Asia-Pacific region. To provide on-the-ground support to
these manufacturers, we have established wholly-owned subsidiaries in Ireland, Korea, Japan, China and Hong Kong, as well as a
representative office in Taiwan. Our subsidiary in Ireland is responsible for all material sales world-wide (excluding the United States)
and for licensing and managing intellectual property and undertaking certain other business transactions in all non-U.S. territories.
We receive a majority of our revenues from customers that are domiciled outside of the United States, and our business is heavily
dependent on our relationships with these customers. In particular, two of our key customers located in the Asia-Pacific region, SDC
and LG Display, accounted for 37% and 33%, respectively, of our consolidated revenues for 2018. Substantially all revenue derived
from our customers is denominated in U.S. dollars.
For more information on our revenues, costs and expenses associated with our business, as well as a breakdown of revenues from
North America and foreign sources, please see our Consolidated Financial Statements and the notes (cid:87)(cid:75)(cid:72)(cid:85)(cid:72)(cid:87)(cid:82)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:68)(cid:86)(cid:3)(cid:179)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)
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Our Technology and its Relation to OLED Technology and Structure
OLED devices are solid-state semiconductor devices made from thin films of organic material that emit light of various
wavelengths when electricity is selectively applied to the emissive layer of the device. OLED devices are typically referred to as
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electron injection layer, an electron transport layer, an emissive layer, a hole transport layer, a hole injection layer and an anode, all of
which are placed on a substrate which may be made of a number of different materials, including glass, plastic and metal.
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Our technology and materials are most commonly utilized in the emissive layer; the materials in the emissive layer are the light-
generating component of the OLED stack. Many of our key technologies relate primarily to phosphorescent emitter materials, which we
believe are more energy efficient than fluorescent emitter materials that can also be used to generate light within the emissive layer of
the OLED device. We began selling emitter materials commercially in 2003. A manufacturer will use a small amount of emitter material
(cid:73)(cid:82)(cid:85)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)(cid:71)(cid:72)(cid:89)(cid:76)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:68)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:70)(cid:68)(cid:79)(cid:79)(cid:72)(cid:71)(cid:3)(cid:179)(cid:71)(cid:82)(cid:83)(cid:76)(cid:81)(cid:74)(cid:180)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:75)(cid:82)(cid:86)(cid:87)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:72)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:85)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:11)(cid:86)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:75)(cid:82)(cid:86)(cid:87)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:11)(cid:86)(cid:12)(cid:3)(cid:87)(cid:82)(cid:74)(cid:72)ther form an
emissive layer system. Depending on the nature of the OLED device, the emissive materials and emissive layer system may be designed
to emit different colors. We have commercially produced and sold phosphorescent emitter materials that produce red, yellow, green and
light-blue light, which are combined in various ways for the display and lighting markets.
Our current materials business, conducted outside the United States by our Irish subsidiary, is focused primarily on the delivery
of such emissive materials. We have also developed host materials for the emissive layer and began selling them commercially in 2011.
In addition to our materials, which are protected by patents covering various molecular structures, we also have fundamental and
important patents that cover various aspects of the OLED device and OLED manufacturing processes. These patents are important to
our licensing business because they enable us to provide our business partners important OLED related technologies.
Our Phosphorescent OLED Technologies
Phosphorescent OLEDs utilize specialized materials and device structures that allow OLEDs to emit light through a process known
as phosphorescence. Traditional fluorescent OLEDs emit light through an inherently less efficient process. Theory and experiment show
that phosphorescent OLEDs exhibit device efficiencies up to four times higher than those exhibited by fluorescent OLEDs.
Phosphorescence substantially reduces the power requirements of an OLED and is useful in displays for hand-held devices, such as
smartphones, where battery power is often a limiting factor.
Phosphorescence is also important for large-area displays such as televisions, where higher device efficiency and lower heat
generation may enable longer product lifetimes and increased energy efficiency.
We have a strong intellectual property portfolio surrounding our existing PHOLED technologies and materials for both displays
and lighting products which we market under the UniversalPHOLED® brand. We devote a substantial portion of our efforts to
developing new and improved proprietary PHOLED materials and device architectures for red, green, yellow, blue and white OLED
devices. In 2018, we continued our commercial supply relationships with companies such as SDC, LG Display, Tianma, BOE and
Visionox to use such materials to manufacture OLED displays. In addition, we continued to work closely with customers evaluating and
qualifying our proprietary PHOLED materials for commercial usage in both displays and lighting products, and with other material
suppliers to match our PHOLED emitters with their phosphorescent hosts and other OLED materials.
Our Additional Proprietary OLED Technologies
Our intellectual property, research, development and commercialization efforts also encompass a number of other OLED device
and manufacturing technologies, including the following:
FOLED (cid:140)(cid:3)Flexible OLEDs
We are working on a number of technologies required for the fabrication of OLEDs on flexible substrates. Most OLED and other
flat panel displays are built on rigid glass substrates. In contrast, FOLEDs are OLEDs built on non-rigid substrates such as plastic or
metal foil. This has the potential to enhance durability and enable conformation to certain shapes or repeated bending or flexing. Many
OLED smartphone displays are built on plastic substrates including those produced by SDC. One of our customers, LG Display,
demonstrated a 65-inch rollable FOLED display at the 2019 CES (Consumer Electronics Show) in Las Vegas. The commercial
introduction of such FOLED product offerings demonstrates the viability of new display product applications that do not exist
commercially today, such as portable, roll-up Internet connectivity and communications devices as well as enhance the usefulness of
such devices in ruggedized, industrial and wearable computing systems. Manufacturers also may be able to produce FOLEDs using
more efficient continuous, or roll-to-roll, processing methods. Our internal research and development efforts are expected to enhance
and promote the future adoption of consumer and industrial FOLED devices.
Thin-Film Encapsulation
We have developed proprietary, patented encapsulation technology for the packaging of flexible OLEDs and other thin-film
devices, as well as for use as a barrier film for plastic substrates. Addressing a major roadblock to the successful commercialization of
flexible OLEDs, our hybrid, multi-layer approach provides barrier performance useful for OLEDs using a potentially cost-effective
process. In addition to accelerating the commercial viability of flexible OLEDs, our thin-film encapsulation technology has the potential
to provide benefits for a variety of other flexible thin-film devices, including photovoltaics and thin-film batteries.
6
UniversalP2 OLED® Printable Phosphorescent OLEDs
The standard approach for manufacturing a small molecule OLED, including a PHOLED, is based on a vacuum thermal
evaporation, or VTE, process. With a VTE process, the thin layers of organic material in an OLED are deposited in a high-vacuum
environment. An alternate approach for manufacturing a small molecule OLED involves solution processing of the various organic
materials in an OLED using techniques such as spin coating or inkjet printing onto the substrate. Solution-processing methods, and
inkjet printing in particular, have the potential to be scalable to large area displays.
OVJP® Organic Vapor Jet Printing
OLEDs could be manufactured using other processes as well, including OVJP. As a direct printing technique, OVJP technology
has the potential to offer high deposition rates for large area OLEDs. In addition, OVJP technology reduces OLED material waste
associated with use of a shadow mask (i.e., the waste of material that deposits on the shadow mask itself when fabricating an OLED).
By comparison to inkjet printing, an OVJP process does not use liquid solvents and therefore the OLED materials utilized are not limited
by their viscosity or solvent solubility. OVJP also avoids generation of solvent wastes and eliminates the additional step of removing
residual solvent from the OLED device. We have installed a prototype OVJP tool at our Ewing, New Jersey facility, and we continue to
collaborate on OVJP technology development with Professor Forrest of Michigan.
OVPD® Organic Vapor Phase Deposition
Another approach for manufacturing a small molecule OLED is based on OVPD. The OVPD process utilizes a carrier gas, such
as nitrogen, in a hot walled reactor in a low pressure environment to deposit the layers of organic material in an OLED. The OVPD
process may offer advantages over the VTE process or solution processing methods through more efficient materials utilization and
enhanced deposition control. We have licensed Aixtron AG, a leading manufacturer of metal-organic chemical vapor deposition
equipment, to develop and qualify equipment for the fabrication of OLED displays utilizing the OVPD process.
TOLED Transparent OLEDs
We have developed a technology for the fabrication of OLEDs that have transparent cathodes. Conventional OLEDs use a
reflective metal cathode and a transparent anode. In contrast, TOLEDs use a transparent cathode and either a transparent, reflective or
(cid:82)(cid:83)(cid:68)(cid:84)(cid:88)(cid:72)(cid:3)(cid:80)(cid:72)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:82)(cid:71)(cid:72)(cid:17)(cid:3)(cid:55)(cid:50)(cid:47)(cid:40)(cid:39)(cid:86)(cid:3)(cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:83)(cid:68)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:68)(cid:87)(cid:75)(cid:82)(cid:71)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:73)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:80)(cid:72)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:82)(cid:71)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:78)(cid:81)(cid:82)(cid:90)(cid:81)(cid:3)(cid:68)(cid:86)(cid:3)(cid:179)(cid:87)(cid:82)(cid:83)-(cid:72)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:180)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:86)(cid:17)(cid:3)(cid:44)(cid:81)(cid:3)(cid:68)(cid:3)
(cid:179)(cid:87)(cid:82)(cid:83)-(cid:72)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:180)(cid:3)(cid:36)(cid:48)(cid:50)(cid:47)(cid:40)(cid:39)(cid:15) light is emitted without having to travel through much of the device electronics where a significant portion
of the usable light is lost. This results in OLED displays having image qualities and lifetimes superior to those of conventional (cid:179)(cid:69)(cid:82)(cid:87)(cid:87)(cid:82)(cid:80)(cid:3)
emitting(cid:180) AMOLEDs. TOLEDs utilizing transparent cathodes and transparent anodes may also be useful in novel flat panel display
applications requiring semi-transparency or transparency, such as graphical displays in automotive windshields and retail window
signage.
Our Strategic Relationships with Product Manufacturers
We have established early-stage evaluation programs, development and pre-commercial programs, and commercial arrangements
with a substantial number of manufacturers or potential manufacturers of OLED display and lighting products. Many of these
relationships are directed towards tailoring our proprietary OLED technologies and materials for use by individual manufacturers. Our
ultimate objective is to license our OLED technologies and sell our OLED materials to these manufacturers for their commercial
production of OLED products.
Relationships with OLED Display Manufacturers
We license our OLED technologies and patents to display manufacturers for use in commercial products and supply our
proprietary OLED materials to these manufacturers for both commercial use and evaluative purposes. We have been collaborating with
some of these display manufacturers for many years.
We have been working with SDC and providing our PHOLED materials to SDC for evaluation since 2001. Under the terms of a
2011 patent license agreement, we licensed our patents and technologies to SDC for its manufacture and sale of AMOLED display
products. Under the terms of a 2011 supplemental purchase agreement, we supplied our proprietary PHOLED materials to SDC for its
use in manufacturing licensed products. We also continue to supply SDC with our proprietary UniversalPHOLED materials for use in
its development efforts under a 2001 joint development agreement.
The 2011 license and purchase agreements with SDC expired on December 31, 2017, and on February 13, 2018, we entered into
new patent license and supplemental purchase agreements, both with an effective date of January 1, 2018. These agreements, which
cover the manufacture and sale of specified OLED display materials, last through the end of 2022 with an additional two-year extension
7
option. Under these agreements, the Company is being paid a license fee, payable in quarterly installments over the agreement term of
five years. These agreements convey 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. The 2018 supplemental purchase agreement provides for certain
minimum annual purchase obligations of phosphorescent emitter material from us for use in the manufacture of licensed products. SDC
is currently the largest manufacturer of AMOLED displays for handset and other personal electronic devices.
We have been working with LG Display or its affiliates for over 15 years. In 2015, the Company entered into an OLED patent
license agreement and an OLED commercial supply agreement with 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 life of the agreements as well as minimum royalty revenue to be generated under the patent license agreement. The Company
(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:71)(cid:82)(cid:80)(cid:76)(cid:81)(cid:68)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)(cid:87)(cid:76)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:47)(cid:42)(cid:3)(cid:39)(cid:76)(cid:86)(cid:83)(cid:79)(cid:68)(cid:92)(cid:182)(cid:86)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:79)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:72)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)s. The
OLED commercial supply agreement provides for the sale 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.
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. 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 has also agreed to supply phosphorescent OLED materials to BOE.
In 2018, the Company entered into long-term, multi-year OLED patent license and material purchase agreements with 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 expects to supply phosphorescent OLED materials to Visionox for use in its licensed
products.
We have been collaborating with AU Optronics since 2001, and we continue to provide our proprietary PHOLED materials to
AU Optronics under a 2016 commercial supply agreement through which AU Optronics also has certain license rights.
We also continue to support numerous display manufacturers in their evaluation of our technologies and proprietary OLED
materials, through evaluation arrangements in which we provide our proprietary OLED materials to such manufacturers for limited scale
commercial production, evaluation and for purposes of development, manufacturing qualification and product testing. Many of these
strategic relationships have been in place for longer than a decade, and we continue to establish new relationships.
Relationships with OLED Lighting Manufacturers
We license our OLED technologies and patents to lighting manufacturers for use in commercial products and supply our
proprietary OLED materials to these manufacturers for both commercial use and evaluative purposes. Many of these strategic
relationships have also been in place for longer than a decade.
Since 2004, we have been supporting Konica Minolta in its efforts to develop OLED lighting products. We continue to license
our patents and technology to Konica Minolta under a 2008 OLED technology license agreement for its manufacture and sale of OLED
lighting products that utilize our phosphorescent and other OLED technologies. We also continue to provide Konica Minolta with our
proprietary PHOLED materials for its manufacture of commercial OLED lighting products under a 2011 commercial material supply
agreement, and for evaluation purposes under a 2012 evaluation agreement.
We also continue to license our OLED patents to Sumitomo under a 2015 OLED patent portfolio license agreement in which we
granted Sumitomo a non-exclusive, world-wide, royalty bearing license to make and sell OLED lighting panels using a solution-based
manufacturing process. Under the license agreement, Sumitomo may also purchase certain of our phosphorescent materials.
We continue to supply LG Display with materials in connection with the OLED lighting business it acquired from LG Chem, Ltd.
(LG Chem) in 2015-2016. This lighting business continues to generate commercial chemical sales and license fee revenues under a
limited-term commercial sales agreement we signed with LG Chem prior to its acquisition.
8
We continue to license our OLED patents, and to provide our OLED materials, to OLEDWorks for use in OLED lighting products
under patent license and commercial supply agreements signed in 2015. We have also extended the rights under these agreements to
OLEDWorks GmbH, the German company and facility that OLEDWorks acquired in 2015 from Philips Technologie GmbH.
We continue to license our technologies and patents to Kaneka for the manufacture and sale of OLED lighting products, under
the terms of a 2013 license agreement, and we continue to supply our materials to Kaneka under a 2014 commercial material supply
agreement. We also have a license agreement for the manufacture and sale of OLED lighting products with Pioneer, among others.
Similar to our arrangements with display manufacturers, we continue to support numerous lighting manufacturers in their
evaluation of our technologies and proprietary OLED materials, typically through evaluation agreements under which we provide our
proprietary OLED materials to such manufacturers for evaluation and potential commercial application.
Relationships with Manufacturers for Other Commercial Products
In addition to our relationships with lighting and display manufacturers, we have agreements and arrangements with manufacturers
or potential manufacturers to use our proprietary OLED technologies and materials in other commercial products, such as in automotive
interiors and exteriors.
Our OLED Materials Manufacturing Business
We supply our proprietary UniversalPHOLED® materials to display manufacturers, lighting manufacturers and others. We qualify
our materials in OLED devices before shipment in order to ensure that they meet required specifications. We believe that our inventory-
carrying practices, along with the terms under which we sell our OLED materials (including payment terms), are typical for the markets
in which we operate. In 2018, our OLED materials business received recertification in accordance with ISO 9001:2015 Quality
Management Systems. In 2018, UDC(cid:182)(cid:86) Ewing, NJ facility also received certification in accordance with ISO 14001:2015 Environmental
Management Systems.
PPG
We have maintained a close working relationship with PPG since 2000. In 2011, we entered into an agreement with PPG, the term
of which continues through December 31, 2019 and shall be automatically renewed for additional one year terms, unless terminated by
us with prior notice of one year or terminated by PPG with prior notice of two years. Under that agreement, PPG is responsible, under
our direction, for manufacturing scale-up of our proprietary OLED materials, and for supplying us with those materials. We use these
materials for our own research and development as well as for resale to our customers, both for their evaluation and for use in commercial
OLED products. Through our collaboration with PPG, key raw materials are sourced from multiple suppliers to ensure that we are able
to meet the needs of our customers on a timely basis. We have not had any issues with obtaining access to adequate amounts of any key
raw materials.
We invested a total of $15.6 million from 2016 through 2018 in PPG(cid:182)(cid:86) Barberton, Ohio manufacturing facility, to approximately
double commercial production capacity for our UniversalPHOLED® phosphorescent emitter products. The expansion project was
completed and operational during 2018.
Collaborations with Other OLED Material Manufacturers
We continued our non-exclusive collaborative relationships with other manufacturers of OLED materials during 2018. Most of
these relationships are focused on matching our proprietary PHOLED emitters with hosts and other OLED materials of these companies.
We believe that collaborative relationships such as these are important for ensuring success of the OLED industry and broader adoption
of our PHOLED and other OLED technologies.
Research and Development
Our research and development activities are focused on the advancement of our OLED technologies and materials for displays,
lighting and other applications. We conduct this research and development both internally and through various relationships with our
commercial business partners and academic institutions.
9
Internal Development Efforts
We conduct a substantial portion of our OLED development activities at our state-of-the-art development and testing facility in
Ewing, New Jersey. At this expanded facility, which now exceeds 50,000 square feet, we perform technology development, including
device and process optimization, prototype fabrication, manufacturing scale-up studies, process and product testing, characterization
and reliability studies, and technology transfer with our business partners.
Our Ewing facility houses multiple OLED deposition systems, including a full-color flexible OLED system and an OVJP organic
vapor jet printing system. In addition, the facility contains equipment for substrate patterning, organic material deposition, display
packaging, module assembly and extensive testing in Class 100 and 100,000 clean rooms and opto-electronic test laboratories. Our
facility also includes state-of-the-art synthetic and analytical chemistry laboratories in which we conduct OLED materials research and
make small quantities of new materials that we then test in OLED devices.
In 2016, we acquired Adesis, Inc. (Adesis). Adesis is a contract research organization (CRO) that provides support services to the
OLED, pharma, biotech, catalysis and other industries. Adesis currently operates in a facility of over 47,500 square feet in New Castle,
Delaware and 7,000 square feet in Wilmington, Delaware. As of December 31, 2018, Adesis employed a team of 84 research and
development chemists, engineers and laboratory technicians(cid:17)(cid:3)(cid:51)(cid:85)(cid:76)(cid:82)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:24)(cid:19)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:36)(cid:71)(cid:72)(cid:86)(cid:76)(cid:86)(cid:182)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)
service and production output. Although we expect to continue to utilize the majority of its technology research capacity for the benefit
of our OLED technology development, Adesis is expected to continue operating as a CRO in the above mentioned industries.
As of December 31, 2018, we employed a team of 182 research scientists, engineers and laboratory technicians at our domestic
and international facilities. This team includes chemists, physicists, engineers and technicians with physics, electrical engineering,
mechanical engineering and organic/inorganic chemistry backgrounds, and highly-trained theoreticians and experimentalists.
University Sponsored Research
We have long-standing relationships with Princeton University and USC, dating back to 1994, for the conduct of research relating
to our OLED and other organic thin-film technologies and materials for applications such as displays and lighting. This research had
been performed at Princeton under the direction of Professor Forrest and at USC under the direction of Professor Thompson. In 2006,
Professor Forrest transferred to the University of Michigan, where we continue to fund his research.
We funded research at Princeton under a research agreement executed in 1997 (the 1997 Research Agreement). The 1997 Research
Agreement was allowed to expire in 2007, after Professor Forrest transferred to Michigan. We have exclusive license rights to all OLED
and other thin-film organic electronic patents (other than for organic photovoltaic solar cells) arising out of research conducted under
that agreement.
(cid:44)(cid:81)(cid:3)(cid:70)(cid:82)(cid:81)(cid:81)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:51)(cid:85)(cid:82)(cid:73)(cid:72)(cid:86)(cid:86)(cid:82)(cid:85)(cid:3)(cid:41)(cid:82)(cid:85)(cid:85)(cid:72)(cid:86)(cid:87)(cid:182)(cid:86)(cid:3)(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:73)(cid:72)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:48)(cid:76)(cid:70)(cid:75)(cid:76)(cid:74)(cid:68)(cid:81)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:19)(cid:25)(cid:3)(cid:90)(cid:72)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:82)(cid:85)(cid:72)(cid:71)(cid:3)(cid:85)(cid:72)(cid:86)(cid:72)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)
USC under which we are funding organic electronics research being conducted by Drs. Forrest and Thompson (the 2006 Research
Agreement). Work by Professor Forrest is being funded through a subcontract between USC and Michigan. As with the 1997 Research
Agreement, we have exclusive license rights to all OLED and thin-film organic electronic patents (other than for organic photovoltaic
solar cells) arising out of this research.
Effective May 1, 2017, we amended the 2006 Research Agreement once again to extend the term of the agreement for an additional
three years. As of December 31, 2018, in connection with this amendment, we are obligated to reimburse the universities up to $4.1
million for work to be performed during the remaining extended term, which expires April 30, 2020.
In 2005, we entered into a separate sponsored research agreement with Princeton to fund research under the direction of Professor
Sigurd Wagner on thin-film encapsulation and fabrication of OLED devices. This research was completed as of December 31, 2013. Like
our other relationships with Princeton, we have exclusive license rights to all patents arising out of the research.
We entered into a contract research agreement with the Chitose Institute of Science and Technology of Japan (CIST) in 2004.
Under that agreement, we funded a research program headed by Professor Chihaya Adachi relating to high-efficiency OLED materials
and devices. We were granted exclusive rights to all intellectual property developed under this program. Our relationship with CIST
ended in 2006 when Professor Adachi transferred to Kyushu University. However, we have continued our relationship with Professor
Adachi under a separate consulting arrangement.
10
In 2006 and 2007, we entered into one-year research agreements with Kyung Hee University to sponsor research programs on
flexible, amorphous silicon thin-film transistor (TFT) backplane technology. The programs were directed by Professor Jin Jang. In 2008
and 2009, we entered into contract research agreements with Silicon Display Technology, Ltd. (SDT), a company founded by Professor
Jang, and in 2013, we entered into another one-year agreement with SDT. We continue to maintain a good working relationship with
Professor Jang.
Aixtron
In 2000, we entered into a development and license agreement with Aixtron AG of Aachen, Germany to develop and
commercialize equipment used in the manufacture of OLEDs using the OVPD process. Under this agreement, we granted Aixtron an
exclusive license to produce and sell its equipment for the manufacture of OLEDs and other devices using our proprietary OVPD
process. Aixtron is required to pay us royalties on its sales of this equipment. Purchasers of the equipment also must obtain rights to use
our proprietary OVPD process to manufacture OLEDs and other devices using the equipment, which they may do through us or Aixtron.
If these rights are granted through Aixtron, Aixtron is required to make additional payments to us under our agreement.
Aixtron has reported to us the delivery of nine OVPD systems since 2002. These include two second-generation systems, one of
which was sold to the Fraunhofer Institute for Photonic Microsystems in Dresden, Germany in 2007, and the other of which was sold to
RiTdisplay Corporation of Taiwan in 2003. We record royal(cid:87)(cid:92)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:36)(cid:76)(cid:91)(cid:87)(cid:85)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:89)(cid:68)(cid:85)(cid:76)(cid:82)(cid:88)(cid:86)(cid:3)(cid:86)(cid:92)(cid:86)(cid:87)(cid:72)(cid:80)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)
which Aixtron notifies us of the sale and the related royalties are due.
U.S. Government-Funded Research
We have entered into several U.S. government contracts and subcontracts to fund a portion of our efforts to develop next-
generation OLED technologies. On contracts for which we were the prime contractor, we subcontract portions of the work to various
entities and institutions. All of our government contracts and subcontracts are subject to termination at the election of the contracting
governmental agency.
Our government-funded programs are concentrated primarily in the area of solid-state lighting. In the past, we have received
support for our work on flexible OLED technology through various U.S. Department of Defense (DOD) agencies, including the Army
Research Laboratory (ARL), the Air Force Research Laboratory (AFRL), the Army Communications-Electronics Research
Development and Engineering Center (CERDEC) and the National Science Foundation (NSF). The U.S. Department of Energy (DOE)
supports our work on white OLEDs for lighting, including through its Solid State Lighting (SSL) initiative. Several of our key U.S.
government program initiatives in 2018 were as follows:
Technology Development for OLED Lighting
During 2018, we received funding from the DOE to work with the University of Michigan on a contract to develop technical
approaches for using our proprietary PHOLED and other OLED technologies for high-efficiency white lighting applications.
OLED Association
We are a charter member of the OLED Association (OLED-A). OLED-A is a trade association whose mission involves serving
as an OLED information resource, driving OLED technology development, and promoting interest in OLED products. We are one of
17 members of OLED-A, and we actively participate on its marketing and technology committees. Dr. Mike Hack, our Vice President
of Business Development, serves as a member of the Board of Directors of OLED-A.
Next Generation Lighting Industry Alliance
We joined the Next Generation Lighting Industry Alliance (NGLIA) in 2009. NGLIA was formed in 2003 to foster industry-
government partnership to accelerate the technical foundation, and ultimate commercialization, of solid state lighting systems. NGLIA
was designated in 20(cid:19)(cid:24)(cid:3) (cid:68)(cid:86)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:179)(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:92)(cid:3) (cid:83)(cid:68)(cid:85)(cid:87)(cid:81)(cid:72)(cid:85)(cid:180)(cid:3) (cid:69)(cid:92)(cid:3) (cid:39)(cid:50)(cid:40)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3) (cid:76)(cid:87)(cid:86)(cid:3) (cid:54)(cid:54)(cid:47)(cid:3) (cid:83)(cid:85)(cid:82)(cid:74)(cid:85)(cid:68)(cid:80)(cid:17)(cid:3) (cid:55)(cid:75)(cid:72)(cid:3) (cid:54)(cid:54)(cid:47)(cid:3) (cid:83)(cid:85)(cid:82)(cid:74)(cid:85)(cid:68)(cid:80)(cid:3) (cid:76)(cid:86)(cid:3) (cid:69)(cid:72)(cid:76)(cid:81)(cid:74)(cid:3) (cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:87)(cid:68)(cid:78)(cid:72)(cid:81)(cid:3) (cid:87)(cid:82)(cid:3) (cid:85)(cid:72)(cid:86)(cid:72)(cid:68)(cid:85)(cid:70)(cid:75)(cid:15)(cid:3)
develop and conduct demonstration activities on advanced solid state white lighting technologies based on LEDs and OLEDs. We are
one of 9 members of NGLIA. Dr. Hack is currently Vice-Chairman of NGLIA.
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OLED Lighting Coalition
We are a founding member of the OLED Lighting Coalition, a subgroup of OLED-A and NGLIA. The OLED Lighting Coalition
is a group of U.S. companies and advocates of OLED technology joined together to promote the OLED lighting industry to the
government, public and the lighting community. Dr. Hack serves as a member of the Board of Directors of the OLED Lighting Coalition.
Intellectual Property
Along with our personnel, our primary and most fundamental assets are patents and other intellectual property. This includes
numerous U.S. and foreign patents and patent applications that we own, exclusively license or have the sole right to sublicense. It also
includes a substantial body of non-patented technical know-how that we have accumulated over time.
Our Patents
Our research and development activities, conducted both internally and through collaborative programs with our partners, have
resulted in the filing of a substantial number of patent applications relating to our OLED technologies and materials. As of December 31,
2018, we owned, through assignment to us alone or jointly with others, 402 pending U.S. applications (active U.S. cases and international
applications designated in the U.S.) and 837 U.S. patents, together with counterparts filed in various foreign countries. These owned
patents will start expiring in the U.S. in 2020.
Patents We License from Princeton, USC and Michigan
We exclusively license many of our patent rights, including certain of our key PHOLED technology patents, under the 1997
(cid:36)(cid:80)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:47)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:17)(cid:3)(cid:44)(cid:81)(cid:3)(cid:21)(cid:19)(cid:19)(cid:25)(cid:15)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:51)(cid:85)(cid:82)(cid:73)(cid:72)(cid:86)(cid:86)(cid:82)(cid:85)(cid:3)(cid:41)(cid:82)(cid:85)(cid:85)(cid:72)(cid:86)(cid:87)(cid:182)(cid:86)(cid:3)(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:73)(cid:72)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:48)(cid:76)(cid:70)(cid:75)(cid:76)(cid:74)(cid:68)(cid:81)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:15)(cid:3)(cid:48)(cid:76)(cid:70)(cid:75)(cid:76)(cid:74)(cid:68)(cid:81)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:68)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)y to
this agreement. As of December 31, 2018, the patent rights we license from these universities included 228 issued U.S. patents, 61
pending U.S. patent applications, together with counterparts filed in various foreign countries. The earliest of these patents expired in
the U.S. in 2014, while one of our U.S. PHOLED technology patents licensed from these universities expired in 2017.
Under the 1997 Amended License Agreement, Princeton, USC and Michigan granted us worldwide, exclusive license rights to
specified patents and patent applications relating to OLED technologies and materials (including our PHOLED technology and
materials). Our license rights also extend to any patent rights arising out of the research conducted by Princeton, USC or Michigan under
our various research agreements with these entities. We are free to sublicense to third parties all or any portion of our patent rights under
the 1997 Amended License Agreement. The term of the 1997 Amended License Agreement continues for the lifetime of the licensed
patents, though it is subject to termination for an uncured material breach or default by us, or if we become bankrupt or insolvent.
Princeton is primarily responsible for the filing, prosecution and maintenance of all patent rights licensed to us under the 1997
Amended License Agreement pursuant to an inter-institutional agreement between Princeton, USC and Michigan. However, we manage
this process and have the right to instruct patent counsel on specific matters to be covered in any patent applications filed by Princeton.
We are required to bear all costs associated with the filing, prosecution and maintenance of these patent rights.
We are required under the 1997 Amended License Agreement to pay Princeton royalties for licensed products sold by us or our
sublicensees. These royalties amount to 3% of the net sales price for licensed products sold by us and 3% of the revenues we receive for
licensed products sold by our sublicensees. These royalty rates are subject to renegotiation for products not reasonably conceivable as
arising out of the research agreements if Princeton reasonably determines that the royalty rates payable with respect to these products
are not fair and competitive. Princeton shares portions of these royalties with USC and Michigan under their inter-institutional
agreement.
We have a minimum royalty obligation of $100,000 per year during the term of the 1997 Amended License Agreement. We owed
royalties under the 1997 Amended License Agreement with Princeton of $7.0 million for 2018. We also are required under the 1997
Amended License Agreement to use commercially reasonable efforts to bring the licensed OLED technology to market. However, this
requirement is deemed satisfied if we invest a minimum of $800,000 per year in research, development, commercialization or patenting
efforts respecting the patent rights licensed to us under the 1997 Amended License Agreement.
Patents We Acquired from Motorola
In 2000, we entered into a license agreement with Motorola whereby Motorola granted us perpetual license rights to what are now
74 issued U.S. (cid:83)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:48)(cid:82)(cid:87)(cid:82)(cid:85)(cid:82)(cid:79)(cid:68)(cid:182)(cid:86)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:87)(cid:82)(cid:74)(cid:72)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:73)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:72)(cid:85)(cid:83)(cid:68)(cid:85)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:89)(cid:68)(cid:85)(cid:76)(cid:82)(cid:88)(cid:86)(cid:3)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:85)(cid:76)(cid:72)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:83)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)
expired in the U.S. during 2018.
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In 2011, we purchased these patents from Motorola, including all existing and future claims and causes of action for any
infringement of the patents. This effectively terminated our license agreement with Motorola, including any obligation to make royalty
payments to Motorola. In consideration for Motorola assigning and transferring the patents to us, we made a one-time cash payment to
Motorola of $440,000, and we granted Motorola a royalty-free, non-exclusive and non-sublicensable license under the patents for use
by Motorola and its affiliates in their respective businesses.
Patents We Acquired from Fujifilm Corporation
In 2012, we entered into a Patent Sale Agreement (the Fujifilm Agreement) with Fujifilm. Under the Fujifilm Agreement, Fujifilm
sold more than 1,200 OLED-related patents and patent applications for a total cost of $109.5 million. The Fujifilm Agreement contains
customary representations and warranties and covenants, including respective covenants not to sue by both parties thereto. The Fujifilm
Agreement permitted us to assign all of our rights and obligations under the Fujifilm Agreement to our affiliates, and we assigned, prior
to the consummation of the transactions contemplated by the Fujifilm Agreement, our rights and obligations to UDC Ireland Limited
(UDC Ireland), a wholly-owned subsidiary formed under the laws of the Republic of Ireland. The transactions contemplated by the
Fujifilm Agreement were consummated on July 26, 2012.
Patents We Acquired from BASF
In 2016, our Irish subsidiary UDC Ireland entered into an IP Transfer Agreement (the BASF Agreement) with BASF. Under the
BASF Agreement, BASF sold us more than 500 OLED-related patents and patent applications for a total cost of $96.0 million. The
transactions contemplated by the BASF Agreement were consummated on June 28, 2016.
Intellectual Property Developed under Our Government Contracts
We and our subcontractors have developed, and may continue to develop, patentable OLED technology inventions under our
various U.S. government contracts and subcontracts. Under these arrangements, we or our subcontractors generally can elect to take
title to any patents on these inventions, and to control the manner in which these patents are licensed to third parties. However, the U.S.
government reserves rights to these inventions and associated technical data that could restrict our ability to market them to the
government for military and other applications, or to third parties for commercial applications. In addition, if the U.S. government
determines that we or our subcontractors have not taken effective steps to achieve practical application of these inventions in any field
of use in a reasonable time, the government may require that we or our subcontractors license these inventions to third parties in that
field of use.
Non-patented Technical Know-How
We have accumulated, and continue to accumulate, a substantial amount of non-patented technical know-how relating to OLED
technologies and materials. Where practicable, we share portions of this information with display manufacturers and other business
partners on a confidential basis. We also employ various methods to protect this information from unauthorized use or disclosure,
although no such methods can afford complete protection. Moreover, because we derive some of this information and know-how from
academic institutions such as Princeton, USC and Michigan, there is an increased potential for public disclosure. We also cannot prevent
the actual independent development of the same or similar information and know-how by third parties.
Competition
The industry in which we operate is highly competitive. We compete against alternative display technologies, in particular LCDs,
as well as other OLED technologies. We also compete in the lighting market against incumbent technologies, such as incandescent
bulbs, fluorescent lamps, and inorganic LEDs, and against emerging technologies, such as other OLED technologies.
Display Panel Industry Competitors
Numerous domestic and foreign companies have developed or are developing and improving LCD and other display technologies
that compete with our OLED display technologies. We believe that OLED display technologies can compete with LCDs and other
display technologies for many product applications on the basis of lower power consumption, better contrast ratios, faster video rates,
form factor and lower manufacturing cost. However, other companies may succeed in continuing to improve these competing display
technologies, or in developing new display technologies, that are superior to OLED display technologies in various respects. We cannot
predict the timing or extent to which such improvements or developments may occur.
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Lighting Industry Competitors
Although there has been a movement to phase out traditional incandescent bulbs throughout many countries, traditional
incandescent bulbs and fluorescent lamps remain well-entrenched products in the lighting industry. In addition, compact fluorescent
lamps and solid-state LEDs have been introduced into the market and would compete with OLED lighting products. Having attributes
different from fluorescent lamps and LEDs, OLEDs may compete directly with these products for certain lighting applications. However,
manufacturers of LEDs and compact fluorescent lamps may succeed in more broadly adapting their products to various lighting
applications, or others may develop competing solid-state lighting technologies that are superior to OLEDs. Again, we cannot predict
whether or when this might occur.
OLED Technology and Materials Competitors
Eastman Kodak Company (Kodak) developed and patented the original fluorescent OLED technology in 1987. Cambridge
Display Technology, Ltd. (CDT), which was acquired by Sumitomo Chemical Company in 2007, developed and patented polymer
OLED technology in 1989. Display and lighting manufacturers, including customers of ours, are engaged in their own OLED research,
development and commercialization activities, and have developed and may continue to develop proprietary OLED technologies that
are necessary or useful for commercial OLED devices. In addition, other material manufacturers, such as Sumitomo, Idemitsu Kosan
Co., Ltd. (Idemitsu Kosan), Merck KGaA, Cynora Gmbh and Kyulux Inc., are selling or sampling competing OLED materials to
customers, including companies to which we sell our proprietary PHOLED materials.
Our licensing business is based on our control of a broad portfolio of OLED-related device patents and technology. We believe
this portfolio includes fundamental patents in the field of phosphorescent OLED materials and devices, as well as certain additional
complementary OLED technologies. As discussed above, alternative technologies, such as fluorescent OLED emitter materials, exist
and could be competitive to our phosphorescent OLED material solutions. However, fluorescent materials have characteristics that we
believe many market participants consider less desirable than those of phosphorescent materials. Suppliers of fluorescent emitter
materials include Doosan Electronics, Dow Chemical (previously Gracel Display), Idemitsu Kosan and SFC Co. Ltd. Fluorescent
materials may also be viewed as complementary in that they can be used in the same OLED stack as phosphorescent materials, especially
for use as emitters for generating deep blue pixels in display modules until such time as the OLED industry improves the properties of
currently available deep blue phosphorescent materials.
The competitive landscape with respect to our host materials business is characterized by a larger number of established chemical
material suppliers who have long-term relationships with many of our existing customers and licensees. We have elected to partner with
certain of these companies to manufacture and deliver host solutions to our customers, as well as selling our host materials directly to
device manufacturers. We believe our competitive advantage stems, in part, from our deep knowledge of our phosphorescent emitter
materials, which are complementary with the host solutions. We believe that our understanding of the phosphorescent emitter materials
enables us to create host material solutions that are especially well suited for use with a certain class of emitter materials that are
implemented commercially today. However, we note that many of our technology partners have their own host solutions and the
competitive landscape includes many well-established companies such as Doosan Electronics, Dow Chemical, Duksan, Idemitsu Kosan,
Merck KGaA, NSCC and Samsung SDI Co. Ltd. and which have significant resources and may aggressively pursue such business in
the future.
Our existing business relationships with SDC and other product manufacturers suggest that our OLED technologies and materials,
particularly our PHOLED technologies and materials, may achieve a significant level of market penetration in the display and lighting
industries. However, others, such as those working to develop thermally activated delayed fluorescence (TADF) and micro-LED
alternative technologies, may succeed in developing new OLED technologies, materials and alternative solutions that may supplement
or be utilized in place of ours. We cannot be sure of the extent to which product manufacturers will adopt and continue to utilize our
OLED technologies and materials for the production of commercial displays and lighting products.
Our Contract Research Organization Business: Adesis, Inc.
Adesis, which we acquired in July 2016, is a contract research organization (CRO) headquartered in New Castle, Delaware that
provides support services to the OLED, pharma, biotech, catalysis and other industries. As of December 31, 2018, Adesis employed a
team of 84 research and development chemists, engineers and laboratory technicians. Prior to our acquisition in 2016, we utilized more
(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:24)(cid:19)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:36)(cid:71)(cid:72)(cid:86)(cid:76)(cid:86)(cid:182)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:88)(cid:87)(cid:83)(cid:88)(cid:87)(cid:17)(cid:3)(cid:58)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:3)(cid:68)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:81)t 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.
14
In May 2017, Adesis purchased its New Castle, Delaware building, to expand its custom organic synthesis, research and
development, and specialty manufacturing capabilities. The New Castle facility is a 47,500-square-foot building in the Southgate
Industrial Center, of which Adesis had previously leased about 25,100 square feet. We believe the purchase of the building will allow
Adesis to continue to expand its CRO offerings and allow us to enhance our chemistry expertise and capabilities.
In December 2017, Adesis signed an agreement with Delaware Innovation Space, Inc. for approximately 7,000 square feet of
laboratory space at the Experimental Station in Wilmington, Delaware, in which Adesis opened a new suite of laboratories to expand
its organic chemistry team and research and development programs. The Wilmington space includes additional ancillary work and
meeting space and supports (cid:36)(cid:71)(cid:72)(cid:86)(cid:76)(cid:86)(cid:182)(cid:3)(cid:82)(cid:81)(cid:74)(cid:82)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:17)
Employees
As of December 31, 2018, we had 265 active full-time employees and two part-time employees, none of whom are unionized. We
believe that relations with our employees are good.
Our Company History
Our corporation was organized under the laws of the Commonwealth of Pennsylvania in 1985. Our business was commenced in
1994 by a company then known as Universal Display Corporation, which had been incorporated under the laws of the State of New
Jersey. In 1995, a wholly-owned subsidiary of ours merged into this New Jersey corporation. The surviving corporation in this merger
became a wholly-owned subsidiary of ours and changed its name to UDC, Inc. Simultaneously with the consummation of this merger,
we changed our name to Universal Display Corporation. UDC, Inc. functions as an operating subsidiary of ours and has certain
overlapping officers and directors. We have also formed or acquired other wholly-owned subsidiaries, including Universal Display
Corporation Hong Kong, Limited (2008), Universal Display Corporation Korea, Y.H. (2010), Universal Display Corporation Japan GK
(2011), UDC Ireland Limited (2012), Universal Display Corporation China, Ltd. (2016) and Adesis, Inc. (2016), and we established a
representative office in Taiwan (2011).
Our Compliance with Environmental Protection Laws
We are not aware of any material effects that compliance with Federal, State or local environmental protection laws or regulations
will have on our business. We have not incurred substantial costs to comply with any environmental protection laws or regulations, and
we do not anticipate having to do so in the foreseeable future.
Our Internet Site
Our Internet address is www.oled.com. We make available through our Internet website, free of charge, our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we file such material with the
Securities and Exchange Commission (the SEC). The SEC maintains a website that contains these reports as well as proxy statements
and information regarding issuers who file electronically, with the address www.sec.gov. In addition, we have made available on our
(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:72)(cid:87)(cid:3)(cid:90)(cid:72)(cid:69)(cid:86)(cid:76)(cid:87)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:75)(cid:72)(cid:68)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:179)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:42)(cid:82)(cid:89)(cid:72)(cid:85)(cid:81)(cid:68)(cid:81)(cid:70)(cid:72)(cid:180)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:75)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:36)(cid:88)(cid:71)(cid:76)(cid:87)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)charter
for the Compensation Committee of our Board of Directors, the charter for the Nominating & Corporate Governance Committee of our
Board of Directors, our Code of Ethics & Business Conduct for Employees, our Code of Conduct for Directors, and our Corporate
Governance Guidelines. We intend to make available on our website any future amendments or waivers to our Code of Ethics & Business
Conduct for Employees and our Code of Conduct for Directors. The information on our Internet site is not part of this report.
ITEM 1A. RISK FACTORS
You should carefully consider the following risks and uncertainties when reading this Annual Report on Form 10-K. The following
factors, as well as other factors affecting our operating results and financial condition, could cause our actual future results and financial
condition to differ materially from those projected.
If we cannot obtain and maintain appropriate patent and other intellectual property protection for our OLED technologies and
materials, our business will suffer.
The value of our OLED technologies and materials is dependent on our ability to secure and maintain appropriate patent and other
intellectual property rights protection. Although we own or license many patents respecting our OLED technologies and materials that
have already been issued, there can be no assurance that additional patents applied for will be obtained, or that any of these patents, once
issued, will afford commercially significant protection for our OLED technologies and materials, or will be found valid if challenged.
Also, there is no assurance that we will be successful in defending the validity of our current or future patents in pending and future
15
patent oppositions, invalidation trials, interferences, reexaminations, reissues, or other administrative or court proceedings. Moreover,
we have not obtained patent protection for some of our OLED technologies and materials in all foreign countries in which OLED
products or materials might be manufactured or sold.
We believe that the strength of our current intellectual property position results primarily from the essential nature of our
fundamental patents covering phosphorescent OLED devices and certain materials utilized in these devices. Certain of our existing
fundamental phosphorescent OLED patents expired in the United States in 2017 or will expire in the United States in 2019; and expired
in other countries of the world in 2018 or will expire in other countries of the world in 2020. While we hold a wide range of additional
patents and patent applications whose expiration dates extend (and in the case of patent applications, will extend) beyond 2020, many
of which are also of importance in the OLED industry, none are of an equally essential nature as our fundamental patents, and therefore
our competitive position may be less certain as these patents expire.
We may become engaged in litigation to protect or enforce our patent and other intellectual property rights, or in International
Trade Commission proceedings to abate the importation of goods that would compete unfairly with those of our licensees. In addition,
we are participating in or have participated in, and in the future will likely have to participate in, interference, reissue, or reexamination
proceedings before the U.S. Patent and Trademark Office, and opposition, nullity or other proceedings before foreign patent offices,
with respect to some of our patents or patent applications. All of these actions place our patents and other intellectual property rights at
risk and may result in substantial costs to us as well as a diversion of management attention from our business and operations. Moreover,
if successful, these actions could result in the loss of patent or other intellectual property rights protection for the key OLED technologies
and materials on which our business depends.
We rely, in part, on several non-patented proprietary technologies to operate our business. Others may independently develop the
same or similar technologies or otherwise obtain access to our unpatented technologies. Furthermore, these parties may obtain patent
protection for such technology, inhibiting or preventing us from practicing the technology. To protect our trade secrets, know-how and
other non-patented proprietary information, we require employees, consultants, financial advisors and strategic partners to enter into
confidentiality agreements. These agreements may not ultimately provide meaningful protection for our trade secrets, know-how or
other non-patented proprietary information. In particular, we may not be able to fully or adequately protect our proprietary information
as we conduct discussions with potential strategic partners. Additionally, although we take many measures to prevent theft and misuse
of our proprietary information, we may face attempts by others to gain unauthorized access through the Internet to our information
technology systems or to our intellectual property, which might be the result of industrial or other espionage or actions by hackers
seeking to harm our company or its products. If we are unable to protect the proprietary nature of our technologies, it will harm our
business.
We or our customers may incur substantial costs or lose important rights as a result of litigation or other proceedings relating to our
patent and other intellectual property rights or with respect to our OLED materials business.
There are a number of other companies and organizations that have been issued patents and are filing patent applications relating
to OLED technologies and materials, including, without limitation, Kodak (substantially all of whose OLED assets were sold to a group
of LG companies in 2009), CDT (acquired by Sumitomo in 2007), Canon, Inc., Semiconductor Energy Laboratories Co., Idemitsu Kosan
and Mitsubishi Chemical Corporation. In addition, some of our customers such as SDC and LG Display have been issued patents and
are filing patent applications relating to OLED technologies and materials. As a result, there may be issued patents or pending patent
applications of third parties that would be infringed by the use of our OLED technologies or materials, thus subjecting our customers to
possible suits for patent infringement in the future. Such lawsuits could result in our customers being liable for damages or require our
customers to obtain additional licenses that could increase the cost of their products. This, in turn, could have an adverse effect on our
customers(cid:182)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:88)(cid:86)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:85)(cid:82)(cid:92)(cid:68)(cid:79)(cid:87)(cid:76)(cid:72)(cid:86) or material sales revenues, or cause our customers to seek to renegotiate our royalty rates or
pricing. In addition, we have agreed to indemnify customers purchasing our OLED materials for commercial usage against certain claims
of patent infringement by third parties, as a result of which we may incur substantial legal costs in connection with defending these
customers from such claims.
Our licensees may also seek to avoid paying future royalties by attempting to have our patents declared invalid and unenforceable
by a court. Our licensees may be more likely to file such declaratory actions (cid:76)(cid:81)(cid:3)(cid:79)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:3)(cid:54)(cid:88)(cid:83)(cid:85)(cid:72)(cid:80)(cid:72)(cid:3)(cid:38)(cid:82)(cid:88)(cid:85)(cid:87)(cid:182)(cid:86)(cid:3)(cid:71)(cid:72)(cid:70)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)MedImmune,
Inc. v. Genentech, Inc. (2007), in which the Court found that a licensee need not refuse to pay royalties and commit material breach of
the license agreement before bringing an action to declare a licensed U. S. patent invalid and unenforceable.
In addition, we may be required, from time-to-time, to assert our intellectual property rights by instituting legal proceedings
against others. We cannot be assured that we will be successful in enforcing our patents in any lawsuits we may commence. Defendants
in any litigation we may commence to enforce our patents may attempt to establish that our patents are invalid or are unenforceable.
Thus, any patent litigation we commence could lead to a determination that one or more of our patents are invalid or unenforceable. If
a third party succeeds in invalidating one or more of our patents, that party and others could compete more effectively against us. Our
ability to derive licensing revenues from products or technologies covered by these patents would also be adversely affected.
16
Whether our customers are defending the assertion of third-party intellectual property rights against their businesses arising as a
result of the use of our technology, or we are asserting our own intellectual property rights against others, such litigation can be complex,
costly, protracted and highly disruptive to our or our customers(cid:182)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3) (cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) (cid:69)(cid:92)(cid:3) (cid:71)(cid:76)(cid:89)(cid:72)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:68)(cid:87)(cid:87)(cid:72)(cid:81)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:72)(cid:81)(cid:72)(cid:85)(cid:74)(cid:76)(cid:72)(cid:86)(cid:3) (cid:82)(cid:73)(cid:3)
management and key technical personnel. As a result, the pendency or adverse outcome of any intellectual property litigation to which
we or our customers are subject could disrupt business operations, require the incurrence of substantial costs and subject us or our
customers to significant liabilities, each of which could severely harm our business. Costs associated with these actions are likely to
increase as AMOLED products using our PHOLED and other OLED technologies and materials continue to enter the consumer
marketplace.
Plaintiffs in intellectual property cases often seek injunctive relief in addition to money damages. Any intellectual property
litigation commenced against our customers may force them to take actions that could be harmful to their businesses and thus to
revenues, including the halting of sales of products that incorporate or otherwise use our technology or materials.
Furthermore, the measure of damages in intellectual property litigation can be complex and is often subjective or uncertain. If our
customers were to be found liable for infringement of proprietary rights of a third party, the amount of damages they might have to pay
could be substantial and is difficult to predict. Decreased sales of our customers(cid:182)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:82)(cid:85)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:86)(cid:3)
would have an adverse effect on our royalty revenues under existing licenses and material sales under our existing sales agreements.
Were this to occur, it would likely harm our ability to (i) obtain new licensees which would have an adverse effect on the terms of the
royalty arrangements we could enter into with any new licensees, and (ii) sell our UniversalPHOLED® materials to existing and new
customers. Moreover, to the extent any third party claims are directed specifically to materials supplied by us to our customers, we may
be required to incur significant costs associated with the defense of such claims and potential damages associated with such claims that
may be awarded against our customers.
As is commonplace in technology companies, we employ individuals who were previously employed at other technology
companies. To the extent our employees are involved in research areas that are similar to those areas in which they were involved at
their former employers, we may be subject to claims that such employees or we have, inadvertently or otherwise, used or disclosed the
alleged trade secrets or other proprietary information of the former employers. Litigation may be necessary to defend against such
claims. The costs associated with these actions or the loss of rights critical to our or our customers(cid:182)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:70)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:81)(cid:72)(cid:74)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:3)
our revenues or cause our business to fail.
Recent court decisions in various patent cases may make it more difficult for us to obtain future patents, enforce our patents against
third parties or obtain favorable judgments in cases where the patents are enforced.
Recent case law may make it more difficult for patent holders to secure future patents and/or enforce existing patents. For example,
in KSR International Co. vs. Teleflex, Inc. (2007), the U.S. Supreme Court mandated a more expansive and flexible approach to
determine whether a patent is obvious and invalid. As a result of the less rigid approach to assessing obviousness, defending the validity
of or obtaining patents may be more difficult.
Recent court decisions may also impact the enforcement of our patents. For example, we may not be able to enjoin certain third
party uses of products or methods covered by our patents following the initial authorized sale, even where those uses are expressly
proscribed in an agreement with the buyer. Also, we may face increased difficulty enjoining infringement of our patents. The U.S.
Supreme Court has held that an injunction should not automatically issue based on a finding of patent infringement, but should be
(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:3)(cid:87)(cid:72)(cid:86)(cid:87)(cid:3)(cid:69)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:71)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:72)(cid:72)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:73)(cid:85)(cid:76)(cid:81)(cid:74)(cid:72)(cid:85)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)terest. Obtaining
enhanced damages for willful infringement of our patents may also be more difficult even in those cases where we successfully prove a
third party has infringed our patents, as a recent case set a more stringent standard for proving willful infringement.
Therefore, as a result of such rulings, it may be more difficult for us to defend our currently issued patents, obtain additional
patents in the future or achieve the desired competitive effect even when our patents are enforced. If we are unable to so defend our
currently issued patents, or to obtain new patents for any reason, our business would suffer.
If we cannot form and maintain lasting business relationships with OLED product manufacturers, our business strategy will fail.
Our business strategy ultimately depends upon our development and maintenance of commercial licensing and material supply
relationships with high-volume manufacturers of OLED products. We have entered into only a limited number of such relationships
from which most of our material sales and licensing revenue are generated. Our other relationships with product manufacturers currently
are limited to technology development and the evaluation of our OLED technologies and materials for possible use in commercial
products. Some or all of these relationships may not succeed or, even if they are successful, may not result in the product manufacturers
entering into commercial licensing and material supply relationships with us.
17
Many of our agreements with product manufacturers last for only limited periods of time, such that our relationships with these
manufacturers will expire unless they are renewed. These product manufacturers may not agree to renew their relationships with us on
a continuing basis or may agree to do so on terms that are less favorable to us. In addition, we regularly continue working with product
manufacturers after our existing agreements with them have expired while we are attempting to negotiate contract extensions or new
agreements with them. Should our relationships with the various product manufacturers not continue or be renewed on less favorable
terms, or if we are not able to identify other product manufacturers and enter into contracts with them, our business may materially
suffer.
Our ability to enter into additional commercial licensing and material supply relationships, or to maintain our existing
relationships, may depend on our ability to make certain financial or other commitments. We might not be able, for financial or other
reasons, to enter into or continue these relationships on commercially acceptable terms, or at all. Failure to do so may cause our business
strategy to fail.
If we fail to make advances in our OLED research and development activities, we might not succeed in commercializing our OLED
technologies and materials.
Further advances in our OLED technologies and materials depend, in part, on the success of the research and development work
we conduct, both alone and with our research partners. We cannot be certain that this work will yield additional advances in the research
and development of these technologies and materials.
Our research and development efforts remain subject to all of the risks associated with the development of new products based on
emerging and innovative technologies, including, without limitation, unanticipated technical or other problems and the possible
insufficiency of funds for completing development of these products. Technical problems may result in delays and cause us to incur
additional expenses that would increase our losses. If we cannot complete research and development of our OLED technologies and
materials successfully, or if we experience delays in completing research and development of our OLED technologies and materials for
use in potential commercial applications, particularly after incurring significant expenditures, our business may fail.
Conflicts or other problems may arise with our customers or joint development partners, resulting in renegotiation, breach or
termination of, or litigation related to, our agreements with them. This would adversely affect our revenues.
Conflicts or other problems could arise between us and our customers or joint development partners, some of which we have made
strategic investments in, as to royalty rates, milestone payments or other commercial terms. Similarly, we may disagree with our
customers or joint development partners as to which party owns or has the right to commercialize intellectual property that is developed
during the course of the relationship or as to other non-commercial terms. If such a conflict were to arise, a customer or joint development
partner might attempt to compel renegotiation of certain terms of their agreement or terminate their agreement entirely, and we might
lose the royalty revenues, material sales revenues and other benefits of the agreement. Either we or the customer or joint development
partner might initiate litigation to determine commercial obligations, establish intellectual property rights or resolve other disputes under
the agreement. Such litigation could be costly to us and require substantial attention of management. If we were unsuccessful in such
litigation, we could lose the commercial benefits of the agreement, be liable for financial damages and suffer losses of intellectual
property or other rights that are the subject of dispute.
If our OLED technologies and materials are not feasible for broad-based product applications, we may not be able to continue to
generate revenues sufficient to support ongoing operations.
Our main business strategy is to license our OLED technologies and sell our OLED materials to manufacturers for incorporation
into the display and lighting products that they sell. Consequently, our success depends on the ability and willingness of these
manufacturers to develop, manufacture and sell commercial products integrating our technologies and materials.
Before product manufacturers will agree to expand the use of our OLED technologies and materials for wider scale commercial
production, they will likely require us to demonstrate to their satisfaction that our OLED technologies and materials are feasible for
broad-based product applications beyond current commercial application, such as smartphones, wearables and television displays. This,
in turn, may require additional advances in our technologies and materials, as well as those of others, for applications in a number of
areas, including, without limitation, advances with respect to the development of:
(cid:120)
(cid:120)
(cid:120)
OLED materials with improved lifetimes, efficiencies and color coordinates for larger area full-color OLED displays
and general lighting products;
more robust OLED materials for use in more demanding large-scale manufacturing environments; and
scalable and cost-effective methods and technologies for the fabrication of large volume OLED materials and
products.
18
We cannot be certain that these advances will occur, and hence our OLED technologies and materials may not be feasible for
additional broad-based product applications and expansion.
Even if our OLED technologies are technically feasible, they may not be adopted by product manufacturers.
The potential size, timing and viability of market opportunities targeted by us are uncertain at this time. Market acceptance of our
OLED technologies beyond current product offerings will depend, in part, upon these technologies providing benefits comparable or
superior to current display and lighting technologies at an advantageous cost to manufacturers, and the adoption of products
incorporating these technologies by consumers. Many current and potential customers for our OLED technologies utilize and have
invested significant resources in competing technologies, and may, therefore, be reluctant to redesign their products or manufacturing
processes to incorporate our OLED technologies.
During the entire product development process for a new product, we face the risk that our technology will fail to meet the
(cid:80)(cid:68)(cid:81)(cid:88)(cid:73)(cid:68)(cid:70)(cid:87)(cid:88)(cid:85)(cid:72)(cid:85)(cid:182)(cid:86)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:76)(cid:70)(cid:68)(cid:79)(cid:15)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:69)(cid:72)(cid:3)(cid:85)(cid:72)(cid:83)(cid:79)(cid:68)(cid:70)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:3)(cid:82)(cid:85)(cid:3)(cid:68)(cid:79)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)gy. Even
if we offer technologies that are satisfactory to a product manufacturer, the manufacturer may choose to delay or terminate its product
development efforts for reasons unrelated to our technologies. In addition, our agreements with our customers do not require them to
purchase our host materials in order to utilize our phosphorescent emitter materials, and those customers may elect not to purchase our
host materials.
Mass production of new mass market OLED products will require the availability of suitable manufacturing equipment,
components and materials, many of which are available only from a limited number of suppliers. In addition, there may be a number of
other technologies that manufacturers need to utilize in conjunction with our OLED technologies in order to bring these new OLED
products to the market. Thus, even if our OLED technologies are a viable alternative to competing approaches, if product manufacturers
are unable to obtain access to this equipment and these components, materials and other technologies, they may not utilize our OLED
technologies.
There are numerous potential alternatives to OLEDs, which may limit our ability to commercialize our OLED technologies and
materials.
The flat panel display market is currently, and will likely continue to be for some time, dominated by displays based on LCD
technology. Numerous companies are making substantial investments in, and conducting research to improve characteristics of, LCDs;
additionally, other competing flat panel display technologies have been, or are being, developed. A similar situation exists in the solid-
state lighting market, which is currently dominated by LED products. Advances in any of these various technologies may overcome
their current limitations and permit them to become the leading technologies in their field, either of which could limit the potential
market for products utilizing our OLED technologies and materials. This, in turn, would cause product manufacturers to avoid entering
into commercial relationships with us, or to terminate or not renew their existing relationships with us.
Other OLED technologies may be more successful or cost-effective than ours, which may limit the commercial adoption of our
OLED technologies and materials.
Our competitors have developed and continue to develop OLED technologies that differ from or compete with our OLED
technologies. In particular, competing fluorescent and thermally activated delayed fluorescence OLED technology may become a viable
alternative to our phosphorescent OLED technology. Moreover, our competitors may succeed in developing new OLED technologies
that may become more cost-effective or have fewer limitations than our OLED technologies. If our OLED technologies, and particularly
our phosphorescent OLED technology, are unable to capture a substantial portion of the OLED product market, our business strategy
may fail.
The consumer electronics industry experiences significant downturns from time to time, any of which may adversely affect the
demand for and pricing of our OLED technologies and materials.
Our success depends upon the ability and continuing willingness of our customers to manufacture and sell products utilizing our
technologies and materials, specifically our phosphorescent emitters and host materials, and the widespread acceptance of our cu(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:182)
products in the consumer marketplace. Any slowdown in the demand for our (cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:182) products or a decrease in our (cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:182) use
of or demand for our materials would adversely affect our material sales and royalty revenues and thus our business. Our (cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:182)
decrease in the use of or demand for our materials may depend on several factors, including pricing, availability, continued technical
improvements and competitive product offerings. The markets for flat panel displays and lighting products are highly competitive.
Success in the market for end-user products that may integrate our OLED technologies and materials also depends on factors beyond
the control of our customers and us, including the cyclical and seasonal nature of the end-user markets that our customers serve, as well
as industry and general economic conditions.
19
The markets that we hope to penetrate have experienced significant periodic downturns, often in connection with, or in anticipation
of, declines in general economic conditions. These downturns have been characterized by lower product demand, production
overcapacity and erosion of average selling prices. Our business strategy is dependent on manufacturers building and selling products
that incorporate our OLED technologies and materials. Industry-wide fluctuations and downturns in the demand for displays and solid-
state lighting products could cause significant harm to our business.
Our customers may develop new or more efficient manufacturing processes, which may adversely affect demand for our OLED
materials.
OLED device manufacturing is in its early stages. By developing enhanced material processing methods and more efficient
manufacturing techniques, our customers who purchase our phosphorescent emitter and host materials could become more efficient in
the utilization of our materials, which could limit or reduce the amount of materials they purchase from us. Thus, demand for our
materials may not expand in proportion to the number of OLED related products manufactured by our customers, and may result in
reduced demand for our materials and technology relative to our customers' manufacture and sale of products made with such materials.
Any downturn in U.S. or global economic conditions may have a significant adverse effect on our business.
There have been significant and sustained economic downturns in the U.S. and globally in the past. These downturns have placed
pressure on consumer demand, and the resulting impact on consumer spending has had a material adverse effect on the demand for
consumer electronic products. Similar downturns in the future may have a significant adverse effect on one or more of our licensees as
an enterprise, which could result in those licensees reducing their efforts to commercialize products that incorporate our OLED
technologies and materials. Consumer demand and the condition of the display and lighting industries may also be impacted by other
external factors such as war, terrorism, geopolitical uncertainties and other business interruptions. The impact of these external factors
is difficult to predict, and one or more of these factors could adversely impact the demand for our customers(cid:182)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:88)(cid:86)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)
business.
Many of our competitors have greater resources, which may make it difficult for us to compete successfully against them.
The flat panel display and solid-state lighting industries are characterized by intense competition. Many of our competitors have
better name recognition and greater financial, technical, marketing, personnel and research capabilities than we do. Because of these
differences, we may never be able to compete successfully in these markets or maintain any competitive advantages we are able to
achieve over time.
If we cannot keep our key employees or hire other talented persons as we grow, our business might not succeed.
Our performance is substantially dependent on the continued services of our executive officers and other key technical and
managerial personnel, and on our ability to offer competitive salaries and benefits to these and our other employees. We do not have
employment agreements with any of our executive officers or other key technical or managerial personnel. Additionally, competition
for highly skilled technical and managerial personnel is intense. We might not be able to attract, hire, train, retain and motivate the
highly skilled employees we need to be successful. If we fail to attract and retain the necessary technical and managerial personnel, our
business will suffer and might fail.
We rely solely on PPG to manufacture the OLED materials we use and sell to product manufacturers.
Our business prospects depend significantly on our ability to obtain proprietary OLED materials for our own use and for sale to
product manufacturers. Our agreement with PPG provides us with a source for these materials for development, evaluation and
commercial purposes. Our agreement with PPG currently runs through the end of 2019 and shall be automatically renewed for additional
one year terms, unless terminated by us with prior notice of one year or terminated by PPG with prior notice of two years. Our inability
to continue obtaining these OLED materials from PPG or another source at cost-competitive prices and to continue obtaining these
OLED materials in sufficient quantities to meet our product manufacturers' current and future demands and timetables would have a
material adverse effect on our revenues and cost of goods sold relating to sales of these materials to OLED product manufacturers, as
well as on our ability to perform future development work.
We strive to maintain sufficient levels of inventory to accommodate our manufacturing customers. Inventory management relating
to our material sales is complex, and excess inventory may harm our business and cause it to suffer.
Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels of our OLED
materials to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and
customer requirements. As a just-in-time supplier to our customers, we carry sufficient inventory to accommodate their capacity
requirements, sometimes without firm purchase commitments. Our dependence on third-party manufacturers to provide our materials
20
to us exposes us to longer lead times than if we were a direct manufacturer, increasing our risk of inventory obsolescence comparatively.
Our customers may increase orders during periods of product shortages, cancel orders if their inventory is too high, or delay orders in
anticipation of new products. They also may adjust their orders in response to the supply and demand of their products by end-users, or
the supply and demand of our products and the products of our competitors that are available to them.
Inventory management risks are heightened when our largest customers launch new products and retire existing products. At such
times, these customers tend to change product designs and may introduce some of our new materials into new designs. The production
of these materials requires us to purchase essential raw material and commence manufacturing well in advance of receiving firm
(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:3)(cid:82)(cid:85)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:86)(cid:88)(cid:70)(cid:75)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:86)(cid:17)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:85)(cid:71)(cid:76)(cid:81)(cid:74)(cid:79)(cid:92)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:82)(cid:73)(cid:3)(cid:88)(cid:81)(cid:68)(cid:81)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:80)(cid:68)(cid:81)(cid:88)(cid:73)(cid:68)cturing
plans and designs. Unanticipated product cessation and product introduction delays or cancellation may cause us to order or produce
excess or insufficient inventory. Excess inventory of our OLED materials is subject to the risk of inventory obsolescence. In the event
that a substantial portion of our inventory becomes obsolete, it could have a material adverse effect on earnings due to the resulting costs
associated with the inventory impairment charges and inventory write downs.
We are the sole source supplier for certain critical components used in OLED technologies, which subjects customers to risk if we
are unable to meet the demand for such components.
Our customers depend on us as the sole source for certain critical components used in manufacturing OLED products, which
makes them susceptible to supply shortages if we are unable to meet their demand for such components. A potential customer could be
hesitant to adopt OLED technology given the risks inherent in depending on a sole source for critical components and the inability to
establish alternate supply relationships. If we are unable to supply the components needed by our existing customers in a timely manner,
or if potential customers do not utilize OLED technology because of concerns about our ability to meet supply demands, our business
may materially suffer.
We may require additional funding in the future in order to continue our business.
Our capital requirements have been and will continue to be significant. We may require additional funding in the future for the
research, development and commercialization of our OLED technologies and materials, to obtain and maintain patents and other
intellectual property rights in these technologies and materials, and for working capital and other purposes, the timing and amount of
which are difficult to ascertain. Our cash on hand may not be sufficient to meet all of our future needs. When we need additional funds,
such funds may not be available on commercially reasonable terms or at all. If we cannot obtain more money when needed, our business
might fail. Additionally, if we attempt to raise money in an offering of shares of our common stock, preferred stock, warrants or
depositary shares, or if we engage in acquisitions involving the issuance of such securities, the issuance of these shares will dilute our
then-existing shareholders.
Because the vast majority of OLED product manufacturers are located in the Asia-Pacific region, we are subject to international
operational, financial, legal and political risks which may negatively impact our operations.
Many of our customers and prospective customers have a majority of their operations in countries other than the United States,
particularly in the Asia-Pacific region. We also have offices in various countries located outside of the United States. Risks associated
with our doing business outside of the United States include, without limitation:
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compliance with a wide variety of foreign laws and regulations, including certain registration requirements for the
OLED materials we sell;
legal uncertainties regarding taxes, tariffs, quotas, export controls, export licenses and other trade barriers;
economic instability in the countries of our customers, causing delays or reductions in orders for their products and
therefore our royalties;
political instability in the countries in which our customers operate, particularly in South Korea relating to its disputes
with and proximity to North Korea and in Taiwan relating to its disputes with China;
difficulties in collecting accounts receivable and longer accounts receivable payment cycles; and
potentially adverse tax and tariff consequences.
Any of these factors could impair our ability to license our OLED technologies and sell our OLED materials, thereby harming our
business. Compliance with changing laws and regulations may involve significant costs or require changes in business practice that
could result in reduced profitability.
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We rely on information technology systems to operate various elements of our business and a cyber-attack or other breach of our
systems, or those of third parties on whom we may rely, could subject us to liability or interrupt the operation of our business.
We are dependent on information technology systems to operate various elements of our business. A breakdown, invasion,
corruption, destruction or interruption of critical information technology systems by employees, others with authorized access to our
systems or unauthorized persons could negatively impact operations. In the ordinary course of business, we collect, store and transmit
important data and it is critical that we do so in a secure manner to maintain the confidentiality and integrity of such information.
Additionally, we outsource certain elements of our information technology systems to third parties. As a result of this outsourcing, our
third party vendors may or could have access to our confidential information making such systems vulnerable. Data breaches of our
information technology systems, or those of our third party vendors, may pose a risk that sensitive data may be exposed to unauthorized
persons or to the public. While we believe that we have taken appropriate security measures to protect our data and information
technology systems, and have been informed by our third party vendors that they have as well, there can be no assurance that our efforts
will prevent breakdowns or breaches in our systems, or those of our third party vendors, that could adversely affect our business.
The U.S. government has rights to intellectual property derived from our government-funded work that might prevent us from
realizing the full benefits of our intellectual property portfolio.
The U.S. government, through various government agencies, has provided and continues to provide funding to us, Princeton, USC
and Michigan for work related to certain aspects of our OLED technologies. Because we have been provided with this funding, the
government has rights to any intellectual property derived from this work that could restrict our ability to market OLED products to the
government for military and other applications, or to license this intellectual property to third parties for commercial applications.
Moreover, if the government determines that we have not taken effective steps to achieve practical application of this intellectual
property in any field of use in a reasonable time, the government could require us to license this intellectual property to other parties in
that field of use. Any of these occurrences would limit our ability to obtain maximum value from our intellectual property portfolio.
The market price of our common stock may be highly volatile.
The market price of our common stock may be highly volatile, as has been the case with our common stock in the past as well as
the securities of many companies, particularly other emerging-growth companies in the technology industry. We have included in the
(cid:86)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:72)(cid:81)(cid:87)(cid:76)(cid:87)(cid:79)(cid:72)(cid:71)(cid:3)(cid:179)(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:53)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:48)(cid:68)(cid:87)(cid:87)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:44)(cid:86)(cid:86)(cid:88)(cid:72)(cid:85)(cid:3)(cid:51)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:40)quity
(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:15)(cid:180) a table indicating the high and low closing prices of our common stock as reported on the NASDAQ Global Market for the
past two years. Factors such as the following may have a significant impact on the market price of our common stock in the future:
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our revenues, expenses and operating results;
announcements by us, by our customers, or our competitors of technological developments, new product applications
or contractual arrangements;
announcements relating to dividends and share repurchases; and
other factors affecting the flat panel display and solid-state lighting industries in general.
Our operating results may have significant period-to-period fluctuations, which would make it difficult to predict our future
performance.
Due to the current stage of commercialization of our OLED technologies and materials, the limited number of commercially
successful consumer products utilizing our OLED technologies that customers have introduced in the marketplace, the relatively short
product lifetimes of these consumer products, and the significant development and manufacturing objectives that we and our customers
must achieve for the widespread inclusion of our OLED technologies in consumer products such as tablets, television displays and
lighting products, our quarterly operating results are difficult to predict and may vary significantly from quarter to quarter.
We believe that period-to-period comparisons of our operating results are not a reliable indicator of our future performance at this
time. Among other factors affecting our period-to-period results, our license and technology development fees often consist of large
one-time, annual or semi-annual payments, which may result in significant fluctuations in our revenues. In addition, our reliance on a
small number of licensees with large volumes of consumer product sales makes our quarterly operating results subject to our licensee's
specific plans and the success of their specific product offerings.
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With respect to material sales, our sales are primarily dependent on purchases made by a small number of customers. In addition
(cid:87)(cid:82)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3) (cid:73)(cid:68)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3) (cid:71)(cid:72)(cid:86)(cid:70)(cid:85)(cid:76)(cid:69)(cid:72)(cid:71)(cid:3) (cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3) (cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:87)(cid:82)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3) (cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3) (cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3) (cid:82)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:88)(cid:81)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3) (cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)-to-quarter sales may be materially
(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:81)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:86)(cid:15)(cid:3)(cid:90)hich may vary substantially based on financial management considerations,
changes in their product mix plans, modified material processing techniques and manufacturing line modifications.
If, in some future period, our operating results or business outlook fall below the expectations of securities analysts or investors,
our stock price would be likely to decline and investors in our common stock may not be able to resell their shares at or above their
purchase price. Broad market, industry and global economic factors may also materially reduce the market price of our common stock,
regardless of our operating performance.
The issuance of additional shares of our common stock could drive down the price of our stock.
The price of our common stock could decrease if:
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shares of our common stock that are currently subject to restriction on sale become freely salable, whether through
an effective registration statement or based on Rule 144 under the Securities Act of 1933, as amended; or
we issue additional shares of our common stock that might be or become freely salable, including shares that would
be issued upon conversion of our preferred stock or the exercise of outstanding stock options.
We can issue shares of preferred stock that may adversely affect the rights of shareholders of our common stock.
Our Articles of Incorporation authorize us to issue up to 5,000,000 shares of preferred stock with designations, rights and
preferences determined from time-to-time by our Board of Directors. Accordingly, our Board of Directors is empowered, without
shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of
shareholders of our common stock. For example, an issuance of shares of preferred stock could:
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adversely affect the voting power of the shareholders of our common stock;
make it more difficult for a third party to gain control of us;
discourage bids for our common stock at a premium; or
otherwise adversely affect the market price of our common stock.
As of February 21, 2019, we have issued and outstanding 200,000 shares of Series A Nonconvertible Preferred Stock, all of which
are held by an entity controlled by members of the family of Sherwin I. Seligsohn, our Founder and Chairman of the Board of Directors.
Our Board of Directors has authorized and issued other shares of preferred stock in the past, none of which are currently outstanding,
and may do so again at any time in the future.
Any decisions to reduce or discontinue paying cash dividends to our shareholders could cause the market price for our common
stock to decline.
In 2017, our Board of Directors declared quarterly cash dividends on our common stock, and we intend to pay regular quarterly
dividends in the future. However, payment of future cash dividends will be at the discretion of our Board of Directors and will depend
upon our results of operations, earnings, capital requirements, contractual restrictions and other factors deemed relevant by our Board
of Directors. As such, we may modify, suspend or cancel our cash dividend policy in any manner and at any time. Any reduction or
discontinuance by us of the payment of quarterly cash dividends could cause the market price of our common stock to decline. Moreover,
in the event our payment of quarterly cash dividends are reduced or discontinued, our failure or inability to resume paying cash dividends
at historical levels could cause the market price of our common stock to decline. There is no guarantee that our common stock will
appreciate in value or even maintain the price at which current shareholders purchased their shares.
Our executive officers and directors own a significant percentage of our common stock and could exert significant influence over
matters requiring shareholder approval, including takeover attempts.
Our executive officers and directors and their respective affiliates and the adult children of Sherwin Seligsohn, beneficially own,
as of February 21, 2019, approximately 10.1% of the outstanding shares of our common stock. Accordingly, these individuals may, as
a practical matter, be able to exert significant influence over matters requiring approval by our shareholders, including the election of
directors and the approval of mergers or other business combinations. This concentration also could have the effect of delaying or
preventing a change in control of us.
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Natural disasters or other unforeseen catastrophic events could unfavorably affect our business.
Natural disasters, such as hurricanes, tsunamis, or earthquakes, particularly in Asia-Pacific region, where many of our customers
are located, or the occurrence of other unforeseen catastrophic events, such a fire or flood, could unfavorably affect our business and
financial performance. Such events could unfavorably affect our customers in many ways, such as causing physical damage to one or
more of their properties, the temporary or permanent closure of one or more plants, the disruption or cessation of manufacturing of
product lines, and the temporary or long-term disruption in the supply or demand for their products. A resulting by-product of such
natural disasters or other unforeseen catastrophic events could be a temporary or long-term disruption in the supply of or demand for
our products.
Our effective tax rate may increase or decrease.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining
our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where
the ultimate tax determination is uncertain. We are subject to audit by tax authorities where we do business. Although we believe that
our tax estimates and tax positions are reasonable, they could be materially affected by many factors including the final outcome of tax
audits and related litigation, the introduction of new tax accounting standards, legislation, regulations, and related interpretations, our
global mix of earnings and the realizability of deferred tax assets. An increase or decrease in our effective tax rate could have a material
adverse impact on our financial condition and results of operations.
In addition, at any time, U.S. federal tax laws or the administrative interpretations of those laws may be changed. In December
2017, the legislation commonly referred to as the Tax Cuts and Jobs Act, which made widespread changes to the Internal Revenue Code,
was signed into law. While we believe that this law generally will have a favorable effect on U.S. corporations and their shareholders,
uncertainty remains regarding the full effect that this law will have on us, particularly given the global nature of our operations, or the
impact on our customers, vendors, shareholders and other stakeholders. We also cannot predict whether, when or to what extent other
new U.S. federal tax laws, regulations, interpretations or rulings will be issued. As a result, changes in U.S. federal tax laws could
negatively impact our operating results, financial condition and business operations, and adversely impact our shareholders.
Occasionally, changes in state and local tax laws or regulations are enacted that may result in an increase in our tax liability.
Shortfalls in tax revenues for states and municipalities in recent years may lead to an increase in the frequency and size of such changes.
If such changes occur, we may be required to pay additional taxes on our assets or income.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our corporate offices and research and development laboratories are located at 375 Phillips Boulevard in Ewing, New Jersey. In
2004, we acquired the building and property at which this facility is located. During 2005, we conducted a two-stage expansion of our
laboratory and office space in the building, as well as a recent expansion in 2013 and 2015. We currently occupy the entire newly
expanded facility. In 2017, we acquired the building and property at which the Adesis facility is located at 27 McCullough Drive in New
Castle, Delaware.
ITEM 3.
LEGAL PROCEEDINGS
Patent Related Challenges and Oppositions
Each major jurisdiction in the world that issues patents provides both third parties and applicants an opportunity to seek a further
review of an issued patent. The process for requesting and considering such reviews is specific to the jurisdiction that issued the patent
in question, and generally does not provide for claims of monetary damages or a review of specific claims of infringement. The
conclusions made by the reviewing administrative bodies tend to be appealable and generally are limited in scope and applicability to
the specific claims and jurisdiction in question.
We believe that opposition proceedings are frequently commenced in the ordinary course of business by third parties who may
believe that one or more claims in a patent do not comply with the technical or legal requirements of the specific jurisdiction in which
the patent was issued. We view these proceedings as reflective of our goal of obtaining the broadest legally permissible patent coverage
permitted in each jurisdiction. Once a proceeding is initiated, as a general matter, the issued patent continues to be presumed valid until
(cid:87)(cid:75)(cid:72)(cid:3)(cid:77)(cid:88)(cid:85)(cid:76)(cid:86)(cid:71)(cid:76)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:68)(cid:83)(cid:83)(cid:79)(cid:76)(cid:70)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:71)(cid:80)(cid:76)(cid:81)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:69)(cid:82)(cid:71)(cid:92)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:86)(cid:3)(cid:68)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:79)(cid:3)(cid:81)(cid:82)(cid:81)-appealable decision. Depending on the jurisdiction, the outcome of
these proceedings could include affirmation, denial or modification of some or all of the originally issued claims. We believe that as
OLED technology becomes more established and as our patent portfolio increases in size, so will the number of these proceedings.
24
Below are summaries of certain active proceedings that have been commenced against issued patents that are either exclusively
licensed to us or which are now assigned to us. We do not believe that the confirmation, loss or modification of our rights in any
individual claim or set of claims that are the subject of the following legal proceedings would have a material impact on our materials
sales or licensing business or on our consolidated financial statements, including our consolidated statements of income, as a whole.
However, as noted within the descriptions, some of the following proceedings involve issued patents that relate to our fundamental
phosphorescent OLED technologies and we intend to vigorously defend against claims that, in our opinion, seek to restrict or reduce the
scope of the originally issued claim, which may require the expenditure of significant amounts of our resources. In certain circumstances,
when permitted, we may also utilize the proceedings to request modification of the claims to better distinguish the patented invention
from any newly identified prior art and/or improve the claim scope of the patent relative to commercially important categories of the
invention. The entries marked with an "*" relate to our UniversalPHOLED® phosphorescent OLED technology, some of which may be
commercialized by us.
Opposition to European Patent No. 1390962
On November 16, 2011, Osram AG and BASF SE each filed a Notice of Opposition to European Patent No. 1390962 (the EP '962
patent), which relates to our white phosphorescent OLED technology. The EP '962 patent, which was issued on February 16, 2011, is a
European counterpart patent to U.S. patents 7,009,338 and 7,285,907. They are exclusively licensed to us by Princeton, and we are
required to pay all legal costs and fees associated with this proceeding.
The EPO combined the oppositions into a single opposition proceeding, and a hearing was held in December 2015, wherein the
EPO Opposition Division revoked the patent claims for alleged insufficiencies under EPC Article 83. We believe the EPO's decision
relating to the original claims is erroneous, and we have appealed the decision. Subsequent to the filing of the appeal, BASF withdrew
its opposition to the patent. This patent, as originally granted by the EPO, is deemed valid during the pendency of the appeals process.
At this time, based on our current knowledge, we believe that the patent being challenged should be declared valid and that all or
a significant portion of our claims should be upheld. However, we cannot make any assurances of this result.
Opposition to European Patent No. 1933395*
On February 24 and 27, 2012, Sumitomo, Merck Patent GmbH and BASF SE filed oppositions to our European Patent No.
(cid:20)(cid:28)(cid:22)(cid:22)(cid:22)(cid:28)(cid:24)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:40)(cid:51)(cid:3)(cid:10)(cid:22)(cid:28)(cid:24)(cid:3)(cid:83)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:12)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:40)(cid:51)(cid:3)(cid:181)(cid:22)(cid:28)(cid:24)(cid:3)(cid:83)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:72)(cid:85)(cid:83)(cid:68)(cid:85)(cid:87)(cid:3)(cid:83)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:40)(cid:51)(cid:3)(cid:181)(cid:25)(cid:22)(cid:26)(cid:3)(cid:83)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:15)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:3)(cid:51)(cid:68)(cid:87)ents 7,001,536;
6,902,830; and 6,830,828 and to JP patents 4358168 and 4357781. This patent is exclusively licensed to us by Princeton, and we are
required to pay all legal costs and fees associated with this proceeding.
At an Oral Hearing on October 14, 2013, the EPO panel issued a decision that affirmed the basic invention and broad patent
coverage in the EP '395 patent, but narrowed the scope of the original claims.
On February 26, 2014, we appealed the ruling to reinstate a broader set of claims. The patent, as originally granted by the EPO,
is deemed to be valid during the pendency of the appeals process. Two of the three opponents also filed their own appeals of the ruling.
In January 2015, Sumitomo withdrew its opposition of the '395 patent, and the EPO accepted the withdrawal notice. The appeal
proceedings were held in the second quarter of 2016. As a result of the proceedings, the board concluded the oral proceedings and
proposed to reinstate a broader set of claims pending the resolution of a remaining question of the applicable law, a question that the
board has deferred to the Enlarged Board of Appeals for review. In December 2017, the Enlarged Board of Appeals issued a written
opinion in which they have generally followed our reasoning regarding the question of law. The written opinion should be used as
guidance by the EPO opposition panel when the oral proceedings are rescheduled. The originally-granted claims remain in force during
the pendency of this process.
In addition to the above proceedings and now concluded proceedings which have been referenced in prior filings, from time to
time, we may have other proceedings that are pending which relate to patents we acquired as part of the Fujifilm patent or BASF OLED
patent acquisitions or which relate to technologies that are not currently widely utilized in the marketplace.
25
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to our executive officers as of February 21, 2019:
Name
Sherwin I. Seligsohn
Steven V. Abramson
Sidney D. Rosenblatt
Julia J. Brown
Janice M. DuFour
Age
83
67
71
57
61
Position
Founder and Chairman of the Board of Directors
President, Chief Executive Officer and Director
Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director
Senior Vice President and Chief Technical Officer
Vice President of Technology Commercialization and General Manager, PHOLED
Material Sales Business
Mauro Premutico
53
Vice President, Legal and General Manager, Patents and Licensing
Our Board of Directors has appointed these executive officers to hold office until their successors are duly appointed.
Sherwin I. Seligsohn is our Founder and has been the Chairman of our Board of Directors since June 1995. He also served as our
Chief Executive Officer from June 1995 through December 2007, and as our President from June 1995 through May 1996. Mr. Seligsohn
serves as the sole Director, President and Secretary of American Biomimetics Corporation, International Multi-Media Corporation, and
Wireless Unified Network Systems Corporation. He was also previously the Chairman of the Board of Directors, President and Chief
Executive Officer of NanoFlex Power Corporation (formally known as Global Photonic Energy Corporation) (NanoFlex) until April
2012, when he resigned from his positions at NanoFlex. Since that time, Mr. Seligsohn(cid:182)(cid:86)(cid:3) (cid:82)(cid:81)(cid:79)(cid:92)(cid:3) (cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:75)(cid:76)(cid:83) with NanoFlex is as a
shareholder and option holder. From June 1990 to October 1991, Mr. Seligsohn was Chairman Emeritus of InterDigital
Communications, Inc. (InterDigital), formerly International Mobile Machines
Corporation. He founded InterDigital and from August
1972 to June 1990 served as its Chairman of the Board of Directors. Mr. Seligsohn is a member of the Industrial Advisory Board of the
Princeton Institute for the Science and Technology of Materials (PRISM) at Princeton.
y
Steven V. Abramson is our President and Chief Executive Officer, and has been a member of our Board of Directors since May
1996. Mr. Abramson served as our President and Chief Operating Officer from May 1996 through December 2007. From March 1992
to May 1996, Mr. Abramson was Vice President, General Counsel, Secretary and Treasurer of Roy F. Weston, Inc., a worldwide
environmental consulting and engineering firm. From December 1982 to December 1991, Mr. Abramson held various positions at
InterDigital, including General Counsel, Executive Vice President and General Manager of the Technology Licensing Division.
t
Sidney D. Rosenblatt is an Executive Vice President and has been our Chie
f Financial Officer, Treasurer and Secretary since June
1995. He also has been a member of our Board of Directors since May 1996. Mr. Rosenblatt was the owner of S. Zitner Company from
August 1990 through August 2010 and served as its President from August 1990 through December 1998. From May 1982 to August
1990, Mr. Rosenblatt served as the Senior Vice President, Chief Financial Officer and Treasurer of InterDigital. Mr. Rosenblatt is on
the Board of Managers of the Overbrook School for the Blind.
t
Julia J. Brown, Ph.D. is a Senior Vice President and has been our Chief Technical Officer since June 2002. She joined us in June
1998 as our Vice President of Technology Development. From 1991 to 1998, Dr. Brown was a Research Department Manager at Hughes
Research Laboratories where she directed the pilot line production of high-speed Indium Phosphide-based integrated circuits for
insertion into advanced airborne radar and satellite communication systems. Dr. Brown received an M.S. and Ph.D. in Electrical
Engineering/Electrophysics at USC and a B.S.E.E. from Cornell University. Dr. Brown is an elected Fellow of both the IEEE and the
SID.
m
r
Janice M. DuFour has been our Vice President of Technology Commercialization since January 1997, and became the General
Manager of our PHOLED Material Sales Business in January 2007. From 1992 to 1996, Ms. DuFour was Vice President of SAGE
Electrochromics, Inc., a thin-film electrochromic technology company, where she oversaw a variety of business development, marketing
and finance and administrative activities. From 1984 to 1989, Ms. DuFour was a Vice President and General Manager for Chronar
Corporation, a leading developer and manufacturer of amorphous silicon photovoltaic (PV) panels. Prior to that, Ms. DuFour worked
as Senior Engineer for the Industrial Chemicals Division of FMC Corporation. Ms. DuFour received her B.S. in Chemical Engineering
from Rensselaer Polytechnic Institute in 1979, and an M.B.A. from Harvard University in 1984. Ms. DuFour was a member of the
Technical Council of the FlexTech Alliance from 1997 through 2010, and a member of its Governing Board from 2008 through
2010. Ms. DuFour was a member of the Board of Directors and Marketing Committee Chairperson of the OLED Association from 2009-
2014.
Mauro Premutico has been our Vice President of Legal and General Manager of Patents and Licensing since April 2012. Prior to
joining us, Mr. Premutico was the Managing Vice President and Chief Patent Counsel for The Walt Disney Company from 2009 to
2012, and Vice President of Intellectual Property and Associate General Counsel for Lenovo Group Ltd. from 2005 to 2009. Mr.
26
Premutico was also Special Counsel at the law firm of Cleary, Gottlieb, Steen & Hamilton from 2002 until 2005 where he served as the
co-head of the New York's office Intellectual Property and Technology Law practice. Mr. Premutico received a J.D. from Boston
University School of Law, an M.B.A. from Yale University and a B.S.E.E. from Worcester Polytechnic Institute.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
27
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our Common Stock
(cid:50)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:76)(cid:86)(cid:3)(cid:84)(cid:88)(cid:82)(cid:87)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:49)(cid:36)(cid:54)(cid:39)(cid:36)(cid:52)(cid:3)(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:92)(cid:80)(cid:69)(cid:82)(cid:79)(cid:3)(cid:179)(cid:50)(cid:47)(cid:40)(cid:39)(cid:17)(cid:180)(cid:3)As of February 21, 2019, there were
approximately 302 holders of record of our common stock.
n
During 2017 and 2018, we declared and paid cash dividends on our common stock. While we intend to pay regular quarterly
dividends in the future, payment of future cash dividends will be at the discretion of our Board of Directors and will depend upon our
results of operations, earnings, capital requirements, contractual restrictions and other factors deemed relevant by our Board of Directors.
As such, we may modify, suspend or cancel our cash dividend policy in any manner and at any time.
uu
Share Repurchases
During the quarter ended December 31, 2018, we acquired 193 shares of common stock through transactions related to the vesting
k in
of restricted share awards previously granted to employees of ours. Upon vesting, the employees turned in shares of common stoc
amounts sufficient to pay the minimum statutory tax withholding at rates required by the relevant tax authorities.
d
The following table provides information relating to the shares we acquired during the fourth quarter of 2018 (dollar amounts in
thousands, other than per share amounts):
Period
October 1 (cid:177) October 31
(cid:177)
November 1 (cid:177) November 30
(cid:177)
December 1 (cid:177) December 31
(cid:177)
Total
Total Number
of Shares
Purchased
Weighted
Average
ePrice
Paid per
Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Program
Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under the
Program
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178) $
(cid:178)
(cid:178)
(cid:178)
134
36
23
193
123.84
98.00
96.01
(cid:178)(cid:178)
28
Performance Graph
The performance graph below compares the change in the cumulative shareholder return of our common stock from December 31,
2013 to December 31, 2018, with the percentage change in the cumulative total return over the same period on (i) the Russell 2000
Index, and (ii) the Nasdaq Electronics Components Index. This performance graph assumes an initial investment of $100 on December
31, 2013 in each of our common stock, the Russell 2000 Index and the Nasdaq Electronics Components Index.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
$600
$500
$400
$300
$200
$100
$0
12/13
12/14
12/15
12/16
12/17
12/18
Universal Display Corp.
Russell 2000
NASDAQ Electronic Components
Universal Display Corp.
Russell 2000
NASDAQ Electronic Components
Cumulative Total Return
12/14
12/13
80.76
100.00
100.00 104.89
100.00 133.28
12/15
158.44
100.26
130.82
12/16
163.85
121.63
169.00
12/17
502.98
139.44
240.33
12/18
273.20
124.09
213.45
Securities Authorized for Issuance under Equity Compensation Plans
y
The information required by this item with respect to our equity compensation plans will be set forth in our Proxy Statement, a
nd
is incorporated herein by reference.
29
ITEM 6.
SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from, and should be read in conjunction with, our
Consolidated Financial Statements and the notes thereto, and (cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:179)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:39)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:36)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:76)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)
(cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:180)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:72)(cid:79)(cid:86)(cid:72)(cid:90)(cid:75)(cid:72)(cid:85)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:17)
(in thousands, except share and per share data)
Year Ended December 31,
Operating Results:
Total revenue
Cost of sales (1)(2)
Research and development expense
Selling, general and administrative expense
Amortization of acquired technology and other intangible
assets
Patent costs
Interest income, net
Income tax expense
Net income
Net income per common share, basic
Net income per common share, diluted
Balance Sheet Data:
Total assets
Current liabilities
(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)
Other Financial Data:
Working capital
Capital expenditures
Purchase of intangibles
Weighted average shares used in computing basic net
income per common share
Weighted average shares used in computing diluted
net income per common share
Shares of common stock outstanding, end of period
2018
2017
2016
2015
2014
$
247,414 $
53,541
53,717
46,999
335,629 $
54,698
49,144
46,808
198,886 $
26,288
42,744
32,876
191,046 $
62,997
44,641
29,046
191,031
41,315
41,154
28,135
21,962
7,464
7,659
(5,471 )
58,840
1.24 $
1.24 $
21,983
7,010
3,294
(45,652)
103,885
2.19 $
2.18 $
16,493
6,249
2,113
(20,528)
48,070
1.02 $
1.02 $
10,999
5,717
783
(18,381)
14,678
0.31 $
0.31 $
10,997
6,291
707
(17,473)
41,854
0.90
0.90
933,424 $
133,182
690,506
779,956 $
63,824
659,054
627,559 $
40,206
528,468
559,412 $
34,510
466,765
489,847
26,823
448,742
501,658 $
25,391
(cid:178)(cid:178)
455,358 $
29,803
(cid:178)(cid:178)
345,164 $
7,300
95,989
413,174 $
5,103
(cid:178)(cid:178)
343,682
6,153
(cid:178)(cid:178)
$
$
$
$
46,849,588 46,725,289 46,408,460 46,816,394 46,252,960
46,896,766 46,805,194 46,535,980 47,494,188 46,685,145
47,319,887 47,118,171 46,913,127 46,774,360 45,703,963
(1) During the year ended December 31, 2018, a write-down in net realizable value of our inventory of $3.6 million was recorded due
to lower than anticipated customer demand.
(2) During the second quarter of 2015, the Company experienced a faster-than-anticipated decline in host material sales, which we
believe was a result of our customer's selling new products that did not include our host materials. Based on the most recent sales
forecast, we determined that there were likely to be significantly lower sales of our existing host material. As such, a write-down
in net realizable value of our inventory of $33.0 million during the second quarter of 2015 was required.
30
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the
section entitled “Selected Financial Data” in this report and our Consolidated Financial Statements and related notes to this report.
This discussion and analysis contains forward-looking statements based on our current expectations, assumptions, estimates and
projections. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those
indicated in these forward-looking statements as a result of certain factors, as more fully discussed in Item 1A of this report, entitled
“Risk Factors.”
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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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.
(cid:48)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:72)(cid:85)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)ir
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 new
supplemental material purchase agreement with SDC. Under the current 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.
(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:80)(cid:76)(cid:81)(cid:76)(cid:80)(cid:88)(cid:80)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:54)(cid:39)(cid:38)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:83)(cid:75)(cid:82)(cid:86)(cid:83)(cid:75)(cid:82)(cid:85)(cid:72)(cid:86)(cid:70)(cid:72)(cid:81)(cid:87)(cid:3)(cid:72)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:85)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:72)(cid:72)(cid:87)(cid:3)
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 life 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
(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:71)(cid:82)(cid:80)(cid:76)(cid:81)(cid:68)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)(cid:87)(cid:76)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:47)(cid:42)(cid:3)(cid:39)(cid:76)(cid:86)(cid:83)(cid:79)(cid:68)(cid:92)(cid:182)(cid:86)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:79)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:72)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:72)rcial supply agreement provides for
the sale of materials for use by LG Display, which may include phosphorescent emitters and host materials.
31
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 expects to supply 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 has also agreed to supply 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 expects 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 December 31, 2018, Adesis
employed a team of 84 research scientists, chemists, engineers and laboratory technicians. Prior to our acquisition in 2016, we utilized
more than 50% of Adesi(cid:86)(cid:182)(cid:3) (cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3) (cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:82)(cid:88)(cid:87)(cid:83)(cid:88)(cid:87)(cid:17)(cid:3) (cid:58)(cid:72)(cid:3) (cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:3) (cid:87)(cid:82)(cid:3) (cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:3) (cid:68)(cid:3) (cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3) (cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:82)(cid:73)(cid:3) (cid:76)(cid:87)(cid:86)(cid:3) (cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)
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 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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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.
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, as
(cid:71)(cid:72)(cid:86)(cid:70)(cid:85)(cid:76)(cid:69)(cid:72)(cid:71)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:15)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:179)(cid:70)(cid:85)(cid:76)(cid:87)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:76)(cid:72)(cid:86)(cid:180)(cid:3)(cid:68)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:72)(cid:80)(cid:83)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:40)(cid:38)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:85)(cid:72)(cid:89)(cid:76)(cid:72)(cid:90)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)
Audit Committee, are discussed in greater detail below.
Revenue Recognition and Deferred Revenue
(cid:48)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:72)(cid:85)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3)
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.
32
(cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:89)(cid:72)(cid:92)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:79)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)
and material supply agreements. These agreements are combined and the licenses and materials sold under these combined agreements
are not distinct from each other for financial reporting purposes and as such, are accounted for as a single performance obligation.
Accordingly, total contract consideration is estimated and recognized over the contract term based on material units sold during the
period at their estimated per unit fee. Total contract consideration includes fixed amounts designated in contracts with customers as
license fees as well as estimates of material fees and royalties to be earned.
Various estimates are relied upon to recognize revenue. The Company estimates total material units to be purchased by its
customers over the contract term based on historical trends, industry estimates and its forecast process and related amounts to be charged.
Additionally, management estimates the total sales-based royalties based on the estimated net sales revenue of its customers over the
contract term.
Contract research services revenue is revenue earned by Adesis through performing organic and organometallic synthetics
research, development and commercialization on a contractual basis. These services range from intermediates for structure-activity
relationship studies, reference agents and building blocks for combinatorial synthesis, re-synthesis of key intermediates, specialty
organic chemistry needs, and selective toll manufacturing. These services are provided to third-party pharmaceutical and life sciences
firms and other technology firms at fixed costs or on an annual contract basis. Revenue is recognized as services are performed with
billing schedules and payment terms negotiated on a contract-by-contract basis. Payments received in excess of revenue recognized are
recorded as deferred revenue. In other cases, services may be provided and revenue is recognized before the client is invoiced. In these
cases, revenue recognized will exceed amounts billed and the difference, representing amounts which are currently unbillable to the
customer pursuant to contractual terms, is recorded as an unbilled receivable.
Technology development and support revenue is revenue earned from government contracts, development and technology
evaluation agreements and commercialization assistance fees, which includes reimbursements by government entities for all or a portion
of the research and development costs the Company incurs in relation to its government contracts. Revenues are recognized
proportionally as research and development costs are incurred, or as defined milestones are achieved, and are included in contract
research services in the accompanying consolidated statements of income.
The Company records taxes billed to customers and remitted to various governmental entities on a gross basis in both revenues
and cost of material sales in the consolidated statements of income. The amounts of these pass-through taxes reflected in revenues and
cost of material sales were $117,000, $409,000, and $171,000 in the years ended December 31, 2018, 2017 and 2016, respectively.
Inventories
Inventories consist of raw materials, work-in-process and finished goods, and are stated at the lower of cost, determined on a first-
in, first-out basis, or net realizable value. Inventory valuation and firm committed purchase order assessments are performed on a
quarterly basis and those items that are identified to be obsolete or in excess of forecasted usage are written down to their estimated
(cid:85)(cid:72)(cid:68)(cid:79)(cid:76)(cid:93)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:17)(cid:3)(cid:40)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:68)(cid:79)(cid:76)(cid:93)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:88)(cid:83)(cid:82)(cid:81)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:68)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:80)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:15)(cid:3)(cid:69)(cid:88)(cid:87)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:79)(cid:76)(cid:80)ited to,
forecasted sales levels by product, expected product lifecycle, product development plans and future demand requirements. A 12-month
rolling forecast based on factors, including, but not limited to, production cycles, anticipated product orders, marketing forecasts,
backlog, and shipment activities is used in the inventory analysis. If market conditions are less favorable than forecasts or actual demand
from customers is lower than estimates, additional inventory write-downs may be required. If demand is higher than expected,
inventories that had previously been written down may be sold.
Accounting for Income Taxes
We are subject to income taxes in both the U.S. and foreign jurisdictions. Significant judgments and estimates are required in
evaluating our tax positions for future realization and determining our provision for income taxes. Our income tax expense, deferred tax
assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessment of estimated future taxes to be
paid.
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of our
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on our ability to generate future
taxable income to obtain benefit from the reversal of temporary differences, net operating loss carryforwards and tax credits. As part of
our assessment we consider the scheduled reversal of deferred tax assets and liabilities, projected future taxable income, and tax planning
strategies.
During the year ended December 31, 2018, based on previous earnings history, a current evaluation of expected future taxable
income and other evidence, we determined to retain the valuation allowance that relates to New Jersey research and development credits.
Actual results could differ from our assessments if adequate taxable income is generated in future periods. To the extent we establish a
new valuation allowance or change a previously established valuation allowance in a future period, income tax expense will be impacted.
33
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2018 and 2017
REVENUE
COST OF SALES
Gross margin
OPERATING EXPENSES:
Research and development
Selling, general and administrative
Amortization of acquired technology and other intangible assets
Patent costs
Royalty and license expense
Total operating expenses
OPERATING INCOME
Interest income, net
Other expense, net
Interest and other expense, net
INCOME BEFORE INCOME TAXES
INCOME TAX EXPENSE
NET INCOME
Revenue
Year Ended December 31,
2017
2018
$
$
247,414
$
53,541
193,873
53,717
46,999
21,962
7,464
6,996
137,138
56,735
7,659
(83)
7,576
64,311
(5,471)
$
58,840
335,629 $
54,698
280,931
(Decrease) Increase
(88,215)
(1,157)
(87,058)
49,144
46,808
21,983
7,010
9,739
134,684
146,247
3,294
(4)
3,290
149,537
(45,652)
103,885 $
4,573
191
(21)
454
(2,743)
2,454
(89,512)
4,365
(79)
4,286
(85,226)
40,181
(45,045)
During the year ended December 31, 2018, we recognized revenue of $247.4 million, a decrease of $88.2 million from the year
ended December 31, 2017. The decrease in revenue was primarily the result of the impact of (cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:54)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:38)(cid:82)(cid:71)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:179)(cid:36)(cid:54)(cid:38)(cid:180)(cid:12)
Topic 606 and lower material sales. Revenue for the year ended December 31, 2018 was $78.9 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. T
he
r
decrease in revenue was also the result of near-term weakness in the mobile display segment of the OLED display market that pri
marily
n
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 for the year ended December 31, 2018 as compared to 97%
t
for the year ended December 31, 2017. The remaining portion of our revenue was derived from contract research services. Contrac
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.
uu
Cost of Sales
Cost of sales for the year ended December 31, 2018 decreased by $1.2 million as compared to the year ended December 31, 2017
primarily due to the decline in the level of material sales. Included in the cost of sales for the year ended December 31, 2018 was an
excess and obsolete inventory charge of $3.6 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 year ended December 31, 2018 decreased by $87.1 million as compared tod
the year ended December 31, 2017 with gross margin as a percentage of sales decreasing to 78% from 84%, respectively.
Research and development
Research and development expenses increased to $53.7 million for the year ended December 31, 2018, as compared to $49.1
million for the year ended December 31, 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 $47.0 million for the year ended December 31, 2018, as compared to
due to
$46.8 million for the year ended December 31, 2017. The increase in selling, general and administrative expenses was primarily
higher employee-related compensation expenses.
n
34
Amortization of acquired technology and other intangible assets
Amortization of acquired technology and other intangible assets was $22.0 million for both of the years ended December 31, 2018
and 2017. See Note 8 in Notes to Consolidated Financial Statements for further discussion.
Patent costs
Patent costs increased to $7.5 million for the year ended December 31, 2018, as compared to $7.0 million for the year ended
December 31, 2017.
Royalty and license expense
Royalty and license expense decreased to $7.0 million for the year ended December 31, 2018, as compared to $9.7 million for the
year ended December 31, 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 10 in Notes to Consolidated Financial
Statements for further discussion.
Interest income, net and other expense, net
Interest income, net was $7.7 million for the year ended December 31, 2018, as compared to $3.3 million for the year ended
December 31, 2017. The increase in interest income, net was primarily due to the increase in available-for-sale investments held during
the year ended December 31, 2018 over amounts held in the comparable period in 2017. Other expense, net primarily consisted of net
exchange gains and losses on foreign currency transactions. We recorded other expense, net of $83,000 for the year ended December
31, 2018, as compared to other expense, net of $4,000 for the year ended December 31, 2017.
Income tax expense
We are subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was 8.5% and
30.5% for the years ended December 30, 2018 and 2017, respectively, and we recorded income tax expense of $5.5 million and $45.7
(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:85)(cid:71)(cid:72)(cid:71)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3)(cid:71)(cid:72)(cid:71)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:68)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3)(cid:11)(cid:179)(cid:90)(cid:76)(cid:81)(cid:71)(cid:73)(cid:68)(cid:79)(cid:79)(cid:86)(cid:180)(cid:12)(cid:3)
under ASU No. 2016-09 for the years ended December 31, 2018 and 2017, and a one-time charge of $11.5 million in the fourth quarter
of 2017 due to the enactment of the Tax Cuts and Jobs Act (TCJA). The effective income tax rate for the year ended December 31, 2018
reflected benefits from a higher research and development credit, the reversal of the repatriation tax recorded in 2017 and a foreign-
derived intangible income deduction (FDII).
Without the $1.1 million benefit of ASU No. 2016-09, for the year ended December 31, 2018, the effective income tax rate and
income tax expense would have been 10.2% and $6.6 million, respectively. Without the benefit of ASU No. 2016-09 and the enactment
of the TCJA, for the year ended December 31, 2017, the effective income tax rate and income expense would have been 24.8%, and
$37.2 million.
For the years ended December 31, 2018 and 2017, the Company incurred Korean withholding tax of $14.9 million and $17.6
million, respectively, which is currently being appealed based on the interpretation of the Korean (cid:177) U. S. tax treaty and recent Korean
Supreme Court decisions.
35
Comparison of the Years Ended December 31, 2017 and 2016
REVENUE
COST OF SALES
Gross margin
OPERATING EXPENSES:
Research and development
Selling, general and administrative
Amortization of acquired technology and other intangible assets
Patent costs
Royalty and license expense
Total operating expenses
OPERATING INCOME
Interest income, net
Other expense, net
Interest and other expense, net
INCOME BEFORE INCOME TAXES
INCOME TAX EXPENSE
NET INCOME
Revenue
Year Ended December 31,
2016
2017
$
$
$
335,629
54,698
280,931
49,144
46,808
21,983
7,010
9,739
134,684
146,247
3,294
(4 )
3,290
149,537
(45,652)
$
103,885
198,886 $
26,288
172,598
Increase (Decrease)
136,743
28,410
108,333
42,744
32,876
16,493
6,249
5,823
104,185
68,413
2,113
(1,928)
185
68,598
(20,528)
48,070 $
6,400
13,932
5,490
761
3,916
30,499
77,834
1,181
1,924
3,105
80,939
(25,124)
55,815
Total revenue for the year ended December 31, 2017 increased by $136.7 million as compared to the year ended December 31,
2016. The increase in revenue was the result of an increase in material sales due to an increase in sales volume resulting from higher
demand for both red and green phosphorescent emitters.
m
Revenue derived from OLED sales comprised 97% of total revenue for the year ended December 31, 2017 as compared to 98%
for the year ended December 31, 2016. The remaining portion of our revenue was derived from contract research services. Contrac
t
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.
u
Cost of Sales
Cost of sales for the year ended December 31, 2017 increased by $28.4 million as compared to the year ended December 31, 2016
and was primarily due to an increase in the level of material sales. As a result, gross margin for the year ended December 31, 2017
increased by $108.3 million as compared to the year ended December 31, 2016 with gross margin as a percentage of sales decreasing to
84% from 87%, respectively.
Research and development
Research and development expenses increased to $49.1 million for the year ended December 31, 2017, as compared to $42.7
million for the year ended December 31, 2016. The increase in research and development expenses was primarily due to higher third-
party contract research activities as well as higher employee-related costs.
Selling, general and administrative
Selling, general and administrative expenses increased to $46.8 million for the year ended December 31, 2017, as compared to
$32.9 million for the year ended December 31, 2016. The increase in selling, general and administrative expenses was primarily
due to
n
incremental costs associated with the addition of Adesis activity, as well as higher employee-related costs and other operating expenses.
ll
Amortization of acquired technology and other intangible assets
Amortization of acquired technology and other intangible assets increased to $22.0 million for the year ended December 31, 2017,
as compared to $16.5 million for the year ended December 31, 2016. The increase was due to higher amortization expense of $5.5
million associated with the acquisitions of the BASF patent portfolio and intangible assets associated with the Adesis acquisit
ion. See
Note 8 in Notes to Consolidated Financial Statements for further discussion.
ff
Patent costs
Patent costs increased to $7.0 million for the year ended December 31, 2017, as compared to $6.2 million for the year ended
December 31, 2016.
Royalty and license expense
Royalty and license expense increased to $9.7 million for the year ended December 31, 2017, as compared to $5.8 million for the
year ended December 31, 2016. The increase was due to increased royalties incurred under our amended license agreement with
Princeton, USC, and Michigan, resulting from an increase in royalty and license fees and qualifying material sales. See Note 10 in Notes
to Consolidated Financial Statements for further discussion.
Interest income, net and other expense, net
Interest income, net, was $3.3 million for the year ended December 31, 2017, as compared to $2.1 million for the year ended
December 31, 2016. The increase in interest income, net was primarily due to the increase in available-for-sale investments held during
the year ended December 31, 2017 over amounts held in the comparable period in 2016. Other expense, net primarily consisted of net
exchange gains and losses on foreign currency transactions. We recorded other expense, net of $4,000 for the year ended December 31,
2017, as compared to other expense, net of $1.9 million for the year ended December 31, 2016. Other expense, net for the year ended
December 31, 2016 primarily consisted of exchange losses on foreign currency associated with the BASF OLED patent acquisition.
Income tax expense
We are subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was 30.5% and
29.9%, for the years ended December 31, 2017 and 2016, respectively, and the Company recorded income tax expense of $45.7 million
and $20.5 million, respectively. The effective income tax rate for the year ended December 31, 2017 reflected a benefit from the
utilization of a valuation allowance at UDC Ireland.
The enactment of the Tax Cuts and Jobs Act in December 2017 resulted in a one-time charge of $11.5 million in the fourth quarter.
The charge includes two elements, a tax on accumulated overseas profits and the revaluation of deferred tax assets and liabilities.
Without the TCJA, for the year ended December 31, 2017, the effective income tax rate and income tax expense would have been 22.8%
and $34.2 million.
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.
Without the adoption of ASU No. 2016-09 and the enactment of TCJA, for the year ended December 31, 2017, the effective
income tax rate and income tax expense would have been 24.8% and $37.2 million.
For the years ended December 31, 2017 and 2016, the Company incurred Korean withholding tax of $17.6 million and $14.4
million, respectively, which is currently being appealed based on the interpretation of the Korean (cid:177) U. S. tax treaty and recent Korean
Supreme Court decisions.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents and our investments. As of December 31, 2018, we had cash
and cash equivalents of $211.0 million and short-term investments of $304.3 million, for a total of $515.3 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 $121.8 million for the year ended December 31, 2018, compared to cash provided by
operating activities of $133.4 million for the year ended December 31, 2017. The decrease in cash provided by operating activities of
$11.6 million was primarily due to a decrease in non-cash adjustments to net income of $89.5 million and a decrease in net income of
$45.0 million. This decrease was partially offset by an increase in cash due to changes in net operating assets and liabilities of $122.9
37
million, which included an increase in deferred revenue and other liabilities and a decrease in deferred income taxes and accounts
receivable, partially offset by an increase in other assets and inventory. The increase in the balances of other assets and other liabilities
is due to the anticipated favorable settlement with the Korean tax authorities.
Cash used in investing activities was $21.0 million for the year ended December 31, 2018, as compared to cash used in investing
activities of $125.6 million for the year ended December 31, 2017. The decrease in cash used by investing activities of $104.6 million
was primarily due to the timing of maturities and purchases of investments resulting in net sales of $4.4 million for the year ended
December 31, 2018, as compared to net purchases of $95.8 million for the year ended December 31, 2017, and a decrease in purchases
of property, plant and equipment of $4.4 million for the year ended December 31, 2018 compared to the year ended December 31, 2017.
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 $22.6 million for the year ended December 31, 2018, as compared to $14.3 million for the
year ended December 31, 2017. The increase in cash used in financing activities of $8.3 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 $2.2 million and repurchase of common stock of $477,000, partially offset by an increase in proceeds
from the issuance of common stock of $64,000.
Working capital was $501.7 million as of December 31, 2018, compared to $455.4 million as of December 31, 2017. The increase
in working capital was primarily due to an increase in cash and cash equivalents, inventory and short-term investments, partially offset
by an increase in deferred revenue and other current liabilities and a decrease in accounts receivable.
t
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.
Contractual Obligations
As of December 31, 2018, we had the following contractual commitments:
Contractual Obligations
Estimated retirement plan benefit payments
Lease obligations
Purchasing obligations
Research related obligations
Minimum royalty obligation (1)
Total (2)
Payments due by period (in thousands)
Total
Less than
y
1 year
y
1-3 years
y
3-5 years
More than 5
y
years
$
$
65,363 $
10,852
15,858
6,532
500
99,105 $
(cid:178) $
2,320
15,858
4,921
100
23,199 $
7,191
$
2,747
(cid:178)
1,611
200
$
11,749
8,549 $
49,623
1,743
4,042
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
200 $100/year
10,492 $
53,665
(1) Under the 1997 Amended License Agreement, we are obligated to pay Princeton minimum royalties of $100,000 per year until
the agreement is no longer in effect. The agreement has no scheduled expiration date.
(2) See Note 16 to the Consolidated Financial Statements for discussion of obligations upon termination of employment of executive
officers as a result of a change in our control.
38
Off-Balance Sheet Arrangements
As of December 31, 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.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are addressed in Note 2 in the Notes to Consolidated Financial Statements.
ITEM 7A. 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
(cid:179)(cid:41)(cid:68)(cid:76)(cid:85)(cid:3)(cid:57)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:48)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:180)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:24)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:75)(cid:72)(cid:85)(cid:72)(cid:76)(cid:81)(cid:17)(cid:3)(cid:58)(cid:72)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)nt
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.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and the related notes to those statements are attached to this report beginning on page F-1.
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
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 December 31, 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(cid:15)(cid:3)(cid:76)(cid:86)(cid:3)(cid:11)(cid:76)(cid:12)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:85)(cid:71)(cid:72)(cid:71)(cid:15)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:86)(cid:86)(cid:72)(cid:71)(cid:15)(cid:3)(cid:86)(cid:88)(cid:80)(cid:80)(cid:68)(cid:85)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:86)(cid:3)(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:40)(cid:38)(cid:182)(cid:86)(cid:3)
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.
(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:44)(cid:81)(cid:71)(cid:72)(cid:83)(cid:72)(cid:81)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:51)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)
Firm on Internal Control over Financial Reporting
The report of management on our internal control over financial reporting and the associated attestation report of our independent
registered public accounting firm are set forth in Item 8 of this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2018 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
39
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information with respect to this item is set forth in our definitive Proxy Statement for the 2019 Annual Meeting of Shareholders,
which is to be filed with the Securities and Exchange Commission no later than April 30, 2019 (cid:11)(cid:82)(cid:88)(cid:85)(cid:3)(cid:179)(cid:51)(cid:85)(cid:82)(cid:91)(cid:92)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:180)(cid:12)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:76)(cid:86)(cid:3)
incorporated herein by reference. Information regarding our executive officers is included at the end of Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item will be set forth in our Proxy Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information with respect to this item will be set forth in our Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information with respect to this item will be set forth in our Proxy Statement, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this item will be set forth in our Proxy Statement, and is incorporated herein by reference.
40
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Financial Statements:
PART IV
F-2
(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)Internal Control Over Financial Reporting ............................................................................................
F-3
Reports of Independent Registered Public Accounting Firm .........................................................................................................
F-5
Consolidated Balance Sheets ..........................................................................................................................................................
F-6
Consolidated Statements of Income................................................................................................................................................
F-7
Consolidated Statements of Comprehensive Income ......................................................................................................................
F-8
(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92) ..........................................................................................................................
Consolidated Statements of Cash Flows .........................................................................................................................................
F-9
Notes to Consolidated Financial Statements ................................................................................................................................... F-10
(2) Financial Statement Schedules:
None.
(3) Exhibits:
The following is a list of the exhibits filed as part of this report. Where so indicated by footnote, exhibits that were previously
filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated
parenthetically, together with a reference to the filing indicated by footnote.
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3)
(cid:49)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:3)
3.1
3.2
10.1#
10.2#
10.3#
10.4#
10.5#
10.6#
10.7#
10.8#
10.9#
10.10#
10.11#
10.12#
10.13#
10.14#
(cid:3)(cid:3)
Amended and Restated Articles of Incorporation of the registrant (1)
Amended and Restated Bylaws of the registrant (2)
(cid:39)(cid:72)(cid:86)(cid:70)(cid:85)(cid:76)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)
Amended and Restated Change in Control Agreement between the registrant and Sherwin I. Seligsohn, dated as of November
4, 2008 (3)
Amended and Restated Change in Control Agreement between the registrant and Steven V. Abramson, dated as of November
4, 2008 (3)
Amended and Restated Change in Control Agreement between the registrant and Sidney D. Rosenblatt, dated as of
November 4, 2008 (3)
Amended and Restated Change in Control Agreement between the registrant and Julia J. Brown, dated as of November 4,
2008 (3)
Amended and Restated Change in Control Agreement between the registrant and Janice M. DuFour, dated as of November
4, 2008 (3)
Non-Competition and Non-Solicitation Agreement between the registrant and Sherwin I. Seligsohn, dated as of February
23, 2007 (4)
Non-Competition and Non-Solicitation Agreement between the registrant and Steven V. Abramson, dated as of January 26,
2007 (4)
Non-Competition and Non-Solicitation Agreement between the registrant and Sidney D. Rosenblatt, dated as of February 7,
2007 (4)
Non-Competition and Non-Solicitation Agreement between the registrant and Julia J. Brown, dated as of February 5, 2007
(4)
Non-Competition and Non-Solicitation Agreement between the registrant and Janice M. DuFour, dated as of February 23, 2007
(3)
Equity Retention Agreement between the registrant and Steven V. Abramson, dated as of March 18, 2010 (5)
Equity Retention Agreement between the registrant and Sidney D. Rosenblatt, dated as of March 18, 2010 (5)
Equity Retention Agreement between the registrant and Julia J. Brown, dated as of January 6, 2011 (6)
Equity Retention Agreement between the registrant and Janice M. DuFour, dated as of January 6, 2011 (6)
41
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3)
(cid:49)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:3)
10.15#
10.16#
10.17#
10.18#
10.19#
10.20#
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29+
10.30+
10.31+
10.32+
10.33+
10.33+
10.34+
10.35+
10.36+
10.37
10.38#
10.39#
10.40#
10.41#
10.42#
10.43#
(cid:3)(cid:3)
Equity Retention Agreement between the registrant and Julia J. Brown, dated as of March 8, 2012 (7)
Equity Retention Agreement between the registrant and Janice M. DuFour, dated as of March 8, 2012 (7)
(cid:39)(cid:72)(cid:86)(cid:70)(cid:85)(cid:76)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)
Amended and Restated Change in Control Agreement between the Registrant and Mauro Premutico, dated April 16, 2012
(8)
Equity Retention Agreement between the Registrant and Mauro Premutico, dated April 16, 2012 (8)
Supplemental Executive Retirement Plan, dated as of April 1, 2010 (5)
Amended and Restated Equity Compensation Plan, effective as of March 7, 2013 (9)
Sponsored Research Agreement between the registrant and the University of Southern California, dated as of May 1, 2006
(10)
Amendment No. 1 to the Sponsored Research Agreement between the registrant and the University of Southern California,
dated as of May 1, 2006 (3)
Amendment No. 2 to the Sponsored Research Agreement between the registrant and the University of Southern California,
dated as of May 7, 2009 (11)
1997 Amended License Agreement among the registrant, The Trustees of Princeton University and the University of
Southern California, dated as of October 9, 1997 (12)
Amendment #1 to the Amended License Agreement among the registrant, the Trustees of Princeton University and the
University of Southern California, dated as of August 7, 2003 (13)
Amendment #2 to the Amended License Agreement among the registrant, the Trustees of Princeton University, the
University of Southern California and the Regents of the University of Michigan, dated as of January 1, 2006 (10)
Termination, Amendment and License Agreement by and among the registrant, PD-LD, Inc., Dr. Vladimir S. Ban, and The
Trustees of Princeton University, dated as of July 19, 2000 (14)
Letter of Clarification of UDC/GPEC Research and License Arrangements between the registrant and Global Photonic
Energy Corporation, dated as of June 4, 2004 (4)
Amended and Restated OLED Materials Supply and Service Agreement between the registrant and PPG Industries, Inc.,
dated as of October 1, 2011 (15)
OLED Patent License Agreement between the registrant and Samsung Display Co., Ltd., dated as of February 13, 2018 (16)
Supplemental OLED Material Purchase Agreement between the registrant and Samsung Display Co., Ltd., dated as of
February 13, 2018 (16)
Settlement and License Agreement between the registrant and Seiko Epson Corporation, dated as of July 31, 2006 (17)
Amendment No. 1 to the Settlement and License Agreement between the registrant and Seiko Epson Corporation, dated as
of March 30, 2009 (18)
OLED Technology License Agreement between the registrant and Konica Minolta Holdings, Inc., dated as of August 11,
2008 (19)
Limited-Term OLED Technology License Agreement between the registrant and Panasonic Idemitsu OLED Lighting Co.,
Ltd., dated as of August 1, 2011 (15)
OLED Technology License Agreement between the registrant and Pioneer Corporation, dated as of May 1, 2011 (20)
Patent Sale Agreement, dated as of July 23, 2012 by and between FUJIFILM Corporation and the Company (21)
Amendment No. 3 to the Sponsored Research Agreement between the registrant and the University of Southern California,
dated as of June 1, 2013 (22)
Universal Display Corporation Annual Incentive Plan (23)
Form Agreement - Restricted Stock Unit Grant Letter (24)
Form Agreement - Performance Unit Grant Letter (24)
Universal Display Corporation Equity Compensation Plan (25)
Amendment 2015-1, dated March 3, 2015, to Universal Display Corporation Supplemental Executive Retirement Plan (26)
Equity Retention Agreement between the Registrant and Steven V. Abramson, dated April 7, 2015 (27)
42
(cid:40)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3)
(cid:49)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:3)
10.44#
10.45#
10.46#
10.47+
21*
23.1*
31.1*
31.2*
32.1**
32.2**
(cid:3)(cid:3)
Equity Retention Agreement between the Registrant and Sidney D. Rosenblatt, dated April 7, 2015 (27)
Equity Retention Agreement between the Registrant and Julia J. Brown, dated September 10, 2015 (28)
Equity Retention Agreement between the Registrant and Mauro Premutico, dated September 10, 2015 (28)
(cid:39)(cid:72)(cid:86)(cid:70)(cid:85)(cid:76)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)
IP Transfer Agreement, dated June 28, 2016 by and between UDC Ireland Limited and BASF SE (29)
Subsidiaries of the registrant
Consent of KPMG LLP
Certifications of Steven V. Abramson, Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a)
Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a)
Certifications of Steven V. Abramson, Chief Executive Officer, as required by Rule 13a-14(b) or Rule 15d-14(b), and by 18
U.S.C. Section 1350. (This exhibit shall not b(cid:72)(cid:3)(cid:71)(cid:72)(cid:72)(cid:80)(cid:72)(cid:71)(cid:3)(cid:179)(cid:73)(cid:76)(cid:79)(cid:72)(cid:71)(cid:180)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:83)(cid:88)(cid:85)(cid:83)(cid:82)(cid:86)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:20)(cid:27)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)
1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended.)
Certifications of Sidney D. Rosenblatt, Chief Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b), and by 18
U.S.C(cid:17)(cid:3)(cid:54)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:20)(cid:22)(cid:24)(cid:19)(cid:17)(cid:3)(cid:11)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:72)(cid:91)(cid:75)(cid:76)(cid:69)(cid:76)(cid:87)(cid:3)(cid:86)(cid:75)(cid:68)(cid:79)(cid:79)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:69)(cid:72)(cid:3)(cid:71)(cid:72)(cid:72)(cid:80)(cid:72)(cid:71)(cid:3)(cid:179)(cid:73)(cid:76)(cid:79)(cid:72)(cid:71)(cid:180)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:83)(cid:88)(cid:85)(cid:83)(cid:82)(cid:86)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:20)(cid:27)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)
1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended.)
XBRL Instance Document
101.INS*
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
Explanation of footnotes to listing of exhibits:
Filed herewith.
Furnished herewith.
*
**
# Management contract or compensatory plan or arrangement.
+
Confidential treatment has been accorded to certain portions of this exhibit pursuant to Rule 406 under the Securities Act of 1933,
as amended, or Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
(1) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, filed with the SEC on
August 9, 2018.
(2) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended December 31, 2003, filed with the SEC on
March 1, 2004.
(3) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on
March 12, 2009.
(4) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC on
March 15, 2007.
(5) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, filed with the SEC on
May 10, 2010.
(6) Filed as an Exhibit to a Current Report on Form 8-K, filed with the SEC on March 21, 2011.
(7) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed with the SEC on
May 9, 2012.
43
(8) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the SEC on
August 8, 2012.
(9) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed with the SEC on
May 9, 2013.
(10) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, filed with the SEC on
August 9, 2006.
(11) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed with the SEC on
August 10, 2009.
(12) Filed as an Exhibit to the Annual Report on Form 10K-SB for the year ended December 31, 1997, filed with the SEC on
March 31, 1998.
(13) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, filed with the SEC on
November 10, 2003.
(14) Filed as an Exhibit to the amended Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, filed with the SEC
on November 20, 2001.
(15) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed with the SEC on
November 8, 2011.
(16) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed with the SEC on May 3,
2018.
(17) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed with the SEC on
November 6, 2006.
(18) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, filed with the SEC on
May 7, 2009.
(19) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed with the SEC on
November 6, 2008.
(20) Filed as an Exhibit to Amendment No. 1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed
with the SEC on January 27, 2012.
(21) Filed as an Exhibit to a Current Report on Form 8-K, filed with the SEC on July 27, 2012.
(22) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, filed with the SEC on
November 7, 2013.
(23) Filed as an Exhibit to a Current Report on Form 8-K, filed with the SEC on June 24, 2013.
(24) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on
February 28, 2014.
(25) Filed as Exhibit A to the Company's Definitive Proxy Statement for the 2014 Annual Meeting filed with the SEC on
April 25, 2014.
(26) Filed as an exhibit to the Current Report on Form 8-K filed with the SEC on March 9, 2015.
(27) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, filed with the SEC on
August 6, 2015.
(28) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed with the SEC on
November 5, 2015.
(29) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed with the SEC on
August 4, 2016.
Note: Any of the exhibits listed in the foregoing index not included with this report may be obtained, without charge, by writing
to Mr. Sidney D. Rosenblatt, Corporate Secretary, Universal Display Corporation, 375 Phillips Boulevard, Ewing, New Jersey 08618.
(b) The exhibits required to be filed by us with this report are listed above.
(c) The consolidated financial statement schedules required to be filed by us with this report are listed above.
ITEM 16. FORM 10-K SUMMARY
None.
44
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
UNIVERSAL DISPLAY CORPORATION
By: /s/ Sidney D. Rosenblatt
Sidney D. Rosenblatt
Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
Date: February 21, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
(cid:49)(cid:68)(cid:80)(cid:72)(cid:3)
(cid:3)(cid:3)
(cid:55)(cid:76)(cid:87)(cid:79)(cid:72)(cid:3)
(cid:3)(cid:3)
(cid:39)(cid:68)(cid:87)(cid:72)(cid:3)
/s/ Sherwin I. Seligsohn Founder and Chairman of the Board of Directors
Sherwin I. Seligsohn
February 21, 2019
/s/ Steven V. Abramson President, Chief Executive Officer and Director (principal executive officer)
Steven V. Abramson
February 21, 2019
/s/ Sidney D. Rosenblatt Executive Vice President, Chief Financial Officer, Treasurer, Secretary and
Director (principal financial and accounting officer)
Sidney D. Rosenblatt
February 21, 2019
/s/ Richard C. Elias
Richard C. Elias
Director
/s/ Elizabeth H. Gemmill Director
C. Elizabeth H. Gemmill
/s/ Rosemarie B. Greco
Rosemarie B. Greco
Director
/s/ C. Keith Hartley
C. Keith Hartley
/s/ Lawrence Lacerte
Lawrence Lacerte
Director
Director
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
45
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:50)(cid:89)(cid:72)(cid:85)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74) .................................................................................. F-2
Reports of Independent Registered Public Accounting Firm ................................................................................................ F-3
Consolidated Balance Sheets ................................................................................................................................................ F-5
Consolidated Statements of Income ...................................................................................................................................... F-6
Consolidated Statements of Comprehensive Income ............................................................................................................ F-7
Consolidated Statements of (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92) ................................................................................................................ F-8
Consolidated Statements of Cash Flows ............................................................................................................................... F-9
Notes to Consolidated Financial Statements ......................................................................................................................... F-10
F-1
(cid:48)(cid:36)(cid:49)(cid:36)(cid:42)(cid:40)(cid:48)(cid:40)(cid:49)(cid:55)(cid:182)(cid:54)(cid:3)(cid:53)(cid:40)(cid:51)(cid:50)(cid:53)(cid:55)(cid:3)(cid:50)(cid:49)(cid:3)(cid:44)(cid:49)(cid:55)(cid:40)(cid:53)(cid:49)(cid:36)(cid:47)(cid:3)(cid:38)ONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the
Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted
accounting principles. Our system of internal control over financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding
(cid:83)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:85)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:79)(cid:92)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:88)(cid:81)(cid:68)(cid:88)(cid:87)(cid:75)(cid:82)(cid:85)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:88)(cid:86)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:71)(cid:76)(cid:86)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:70)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)rial effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31,
2018 based upon criteria in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
(cid:87)(cid:75)(cid:72)(cid:3) (cid:55)(cid:85)(cid:72)(cid:68)(cid:71)(cid:90)(cid:68)(cid:92)(cid:3) (cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3) (cid:11)(cid:38)(cid:50)(cid:54)(cid:50)(cid:12)(cid:17)(cid:3) (cid:37)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3) (cid:82)(cid:81)(cid:3) (cid:87)(cid:75)(cid:76)(cid:86)(cid:3) (cid:68)(cid:86)(cid:86)(cid:72)(cid:86)(cid:86)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3) (cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3) (cid:87)(cid:75)(cid:68)(cid:87)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3) (cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3) (cid:82)(cid:89)(cid:72)(cid:85)(cid:3)
financial reporting was effective as of December 31, 2018, based on the criteria in Internal Control-Integrated Framework (2013) issued
by COSO.
The effectiveness of our internal control over financial reporting as of December 31, 2018, has been attested to by KPMG LLP,
an independent registered public accounting firm, as stated in its report which appears on the following page.
Steven V. Abramson
President and Chief Executive Officer
Sidney D. Rosenblatt
Executive Vice President and Chief Financial Officer
February 21, 2019
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Universal Display Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Universal Display Corporation and subsidiaries(cid:182) (the Company) internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of
(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:15)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:85)(cid:72)(cid:75)(cid:72)(cid:81)(cid:86)(cid:76)(cid:89)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:15)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:73)(cid:79)(cid:82)(cid:90)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:75)(cid:85)(cid:72)(cid:72)-year period ended December
31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated February 21, 2019 expressed
an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on
Internal Control over Financial Reporting. Our responsibility is to express an (cid:82)(cid:83)(cid:76)(cid:81)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
(cid:36)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:86)(cid:86) designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A (cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or ti(cid:80)(cid:72)(cid:79)(cid:92)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:88)(cid:81)(cid:68)(cid:88)(cid:87)(cid:75)(cid:82)(cid:85)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:88)(cid:86)(cid:72)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:71)(cid:76)(cid:86)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:70)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:3)
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 21, 2019
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Universal Display Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Universal Display Corporation and subsidiaries (the
Company) as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income,
(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:68)(cid:81)d cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes
(collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)nancial reporting as of December 31, 2018, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and
our report dated February 21, 2019 expressed an u(cid:81)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:82)(cid:83)(cid:76)(cid:81)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)
financial reporting.
Changes in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed its method for accounting for revenue
from contracts with customers due to the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts
with Customers. The Company adopted the standard effective January 1, 2018 using the modified retrospective adoption method.
Also, the Company elected to change its method of accounting for share-based payment transactions in 2017 due to the adoption
of amendments to the FASB ASC resulting from Accounting Standards Update No. 2016-09, Compensation - Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting, effective January 1, 2017.
Basis for Opinion
These (cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:76)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87). Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
(cid:58)(cid:72)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)s auditor since 2002.
Philadelphia, Pennsylvania
February 21, 2019
F-4
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
December 31, 2018
December 31, 2017
CURRENT ASSETS:
Cash and cash equivalents
Short-term investments
Accounts receivable
Inventory
Other current assets
Total current assets
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $44,943
and $36,368
ACQUIRED TECHNOLOGY, net of accumulated amortization of $111,890 and $91,312
OTHER INTANGIBLE ASSETS, net of accumulated amortization of $3,384 and $2,000
GOODWILL
INVESTMENTS
DEFERRED INCOME TAXES
OTHER ASSETS
TOTAL ASSETS
(cid:47)(cid:44)(cid:36)(cid:37)(cid:44)(cid:47)(cid:44)(cid:55)(cid:44)(cid:40)(cid:54)(cid:3)(cid:36)(cid:49)(cid:39)(cid:3)(cid:54)(cid:43)(cid:36)(cid:53)(cid:40)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:54)(cid:182)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)
CURRENT LIABILITIES:
Accounts payable
Accrued expenses
Deferred revenue
Other current liabilities
Total current liabilities
DEFERRED REVENUE
RETIREMENT PLAN BENEFIT LIABILITY
OTHER LIABILITIES
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 16)
(cid:54)(cid:43)(cid:36)(cid:53)(cid:40)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:54)(cid:182)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)(cid:29)
$
$
$
211,022 $
304,323
43,129
70,000
6,366
634,840
69,739
110,951
13,456
15,535
(cid:178)(cid:178)
24,377
64,526
933,424 $
10,532 $
36,057
80,782
5,811
133,182
41,785
44,055
23,896
242,918
132,840
287,446
52,355
36,265
10,276
519,182
56,450
131,529
14,840
15,535
14,794
27,022
604
779,956
13,774
35,019
14,981
50
63,824
23,902
33,176
(cid:178)
120,902
Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized, 200,000
shares of Series A Nonconvertible Preferred Stock issued and outstanding
(liquidation value of $7.50 per share or $1,500)
Common Stock, par value $0.01 per share, 200,000,000 shares authorized, 48,681,524
and 48,476,034 shares issued, and 47,319,887 and 47,118,171 shares outstanding at
December 31, 2018 and December 31, 2017, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock, at cost (1,361,637 and 1,357,863 shares at December 31, 2018
and December 31, 2017)
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)
(cid:55)(cid:50)(cid:55)(cid:36)(cid:47)(cid:3)(cid:47)(cid:44)(cid:36)(cid:37)(cid:44)(cid:47)(cid:44)(cid:55)(cid:44)(cid:40)(cid:54)(cid:3)(cid:36)(cid:49)(cid:39)(cid:3)(cid:54)(cid:43)(cid:36)(cid:53)(cid:40)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:54)(cid:182)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)
$
2
2
487
617,334
129,552
(16,234 )
(40,635 )
690,506
933,424 $
485
611,063
99,126
(11,464)
(40,158)
659,054
779,956
The accompanying notes are an integral part of these consolidated financial statements.
F-5
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
REVENUE
COST OF SALES
Gross margin
OPERATING EXPENSES:
Research and development
Selling, general and administrative
Amortization of acquired technology and other intangible assets
Patent costs
Royalty and license expense
Total operating expenses
OPERATING INCOME
Interest income, net
Other expense, net
Interest and other expense, net
INCOME BEFORE INCOME TAXES
INCOME TAX EXPENSE
NET INCOME
NET INCOME PER COMMON SHARE:
BASIC
DILUTED
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
INCOME PER COMMON SHARE:
BASIC
DILUTED
CASH DIVIDEND DECLARED PER COMMON SHARE
2018
Year Ended December 31,
2017
2016
247,414 $
53,541
193,873
53,717
46,999
21,962
7,464
6,996
137,138
56,735
7,659
(83)
7,576
64,311
(5,471)
58,840 $
335,629 $
54,698
280,931
49,144
46,808
21,983
7,010
9,739
134,684
146,247
3,294
(4 )
3,290
149,537
(45,652)
103,885 $
198,886
26,288
172,598
42,744
32,876
16,493
6,249
5,823
104,185
68,413
2,113
(1,928)
185
68,598
(20,528)
48,070
1.24 $
1.24 $
2.19 $
2.18 $
1.02
1.02
46,849,588
46,896,766
0.24 $
46,725,289
46,805,194
0.12 $
46,408,460
46,535,980
(cid:178)(cid:178)
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-6
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
NET INCOME
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gain (loss) on available-for-sale securities, net of tax
of $74, $7 and $72, respectively
Employee benefit plan:
Actuarial loss on retirement plan, net of tax of $1,841, $1,047
and $945, respectively
Plan amendment cost, net of tax of none, $154 and none,
respectively
Amortization of plan amendment cost, prior service cost and actuarial
loss for retirement plan included in net periodic pension costs, net
of tax of $457, $754 and $591, respectively
Net change for employee benefit plan
Change in cumulative foreign currency translation adjustment
TOTAL OTHER COMPREHENSIVE LOSS
COMPREHENSIVE INCOME
2018
Year Ended December 31,
2017
2016
$
58,840 $
103,885
$
48,070
268
(12)
(135)
(6,690)
(1,904)
(1,731)
(cid:178)(cid:178)
(280)
(cid:178)(cid:178)
1,661
(5,029)
(9 )
(4,770)
54,070 $
1,370
(814)
28
(798)
103,087
$
1,084
(647)
(65)
(847)
47,223
$
The accompanying notes are an integral part of these consolidated financial statements.
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8
-
F
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
2018
Year Ended December 31,
2017
2016
$
58,840 $
103,885 $
48,070
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred revenue and recognition of unbilled receivables
Depreciation
Amortization of intangibles
Inventory write-down
Amortization of premium and discount on investments, net
Stock-based compensation to employees
Stock-based compensation to Board of Directors and Scientific Advisory Board
Change in earnout liability recorded for Adesis acquisition
Deferred income tax (benefit) expense
Excess tax benefits from share-based payment arrangements
Retirement plan benefit expense
Decrease (increase) in assets:
Accounts receivable
Inventory
Other current assets
Deferred income taxes
Other assets
Increase (decrease) in liabilities:
Accounts payable and accrued expenses
Other current liabilities
Deferred revenue
Other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
Purchase of intangibles
Purchase of business, net of cash acquired
Purchases of investments
Proceeds from sale of investments
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
Repurchase of common stock
Proceeds from the exercise of common stock options
Payment of withholding taxes related to stock-based compensation to employees
Excess tax benefits from share-based payment arrangements
Cash dividends paid
Net cash used in financing activities
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
The following non-cash activities occurred:
Unrealized gain (loss) on available-for-sale securities
Common stock issued to Board of Directors and Scientific Advisory Board
that was earned and accrued for in a previous period
Common stock issued to employees that was earned and accrued for
in a previous period
Net change in accounts payable and accrued expenses related to purchases
of property and equipment
Earnout liability recorded for Adesis acquisition
Excess tax benefits accrued for in other current liabilities
Cash paid for income tax
$
$
(68,905 )
8,612
21,962
3,630
(6,131)
12,432
4,364
(cid:178)(cid:178)
(12,814 )
(cid:178)(cid:178)
4,466
9,226
(37,365 )
4,860
20,682
(63,922 )
1,563
5,761
130,639
23,896
121,796
(25,391 )
(cid:178)(cid:178)
(cid:178)(cid:178)
(628,789 )
633,179
(21,001 )
798
(477)
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(11,620 )
(cid:178)(cid:178)
(11,314 )
(22,613 )
78,182
132,840
211,022 $
342 $
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3,490
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(cid:178)(cid:178)
17,771
(11,122)
4,919
21,983
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2,609
519
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4,351
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(18,951)
(3,884)
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16,420
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(29,803)
(cid:178)(cid:178)
(cid:178)(cid:178)
(594,283)
498,508
(125,578)
734
(cid:178)(cid:178)
38
(9,432)
(cid:178)(cid:178)
(5,652)
(14,312)
(6,525)
139,365
132,840 $
(19) $
300
(7,406)
4,270
16,492
(cid:178)(cid:178)
(1,830)
11,374
1,715
(cid:178)(cid:178)
3,094
(4,232)
3,965
1,205
(4,460)
(3,870)
(cid:178)(cid:178)
(133)
4,362
4,362
3,360
(cid:178)(cid:178)
80,338
(7,300)
(95,989 )
(33,380 )
(450,277 )
548,474
(38,472 )
439
(cid:178)(cid:178)
185
(4,870)
4,232
(cid:178)(cid:178)
(14 )
41,852
97,513
139,365
(207)
300
174
1,105
4,363
(cid:178)(cid:178)
(cid:178)(cid:178)
23,248
(103)
1,670
(4,232)
12,870
The accompanying notes are an integral part of these consolidated financial statements.
F-9
UNIVERSAL DISPLAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
BUSINESS:
Universal Display Corporation (the Company) is a leader in the research, development and commercialization of organic light
emitting diode (OLED) technologies and materials for use in display and solid-state lighting applications. OLEDs are thin, lightweight
and power-efficient solid-state devices that emit light that can be manufactured on both flexible and rigid substrates, making them highly
suitable for use in full-color displays and as lighting products. OLED displays are capturing a growing share of the display market. The
Company believes this is because OLEDs offer potential advantages over competing display technologies with respect to power
efficiency, contrast ratio, viewing angle, video response time, form factor and manufacturing cost. The Company also believes that
OLED lighting products have the potential to replace many existing light sources in the future because of their high power efficiency,
excellent color rendering index, low operating temperature and novel form factor. The Company's technology leadership and intellectual
property position should enable it to share in the revenues from OLED displays and lighting products as they enter mainstream consumer
and other markets.
The Company's primary business strategy is to (1) further develop and license its proprietary OLED technologies to manufacturers
of products for display applications, such as mobile phones, televisions, tablets, wearables, portable media devices, notebook computers,
personal computers, and automotive interiors, and specialty and general lighting products; and (2) develop new OLED materials and
sell existing and any new materials to those product manufacturers. The Company has established a significant portfolio of proprietary
OLED technologies and materials, primarily through internal research and development efforts and acquisitions of patents and patent
applications, as well as maintaining its relationships with world-class partners such as Princeton University (Princeton), the University
of Southern California (USC), the University of Michigan (Michigan) and PPG Industries, Inc. (PPG). The Company currently owns,
exclusively licenses or has the sole right to sublicense more than 5,000 patents issued and pending worldwide.
The Company sells its proprietary OLED materials to customers for evaluation and use in commercial OLED products. The
Company also enters into agreements with manufacturers of OLED display and lighting products under which it grants them licenses to
practice under its patents and to use the Company's proprietary know-how. At the same time, the Company works with these and other
companies who are evaluating the Company's OLED technologies and materials for possible use in commercial OLED display and
lighting products.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Universal Display Corporation and its wholly owned subsidiaries,
UDC, Inc., UDC Ireland Limited, Universal Display Corporation Hong Kong, Limited, Universal Display Corporation Korea, Y.H.,
Universal Display Corporation Japan GK, Universal Display Corporation China, Ltd. and Adesis, Inc. (Adesis). All intercompany
transactions and accounts have been eliminated.
Business Combinations
Accounting for acquisitions requires the Company to recognize separately from goodwill the assets acquired and the liabilities
assumed at the acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred
over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best
estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent
consideration, where applicable, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement
period, which is when all information necessary is obtained not to exceed one year, adjustments may be recorded to the assets acquired
and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination
of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the
consolidated statements of income.
Management’s Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. The estimates made are principally in the areas of revenue recognition including estimates of material unit sales and royalties,
the useful life of acquired intangibles, the use and recoverability of inventories, intangibles and income taxes including realization of
deferred tax assets, stock-based compensation and retirement benefit plan liabilities. Actual results could differ from those estimates.
F-10
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash
equivalents. The Company classifies its remaining investments as available-for-sale. These securities are carried at fair market value,
(cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:88)(cid:81)(cid:85)(cid:72)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3) (cid:74)(cid:68)(cid:76)(cid:81)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3) (cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:72)(cid:71)(cid:3) (cid:76)(cid:81)(cid:3) (cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3) (cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:17)(cid:3) (cid:42)(cid:68)(cid:76)(cid:81)(cid:86)(cid:3) (cid:82)(cid:85)(cid:3) (cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3) (cid:82)(cid:81)(cid:3) (cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:86)(cid:82)(cid:79)(cid:71)(cid:3) (cid:68)(cid:85)(cid:72)(cid:3) (cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3) (cid:82)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:73)ic
identification method.
Trade Accounts Receivable
Trade accounts receivable are stated at the amount the Company expects to collect and do not bear interest. The Company
considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past
(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:75)(cid:76)(cid:86)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:15)(cid:3) (cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3) (cid:72)(cid:70)(cid:82)(cid:81)(cid:82)(cid:80)(cid:76)(cid:70)(cid:3) (cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:92)(cid:3) (cid:87)(cid:85)(cid:72)(cid:81)(cid:71)(cid:86)(cid:15)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3) (cid:76)(cid:81)(cid:3) (cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:3) (cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:87)(cid:72)(cid:85)(cid:80)(cid:86)(cid:17)(cid:3) (cid:55)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)
accounts receivable balance is a result of chemical sales, royalties and license fees. These receivables have historically been paid timely.
Due to the nature of the accounts receivable balance, the Company believes there is no significant risk of collection. If the financial
(cid:70)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:76)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:15)(cid:3)(cid:68)(cid:71)(cid:89)(cid:72)(cid:85)(cid:86)(cid:72)(cid:79)(cid:92)(cid:3)(cid:68)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:76)(cid:85)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:68)(cid:78)(cid:72)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86), allowances for doubtful
accounts would be required. The allowance for doubtful accounts was $77,000, none and $100,000 at December 31, 2018, 2017 and
2016, respectively.
Inventories
Inventories consist of raw materials, work-in-process and finished goods, including inventory consigned to customers, and are
stated at the lower of cost, determined on a first-in, first-out basis, or net realizable value. Inventory valuation and firm committed
purchase order assessments are performed on a quarterly basis and those items that are identified to be obsolete or in excess of forecasted
usage are written down to their estimated realizable value. Estimates of realizable value are based upon manag(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:68)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
assumptions, including, but not limited to, forecasted sales levels by product, expected product lifecycle, product development plans
and future demand requirements. A 12-month rolling forecast based on factors, including, but not limited to, production cycles,
anticipated product orders, marketing forecasts, backlog, and shipment activities is used in the inventory analysis. If market conditions
are less favorable than forecasts or actual demand from customers is lower than estimates, additional inventory write-downs may be
required. If demand is higher than expected, inventories that had previously been written down may be sold.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful life of thirty years for
building, fifteen years for building improvements, and three to seven years for office and lab equipment and furniture and fixtures.
Repair and maintenance costs are charged to expense as incurred. Additions and betterments are capitalized.
Major renewals and improvements are capitalized and minor replacements, maintenance, and repairs are charged to current
operations as incurred. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the
consolidated balance sheet and any gain or loss is reflected in other operating expenses.
Certain costs of computer software obtained for internal use are capitalized and amortized on a straight-line basis over three years.
Costs for maintenance and training, as well as the cost of software that does not add functionality to an existing system, are expensed as
incurred.
Impairment of Long-Lived Assets
Company management continually evaluates whether events or changes in circumstances might indicate that the remaining
estimated useful life of long-lived assets may warrant revision, or that the remaining balance may not be recoverable. When factors
indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted
cash flows in measuring whether the long-lived asset should be written down to fair value. Measurement of the amount of impairment
would be based on generally accepted valuation methodologies, as deemed appropriate. As of December 31, 2018, Company
management believed that no revision to the remaining useful lives or write-(cid:71)(cid:82)(cid:90)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)-lived assets was required, and
similarly, no such revisions were required for the years ended December 31, 2017 or 2016.
Goodwill and Purchased Intangible Assets
Goodwill is tested for impairment in the fourth fiscal quarter and, when specific circumstances dictate, between annual tests.
Company management first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount as a basis for determining whether a quantitative goodwill impairment test is necessary. If it is
concluded it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, then a quantitative impairment
F-11
assessment is not necessary. If it is determined that goodwill has been impaired, then its carrying value is written down to fair value.
The goodwill impairment test involves a two-step process. The first step, identifying a potential impairment, compares the fair value of
a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second
step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. If necessary, the second
step to measure the impairment loss would be to compare the implied fair value of the reporting unit goodwill with the carrying amount
of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an
impairment loss. The Company performed its annual impairment assessment as of December 31, 2018 utilizing a qualitative evaluation
and concluded that it was more likely than not that the fair value of Adesis (see Note 3) is greater than its carrying value. Company
management believes it has made reasonable estimates and assumptions to calculate the fair value of the reporting unit. Future
impairment tests will continue to be performed annually in the fiscal fourth quarter, or sooner if a triggering event occurs. As of
December 31, 2018, no indications of impairment existed.
Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed over the
estimated useful lives of the respective assets.
Fair Value of Financial Instruments
The carrying values of accounts receivable, other current assets, and accounts payable approximate fair value in the accompanying
financial statements due to the short-(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:81)(cid:68)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:82)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)
equivalents and investments, are carried at fair value.
Fair Value Measurements
Fair value is defined as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants based on the highest and best use of the asset or liability. The Company uses valuation
techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. Observable
inputs are inputs that market participants would use in pricing the asset or liability, and are based on market data obtained from sources
independent of the Company. Unobservable inputs reflect assumptions market participants would use in pricing the asset or liability
based on the best information available in the circumstances.
Revenue Recognition and Deferred Revenue
(cid:48)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:72)(cid:85)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)cts
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.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:89)(cid:72)(cid:92)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:79)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)s
and material supply agreements. These agreements are combined and the licenses and materials sold under these combined agreements
are not distinct from each other for financial reporting purposes and as such, are accounted for as a single performance obligation.
Accordingly, total contract consideration is estimated and recognized over the contract term based on material units sold during the
period at their estimated per unit fee. Total contract consideration includes fixed amounts designated in contracts with customers as
license fees as well as estimates of material fees and royalties to be earned.
Various estimates are relied upon to recognize revenue. The Company estimates total material units to be purchased by its
customers over the contract term based on historical trends, industry estimates and its forecast process and related amounts to be charged.
Additionally, management estimates the total sales-based royalties based on the estimated net sales revenue of its customers over the
contract term.
Contract research services revenue is revenue earned by Adesis through performing organic and organometallic synthetics
research, development and commercialization on a contractual basis. These services range from intermediates for structure-activity
relationship studies, reference agents and building blocks for combinatorial synthesis, re-synthesis of key intermediates, specialty
organic chemistry needs, and selective toll manufacturing. These services are provided to third-party pharmaceutical and life sciences
firms and other technology firms at fixed costs or on an annual contract basis. Revenue is recognized as services are performed with
billing schedules and payment terms negotiated on a contract-by-contract basis. Payments received in excess of revenue recognized are
recorded as deferred revenue. In other cases, services may be provided and revenue is recognized before the customer is invoiced. In
these cases, revenue recognized will exceed amounts billed and the difference, representing amounts which are currently unbillable to
the customer pursuant to contractual terms, is recorded as an unbilled receivable.
F-12
Technology development and support revenue is revenue earned from government contracts, development and technology
evaluation agreements and commercialization assistance fees, which includes reimbursements by government entities for all or a portion
of the research and development costs the Company incurs in relation to its government contracts. Revenues are recognized
proportionally as research and development costs are incurred, or as defined milestones are achieved, and are included in contract
research services in the accompanying consolidated statements of income.
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 new
supplemental material purchase agreement with SDC. Under the current 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.
(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:80)(cid:76)(cid:81)(cid:76)(cid:80)(cid:88)(cid:80)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:54)(cid:39)(cid:38)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:83)(cid:75)(cid:82)(cid:86)(cid:83)(cid:75)(cid:82)(cid:85)(cid:72)(cid:86)(cid:70)(cid:72)(cid:81)(cid:87)(cid:3)(cid:72)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:85)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:72)(cid:72)(cid:87)(cid:3)
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 life 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
(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:71)(cid:82)(cid:80)(cid:76)(cid:81)(cid:68)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)(cid:87)(cid:76)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:47)(cid:42)(cid:3)(cid:39)(cid:76)(cid:86)(cid:83)(cid:79)(cid:68)(cid:92)(cid:182)(cid:86)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:79)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:72)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:72)(cid:85)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:79)(cid:92)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:86)(cid:3)(cid:73)(cid:82)r
the sale 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 expects to supply 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 has also agreed to supply 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 expects to supply phosphorescent OLED materials
to Visionox for use in its licensed products.
The Company records taxes billed to customers and remitted to various governmental entities on a gross basis in both revenues
and cost of material sales in the consolidated statements of income. The amounts of these pass through taxes reflected in revenues and
cost of material sales were $117,000, $409,000 and $171,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
All sales transactions are billed and due within 90 days and substantially all are transacted in U.S. dollars.
See Recent Accounting Pronouncements for discussion of revenue recognition under the new standard, which became effective
January 1, 2018.
F-13
Cost of Sales
Cost of sales consists of labor and material costs associated with the production of materials processed at the Company's
(cid:80)(cid:68)(cid:81)(cid:88)(cid:73)(cid:68)(cid:70)(cid:87)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:81)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:10)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:80)(cid:68)(cid:81)(cid:88)(cid:73)(cid:68)(cid:70)(cid:87)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:86)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:68)les also
includes depreciation of manufacturing equipment, as well as manufacturing overhead costs and inventory adjustments for excess and
obsolete inventory.
Research and Development
Expenditures for research and development are charged to operations as incurred.
Patent Costs
Costs associated with patent applications, patent prosecution, patent defense and the maintenance of patents are charged to expense
as incurred. Costs to successfully defend a challenge to a patent are capitalized to the extent of an evident increase in the value of the
patent. Costs that relate to an unsuccessful outcome are charged to expense.
Amortization of Acquired Technology
Amortization costs relate to technology acquired from BASF, Fujifilm and Motorola. These acquisitions were completed in the
years ended December 31, 2016, 2012 and 2011, respectively. Acquisition costs are being amortized over a period of 10 years for the
BASF and Fujifilm patents and 7.5 years for the Motorola patents.
Amortization of Other Intangible Assets
Other intangible assets from the Adesis acquisition are being amortized over a period of 10 to 15 years. See Notes 3 and 8 for
further discussion.
Translation of Foreign Currency Financial Statements and Foreign Currency Transactions
The Company's reporting currency is the U.S. dollar. The functional currency for the Company's Ireland subsidiary is also the
U.S. dollar and the functional currency for each of the Company's Asia-Pacific foreign subsidiaries is its local currency. The Company
translates the amounts included in the consolidated statements of income from its Asia-Pacific foreign subsidiaries into U.S. dollars at
weighted-average exchange rates, which the Company believes are representative of the actual exchange rates on the dates of the
transactions. The Company's foreign subsidiaries' assets and liabilities are translated into U.S. dollars from the local currency at the
actual exchange rates as of the end of each reporting date, and the Company records the resulting foreign exchange translation
adjustments in the consolidated balance sheets as a component of accumulated other comprehensive loss. The overall effect of the
translation of foreign currency and foreign currency transactions to date has been insignificant.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.
Recognized income tax positions are measured at the largest amount of which the likelihood of realization is greater than 50%. Changes
in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and
penalties, if any, related to unrecognized tax benefits as a component of tax expense.
Share-Based Payment Awards
The Company recognizes in the consolidated statements of income the grant-date fair value of equity based awards such as shares
issued under employee stock purchase plans, restricted stock awards, restricted stock units and performance unit awards issued to
employees and directors.
The grant-date fair value of stock awards is based on the closing price of the stock on the date of grant. The fair value of share-
based awards is recognized as compensation expense on a straight-line basis over the requisite service period, net of forfeitures. The
Company issues new shares upon the respective grant, exercise or vesting of the share-based payment awards, as applicable.
F-14
Performance unit awards are subject to either a performance-based or market-based vesting requirement. For performance-based
vesting, the grant-date fair value of the award, based on fair value of the Company's common stock, is recognized over the service
period, based on an assessment of the likelihood that the applicable performance goals will be achieved and compensation expense is
periodically adjusted based on actual and expected performance. Compensation expense for performance unit awards with market-based
vesting is calculated based on the estimated fair value as of the grant date utilizing a Monte Carlo simulation model and is recognized
over the service period on a straight-line basis.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued a new revenue recognition standard entitled Accounting
(cid:54)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:38)(cid:82)(cid:71)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:179)(cid:36)(cid:54)(cid:38)(cid:180)(cid:12)(cid:3)(cid:55)(cid:82)(cid:83)(cid:76)(cid:70)(cid:3)(cid:25)(cid:19)(cid:25)(cid:15)(cid:3)Revenue from Contracts with Customers. The objective of the standard is to establish the
principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and
uncertainty of revenue and cash flows from a contract with a customer. The standard is effective for annual reporting periods beginning
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meaning the standard was applied only to the most current period presented in the financial statements, with a cumulative adjustment to
retained earnings.
The new standard impacts how the Company recognizes revenue on its commercial license and material supply agreements with
customers. In addition, the Company previously recognized royalty revenue one quarter in arrears based on sales information received
(cid:73)(cid:85)(cid:82)(cid:80)(cid:3) (cid:76)(cid:87)(cid:86)(cid:3) (cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3) (cid:87)(cid:92)(cid:83)(cid:76)(cid:70)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3) (cid:85)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:72)(cid:71)(cid:3) (cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3) (cid:71)(cid:76)(cid:86)(cid:70)(cid:79)(cid:82)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3) (cid:87)(cid:75)(cid:68)(cid:87)(cid:3) (cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:182)(cid:86)(cid:3) (cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:17)(cid:3) (cid:56)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3) (cid:36)(cid:54)(cid:38)(cid:3) (cid:55)(cid:82)(cid:83)(cid:76)(cid:70)(cid:3) (cid:25)(cid:19)(cid:25)(cid:15)(cid:3) (cid:85)(cid:82)(cid:92)(cid:68)(cid:79)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:87)(cid:82)(cid:3) (cid:69)(cid:72)(cid:3) (cid:72)(cid:68)(cid:85)(cid:81)(cid:72)(cid:71)(cid:3) (cid:82)(cid:89)er the
contract term are estimated as part of total contract consideration and recognized as noted below. The estimates are updated on a quarterly
basis.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:89)(cid:72)(cid:92)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:79)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)
and material supply agreements. These agreements are combined and the licenses and materials sold under these combined agreements
are not distinct from each other for financial reporting purposes and as such, are accounted for as a single performance obligation.
Accordingly, total contract consideration is estimated and recognized over the contract term based on material units sold at its estimated
per unit fee.
Adoption of the new standard resulted in an increase in deferred revenue of $21.3 million offset by a reduction of retained earnings
of $17.1 million, net of tax of $3.9 million, and unbilled receivables of $0.3 million as of January 1, 2018. The impact of the new
standard to revenue for the year ended December 31, 2018 was a decrease of $78.9 million from the amount that would have been
recorded under the prior accounting standard. See Note 19 for further discussion.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which addresses the classification and recognition of lease assets
and liabilities. The guidance addresses certain aspects of recognition and measurement, and quantitative and qualitative aspects of
presentation and disclosure. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. The Company will adopt the standard on January 1, 2019. The Company estimates that adoption of the new
standard will result in a reduction in retained earnings of $592,000, net of tax of $157,000, offset by increases in net property and
equipment of $7.0 million, other current liabilities of $1.3 million and other liabilities of $6.5 million.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments. The objective of the standard is to reduce diversity in practice in how certain transactions are classified in
the consolidated statements of cash flows. The ASU provides additional clarification guidance on the classification of certain cash
receipts and payments in the consolidated statements of cash flows. The new guidance is effective for fiscal years and interim periods
within those years beginning after December 15, 2017 and did not have any impact on the consolidated financial statements and related
disclosures.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than
Inventory. ASU 2016-16 clarifies the accounting for the current and deferred income taxes for an intra-entity transfer of an asset other
than inventory. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, including interim periods within those
fiscal years, with early adoption permitted. The new guidance is effective for fiscal years and interim periods within those years
beginning after December 15, 2017 and did not have any impact on the consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test of
Goodwill Impairment, eliminating the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill
impairment test. The new standard requires goodwill impairment to be based upon the results of step one of the impairment test, which
is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount
of goodwill allocated to that reporting unit. The standards update is effective prospectively for annual and interim goodwill impairment
testing performed in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the
effect that adoption of ASU 2017-04 may have on its consolidated financial statements and related disclosures.
F-15
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification
Accounting. ASU 2017-09 clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply
modification accounting, in accordance with Topic 718. The guidance is effective for annual periods beginning after December 15,
2017, with early adoption permitted, and requires a prospective application to awards modified on or after the adoption date. The
Company has not historically made changes to the terms or conditions of shared-based payment awards and the adoption of ASU 2017-
09, beginning January 1, 2018, did not have any impact on the consolidated financial statements and related disclosures.
–
3.
BUSINESS COMBINATIONS:
On June 23, 2016, the Company entered into an agreement to acquire Adesis, Inc., a privately held contract research organization
(CRO) with then 43 employees specializing in organic and organometallic synthetic research, development, and commercialization.
d
Adesis is a technology vendor to companies in the pharmaceutical, fine chemical, biomaterials, and catalyst industries, and had
worked
with the Company prior to the acquisition (cid:87)(cid:82)(cid:3)(cid:75)(cid:72)(cid:79)(cid:83)(cid:3)(cid:68)(cid:71)(cid:89)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:70)(cid:70)(cid:72)(cid:79)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:68)(cid:3)(cid:81)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)ct offerings. The transaction
(cid:70)(cid:79)(cid:82)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:45)(cid:88)(cid:79)(cid:92)(cid:3)(cid:20)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:17)(cid:3)(cid:56)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:15)(cid:3)(cid:56)(cid:39)(cid:38)(cid:15)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:15)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)es of
Adesis in a merger for $33.9 million in cash, and up to an additional $2.4 million in cash cont(cid:76)(cid:81)(cid:74)(cid:72)(cid:81)(cid:87)(cid:3)(cid:88)(cid:83)(cid:82)(cid:81)(cid:3)(cid:36)(cid:71)(cid:72)(cid:86)(cid:76)(cid:86)(cid:182)(cid:3)(cid:68)(cid:70)(cid:75)(cid:76)(cid:72)(cid:89)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)
milestones within two years of the acquisition. The acquisition was funded through use of existing cash and investments.
uu
Purchase Price Allocation
The Company accounted for Adesis using the acquisition method of accounting in accordance with applicable GAAP whereby
the total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on respective fair values.
The contingent consideration arrangement required the Company to pay up to $1.2 million of additional consideration to the former
shareholders of Adesis if revenues exceeded certain threshold levels at the end of each twelve-month period ended December 31, 2016
and December 31, 2017. For both of the years ended December 31, 2017 and 2016, the additional cash consideration earned by the
former shareholders of Adesis was $1.2 million. The fair value of the contingent consideration was derived using a Monte Carlo
(cid:86)(cid:76)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:80)(cid:82)(cid:71)(cid:72)(cid:79)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:77)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:73)(cid:88)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:79)(cid:72)(cid:89)(cid:72)(cid:79)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:86)(cid:88)(cid:80)(cid:80)(cid:68)(cid:85)(cid:76)(cid:93)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72) assets
acquired and liabilities assumed at the date of acquisition (in thousands):
h
ff
Cash consideration
Contingent consideration
Allocation of purchase price:
Current assets, including cash of $492
Property and equipment
Accounts payable and accrued liabilities
Net tangible assets
Identifiable intangible assets
Goodwill
Total purchase price
$
$
$
$
33,872
1,670
35,542
2,204
1,869
(906)
3,167
16,840
15,535
35,542
The purchase price exceeded the fair value of the net tangible assets and identifiable intangible assets acquired and, as a result,
the Company recorded goodwill in connection with this transaction. This difference includes a going concern element that represents
(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:3)(cid:68)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:72)(cid:85)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:87)(cid:88)(cid:85)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:74)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:90)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:69)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:72)(cid:83)(cid:68)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)s determined
during the valuation process.
Transaction costs of $360,000 were recorded and charged to selling, general and administrative expense on the accompanying
consolidated statements of income during 2016.
Intangible Assets Identified
The following table presents the intangible assets identified in the transaction:
Category
Customer relationships
Developed IP, processes and recipes
Trade name/Trademarks
Total identifiable intangible assets
Estimated fair value
(in thousands)
Estimated useful life
(in years)
$
$
10,520
4,820
1,500
16,840
11.5
15.0
10.0
F-16
The fair value of the customer relationships asset was determined using the income approach through an excess earnings analysis
which estimates value based on the present value of future economic benefits. The customer relationships intangible asset represents
relationships between Adesis and its customers. The fair value of the internally-developed IP, processes and recipes was determined by
utilizing the relief-from-royalty methodology. The fair value of the Adesis trade name asset was determined using the income approach
through a relief-from-royalty analysis. The determination of useful lives was based upon consideration of market participant as
sumptions
ff
and transaction specific factors.
Impact on Operating Results
(cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:36)(cid:71)(cid:72)(cid:86)(cid:76)(cid:86)(cid:182)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)
(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:86)(cid:76)(cid:81)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:45)(cid:88)(cid:79)(cid:92)(cid:3)(cid:20)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)16
date of acquisition. The following unaudited pro forma information assumes the acquisition of Adesis occurred at the beginning of the
respective periods presented (in thousands):
(cid:80)(cid:80)
Revenue
Net income
2016
$
202,547
44,718
The unaudited pro forma information presented is for illustrative purposes only and does not reflect
future events that may occur
lly, this
ff
after December 31, 2018, or any operating efficiencies or inefficiencies that may result from the Adesis acquisition. Additiona
unaudited pro forma information includes certain one-(cid:87)(cid:76)(cid:80)(cid:72)(cid:3) (cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3) (cid:68)(cid:86)(cid:86)(cid:82)(cid:70)(cid:76)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:76)(cid:81)(cid:87)(cid:72)(cid:74)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)he acquired Adesis
operations. Therefore, the information is not necessarily indicative of the results that would have been achieved had the business been
combined during the periods presented or the results that the Company will experience going forward.
uu
4.
CASH, CASH EQUIVALENTS AND INVESTMENTS:
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash
equivalents. The Company classifies its remaining investments as available-for-sale. These debt securities are carried at fair market
(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:15)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:88)(cid:81)(cid:85)(cid:72)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:74)(cid:68)(cid:76)(cid:81)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:17)(cid:3)(cid:42)(cid:68)(cid:76)(cid:81)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:86)(cid:82)(cid:79)(cid:71)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72) specific
identification method. Investments as of December 31, 2018 and December 31, 2017 consisted of the following (in thousands):
Investment Classification
December 31, 2018
Certificates of deposit
Corporate bonds
U.S. Government bonds
December 31, 2017
Certificates of deposit
Corporate bonds
U.S. Government bonds
Amortized
Unrealized
Cost
Gains
(Losses)
Aggregate Fair
Market Value
$
$
$
$
500 $
114,678
317,984
433,162 $
1,296 $
104,626
214,641
320,563 $
(cid:178) $
1
14
15 $
1 $
(cid:178)
(cid:178)
1 $
(1) $
(19)
(43)
(63) $
(1) $
(252)
(139)
(392) $
499
114,660
317,955
433,114
1,296
104,374
214,502
320,172
As of December 31, 2018 and 2017, there was none and $17.9 million of corporate bonds, respectively, and $128.8 million and
d
none of U.S. government securities, respectively, included in cash equivalents on the consolidated balance sheet.
F-17
5.
FAIR VALUE MEASUREMENTS:
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December 31,
r
2018
(in thousands):
Cash equivalents
Short-term investments
Long-term investments
y g
Total carrying value
as of December 31,
2018
Quoted prices in
p
active markets
(Level 1)
g
Significant other
observable inputsp
(Level 2)
g
Significant unobservable
Significant unobservable
inputsp
(Level 3)
Fair Value Measurements, Using
$
139,805 $
304,323
(cid:178)(cid:178)
139,805 $
304,323
(cid:178)
(cid:178)(cid:178) $
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December 31,
r
2017
(in thousands):
Cash equivalents
Short-term investments
Long-term investments
y g
Total carrying value
as of December 31,
2017
p
Quoted prices in
active markets
(Level 1)
g
Significant other
observable inputsp
(Level 2)
g
Significant unobservable
Significant unobservable
inputsp
(Level 3)
Fair Value Measurements, Using
$
27,532 $
287,446
14,794
27,532 $
287,446
14,794
(cid:178)(cid:178) $
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices
for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly
through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based
(cid:82)(cid:81)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:82)(cid:90)(cid:81)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:80)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:17)(cid:3)(cid:36)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:182)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:182)(cid:86)(cid:3)(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:86)
determined based on the lowest level input that is significant to the fair value measurement.
Changes in fair value of the investments are recorded as unrealized gains and losses in other comprehensive income (loss). If a
(cid:71)(cid:72)(cid:70)(cid:79)(cid:76)(cid:81)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:81)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:71)(cid:72)(cid:72)(cid:80)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:87)(cid:72)(cid:80)(cid:83)(cid:82)(cid:85)(cid:68)(cid:85)(cid:92)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:69)(cid:72)(cid:3)(cid:90)(cid:85)(cid:76)tten down
by the amount of the other-than-temporary impairment with a resulting charge to net income. There were no other-than-temporary
impairments of investments as of December 31, 2018 or December 31, 2017.
6.
INVENTORY:
Inventory consisted of the following (in thousands):
Raw materials
Work-in-process
Finished goods
Inventory
December 31,
2018
2017
$
$
31,203 $
781
38,016
70,000 $
17,464
2,977
15,824
36,265
For the year ended December 31, 2018, the Company recorded an inventory write-down of $3.6 million as lower than anticipated
customer demand created excess inventory levels in certain products. No inventory write-down was recorded for the years ended
December 31, 2017 and 2016.
F-18
7.
PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
Land
Building and improvements
Office and lab equipment
Furniture, fixtures and computer related assets
Construction-in-progress
Less: Accumulated depreciation
Property and equipment, net
December 31,
2018
2017
$
$
1,006 $
39,285
55,333
6,941
12,117
114,682
(44,943 )
69,739 $
1,006
24,101
33,269
4,431
30,011
92,818
(36,368)
56,450
Depreciation expense was $8.6 million, $4.9 million and $4.3 million for the years ended December 31, 2018, 2017 and 2016,
respectively.
8.
GOODWILL AND INTANGIBLE ASSETS:
The Company monitors the recoverability of goodwill annually or whenever events or changes in circumstances indicate the
carrying value may not be recoverable. Purchased intangible assets subject to amortization consist primarily of acquired technology and
other intangible assets that include trade names, customer relationships and internally developed IP processes.
r
r
Acquired Technology
Acquired technology consists of acquired license rights for patents and know-how obtained from PD-LD, Inc., Motorola, BASF
SE (BASF) and Fujifilm. These intangible assets consist of the following (in thousands):
PD-LD, Inc.
Motorola
BASF
Fujifilm
Less: Accumulated amortization
Acquired technology, net
December 31,
2018
(cid:3)
1,481
15,909
95,989
109,462
222,841
(111,890)
110,951
$
$
2017
1,481
15,909
95,989
109,462
222,841
(91,312)
131,529
$
$
Amortization expense related to acquired technology was $20.6 million, $20.6 million and $15.9 million for the years ended
December 31, 2018, 2017 and 2016, respectively. Amortization expense is included in amortization of acquired technology and other
$20.5 million in each of the years
intangible assets expense line item on the consolidated statements of income and is expected to be
ending December 31, 2019 through 2021, $15.8 million in the year ending December 31, 2022 and $33.6 million thereafter.
f
Motorola Patent Acquisition
In 2000, the Company entered into a royalty-bearing license agreement with Motorola whereby Motorola granted the Company
(cid:83)(cid:72)(cid:85)(cid:83)(cid:72)(cid:87)(cid:88)(cid:68)(cid:79)(cid:3) (cid:79)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3) (cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3) (cid:87)(cid:82)(cid:3) (cid:90)(cid:75)(cid:68)(cid:87)(cid:3) (cid:68)(cid:85)(cid:72)(cid:3) (cid:81)(cid:82)(cid:90)(cid:3) (cid:26)(cid:23)(cid:3) (cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:71)(cid:3) (cid:56)(cid:17)(cid:54)(cid:17)(cid:3) (cid:83)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:87)(cid:82)(cid:3) (cid:48)(cid:82)(cid:87)(cid:82)(cid:85)(cid:82)(cid:79)(cid:68)(cid:182)(cid:86)(cid:3) (cid:50)(cid:47)(cid:40)(cid:39)(cid:3) (cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3) (cid:87)(cid:82)(cid:74)(cid:72)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:73)(cid:82)(cid:85)(cid:72)(cid:76)gn
counterparts in various countries. The last of the issued U.S. patents expired in 2018.
f
On March 9, 2011, the Company purchased these patents from Motorola, including all existing and future claims and causes of
action for any infringement of the patents, pursuant to a Patent Purchase Agreement. The Patent Purchase Agreement effectively
(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:79)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3) (cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3) (cid:48)(cid:82)(cid:87)(cid:82)(cid:85)(cid:82)(cid:79)(cid:68)(cid:15)(cid:3) (cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3) (cid:68)(cid:81)(cid:92)(cid:3) (cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:87)(cid:82)(cid:3) (cid:80)(cid:68)(cid:78)(cid:72)(cid:3) (cid:85)(cid:82)(cid:92)(cid:68)(cid:79)(cid:87)(cid:92)(cid:3) (cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:87)(cid:82)(cid:3) (cid:48)(cid:82)(cid:87)(cid:82)(cid:85)(cid:82)(cid:79)(cid:68)(cid:17)(cid:3) (cid:55)(cid:75)(cid:72)(cid:3)
technology acquired from Motorola was amortized over a period of 7.5 years.
F-19
Fujifilm Patent Acquisition
On July 23, 2012, the Company entered into a Patent Sale Agreement with Fujifilm. Under the agreement, Fujifilm sold more
than 1,200 OLED-related patents and patent applications in exchange for a cash payment of $105.0 million, plus costs incurred in
connection with the purchase. The agreement contains customary representations and warranties and covenants, including respective
covenants not to sue by both parties thereto. The agreement permitted the Company to assign all of its rights and obligations under the
agreement to its affiliates, and the Company assigned, prior to the consummation of the transactions contemplated by the agreement, its
the
d
rights and obligations to UDC Ireland Limited (UDC Ireland), a wholly-owned subsidiary of the Company formed under the laws of
Republic of Ireland. The transactions contemplated by the agreement were consummated on
n
July 26, 2012. The Company recorded the
mm
$105.0 million plus $4.5 million of purchase costs as acquired technology, which is being amortized over a period of 10 years.
BASF Patent Acquisition
On June 28, 2016, UDC Ireland entered into and consummated an IP Transfer Agreement with BASF. Under the IP Transfer
Agreement, BASF sold to UDC Ireland all of its rights, title and interest to certain of its owned and co-owned intellectual property rights
relating to the composition of, 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. These assets were acquired in exchange for a cash payment of
(cid:188)86.8 million
($95.8 million). In addition, UDC Ireland also took on certain rights and obligations under three joint research and development
agreements to which BASF was a party. The IP Transfer Agreement also contains customary representations, warranties and covenantsnn
of the parties. UDC Ireland recorded the payment of (cid:188)86.8 million ($95.8 million) and acquisition costs incurred of $217,000 as acquired
technology, which is being amortized over a period of 10 years.
n
d
Other Intangible Assets
As a result of the Adesis acquisition in June 2016, the Company recorded $16.8 million of other intangible assets, including $10.5
million assigned to customer relationships with a weighted average life of 11.5 years, $4.8 million of internally developed IP, processes
and recipes with a weighted average life of 15 years, and $1.5 million assigned to trade name and trademarks with a weighted average
life of 10 years. At December 31, 2018, these other intangible assets consist of the following (in thousands):
Customer relationships
Developed IP, processes and recipes
Trade name/Trademarks
Total identifiable intangible assets
December 31, 2018
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
$
$
10,520 $
4,820
1,500
16,840 $
(2,228) $
(788)
(368)
(3,384) $
8,292
4,032
1,132
13,456
Amortization expense related to other intangible assets was $1.4 million, $1.4 million and $615,000 for the years ended December
31, 2018, 2017, and 2016, respectively. Amortization expense is included in amortization of acquired technology and other intangible
assets expense line item on the consolidated statements of income and is expected to be $1.4 million for each of the next five fiscal years
(2019 - 2023) and $6.4 million thereafter.
Goodwilll
As a result of the Adesis acquisition, the Company recorded $15.5 million of goodwill. The Company performs its annual
assessment of goodwill during the fourth quarter of the fiscal year unless events suggest an impairment may have been incurred in an
interim period. Application of the goodwill impairment test requires the exercise of judgment, including the determination of the fair
value of each reporting unit. The Company estimates the fair value of reporting units using an income approach based on the present
value of estimated future cash flows. As part of the annual assessment of goodwill completed during the fourth quarter ended December
31, 2018, there were no significant indicators to conclude that an impairment of the goodwill associated with the acquisition of Adesis
had occurred.
F-20
9.
ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
Compensation
Royalties
Research and development agreements
Professional fees
Consulting
Other
December 31,
2018
2017
13,803
$
6,996
3,572
655
527
10,504
36,057 $
20,997
9,746
48
748
491
2,989
35,019
$
$
10. RESEARCH AND LICENSE AGREEMENTS WITH PRINCETON UNIVERSITY, UNIVERSITY OF SOUTHERN
CALIFORNIA AND THE UNIVERSITY OF MICHIGAN:
The Company funded OLED technology research at Princeton University and, on a subcontractor basis, at the University of
Southern California for 10 years under a Research Agreement executed with Princeton University in August 1997 (the 1997 Research
Agreement). The principal investigator conducting work under the 1997 Research Agreement transferred to the University of Michigan
in January 2006. Following this transfer, the 1997 Research Agreement was allowed to expire on July 31, 2007.
As a result of the transfer, the Company entered into a new Sponsored Research Agreement with the University of Southern
California to sponsor OLED technology research and, on a subcontractor basis, with the University of Michigan. This new Sponsored
Research Agreement (as amended, the 2006 Research Agreement) was effective as of May 1, 2006 and had an original term of three
years. On May 1, 2009, the Company amended the 2006 Research Agreement to extend the term of the agreement for an additional four
years. The 2006 Research Agreement superseded the 1997 Research Agreement with respect to all work being performed at the
University of Southern California and the University of Michigan. Payments under the 2006 Research Agreement were made to the
University of Southern California on a quarterly basis as actual expenses were incurred. The Company incurred a total of $5.0 million
in research and development expense for work performed under the 2006 Research Agreement, which ended on April 30, 2013.
Effective June 1, 2013, the Company amended the 2006 Research Agreement again to extend the term of the agreement for an
expense for work performed under the
additional four years. The Company incurred a total of $4.6 million in research and development
2006 Research Agreement during the extended term.
n
Effective May 1, 2017, the Company amended the 2006 Research Agreement once again to extend the term of the agreement for
an additional three years. As of December 31, 2018, in connection with this amendment, the Company was obligated to pay the
University of Southern California up to $4.1 million for work to be performed during the remaining extended term, which expires April
30, 2020. From May 1, 2017 through December 31, 2018, the Company incurred $1.6 million in research and development expense for
work performed under the 2006 Research Agreement.
In connection with entering into the 2006 Research Agreement, the Company amended the 1997 Amended License Agreement to
include the University of Michigan as a party to that agreement effective as of January 1, 2006. Under this amendment, Princeton
University, the University of Southern California and the University of Michigan have granted the Company a worldwide exclusive
license, with rights to sublicense, to make, have made, use, lease and/or sell products and to practice processes based on patent
applications and issued patents arising out of work performed under the 2006 Research Agreement. The financial terms of the 1997
Amended License Agreement were not impacted by this amendment.
On October 9, 1997, the Company, Princeton University and the University of Southern California entered into an Amended
License Agreement (as amended, the 1997 Amended License Agreement) under which Princeton University and the University of
Southern California granted the Company worldwide, exclusive license rights, with rights to sublicense, to make, have made, use, lease
and/or sell products and to practice processes based on patent applications and issued patents arising out of work performed by Princeton
University and the University of Southern California under the 1997 Research Agreement. Under this 1997 Amended License
Agreement, the Company is required to pay Princeton University royalties for licensed products sold by the Company or its
sublicensees. For licensed products sold by the Company, the Company is required to pay Princeton University 3% of the net sales price
of these products. (cid:41)(cid:82)(cid:85)(cid:3) (cid:79)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:72)(cid:71)(cid:3) (cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3) (cid:86)(cid:82)(cid:79)(cid:71)(cid:3) (cid:69)(cid:92)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:86)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:72)(cid:72)(cid:86)(cid:15)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3) (cid:76)(cid:86)(cid:3) (cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3) (cid:87)(cid:82)(cid:3) (cid:83)(cid:68)(cid:92)(cid:3) (cid:51)(cid:85)(cid:76)(cid:81)(cid:70)(cid:72)(cid:87)(cid:82)(cid:81)(cid:3) (cid:22)% of the
revenues received by the Company from these sublicensees. These royalty rates are subject to renegotiation for products not reasonably
conceivable as arising out of the 1997 Research Agreement if Princeton University reasonably determines that the royalty rates payable
with respect to these products are not fair and competitive.
y
F-21
The Company is obligated, under the 1997 Amended License Agreement, to pay to Princeton University minimum annual
royalties. The minimum royalty payment is $100,000 per year. The Company recorded royalty expense in connection with this
agreement of $7.0 million, $9.7 million, and $5.8 million for the years ended December 31, 2018, 2017, and 2016, respectively.
The Company also is required, under the 1997 Amended License Agreement, to use commercially reasonable efforts to bring the
licensed OLED technology to market. However, this requirement is deemed satisfied if the Company invests a minimum of $800,000
per year in research, development, commercialization or patenting efforts respecting the patent rights licensed to the Company.
11. EQUITY AND CASH COMPENSATION UNDER THE PPG AGREEMENTS:
On September 22, 2011, the Company entered into an Amended and Restated OLED Materials Supply and Service Agreement
with PPG (the New OLED Materials Agreement), which replaced the original OLED Materials Agreement with PPG effective as of
October 1, 2011. The term of the New OLED Materials Agreement ran through December 31, 2015 and shall be automatically renewed
for additional one year terms, unless terminated by the Company by providing prior notice of one year or terminated by PPG by providing
prior notice of two years. The agreement was automatically renewed through December 31, 2019. The New OLED Materials Agreement
contains provisions that are substantially similar to those of the original OLED Materials Agreement. Under the New OLED Materials
Agreement, PPG continues to assist the Company in developing its proprietary OLED materials and supplying the Company with those
materials for evaluation purposes and for resale to its customers.
Under the New OLED Materials Agreement, the Company compensates PPG on a cost-plus basis for the services provided during
each calendar quarter. The Company is required to pay for some of these services in all cash. Up to 50% of the remaining services are
(cid:83)(cid:68)(cid:92)(cid:68)(cid:69)(cid:79)(cid:72)(cid:15)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:86)(cid:82)(cid:79)(cid:72)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:85)(cid:72)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:82)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:15)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:83)(cid:68)(cid:92)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:17) The
actual number of shares of common stock issuable to PPG is determined based (cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:70)(cid:79)(cid:82)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)
stock during a specified number of days prior to the end of each calendar half-year period ending on March 31 and September 30. If,
however, this average closing price is less than $20.00, the Company is required to compensate PPG in cash. No shares were issued for
services to PPG for the years ended December 31, 2018, 2017 and 2016.
The Company is also required to reimburse PPG for raw materials used for research and development. The Company records the
purchases of these raw materials as a current asset until such materials are used for research and development efforts.
The Company recorded research and development expense of $771,000, $1.7 million and $2.3 million for the years ended
December 31, 2018, 2017 and 2016, respectively, in relation to the cash portion of the reimbursement of expenses and work performed
by PPG, excluding amounts paid for commercial chemicals.
12. SHAREHOLDERS' EQUITY:
Preferred Stock
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:36)(cid:85)(cid:87)(cid:76)(cid:70)(cid:79)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:44)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)authorize it to issue up to 5,000,000 shares of preferred stock with designations, rights
and preferences determined from time-to-(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:17)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:85)(cid:71)(cid:76)(cid:81)(cid:74)(cid:79)(cid:92)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)
is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights
(cid:86)(cid:88)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:82)(cid:86)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78).
In 1995, the Company issued 200,000 shares of Series A Nonconvertible Preferred Stock (Series A) to American Biomimetics
Corporation (ABC) pursuant to a certain Technology Transfer Agreement between the Company and ABC. The Series A shares have a
liquidation value of $7.50 per share. Series A shareholders, as a single class, have the right to elect two (cid:80)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)
Board of Directors. This right has never been exercised. Holders of the Series A shares are entitled to one vote per share on matters
which shareholders are generally entitled to vote. The Series A shareholders are not entitled to any dividends.
As of December 31, 2018, the Company had issued 200,000 shares of preferred stock, all of which were outstanding.
Common Stock
(cid:50)(cid:81)(cid:3)(cid:45)(cid:88)(cid:81)(cid:72)(cid:3)(cid:21)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:3)(cid:68)(cid:80)(cid:72)(cid:81)(cid:71)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:36)(cid:80)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:53)(cid:72)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:36)(cid:85)(cid:87)(cid:76)cles of
(cid:44)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:81)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:88)(cid:87)(cid:75)(cid:82)(cid:85)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3) (cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:20)(cid:19)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19)(cid:3)(cid:87)(cid:82)(cid:3)(cid:21)(cid:19)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)
amendment was filed with the Pennsylvania Department of State, and became effective on July 17, 2018.
As of December 31, 2018, the Company had issued 48,681,524 shares of common stock, of which 47,319,887 were outstanding.
During the year ended December 31, 2018, the Company repurchased 3,774 shares of common stock, now held as treasury stock, for an
aggregate purchase price of $477,000.
F-22
Scientific Advisory Board and Employee Awards
During the year ended December 31, 2018 and 2017, the Company granted a total of 2,456 and 5,590 shares, respectively, of fully
vested common stock to employees and non-employee members of the Scientific Advisory Board for services performed in 2017 and
2016, respectively. The fair value of the shares issued to members of the Scientific Advisory Board was $300,000 for both years ended
December 31, 2018 and 2017. No fully vested common stock was issued to employees during 2018 and the fair value of the shares
issued to employees during 2017 was $165,000. In connection with the issuance of these employee grants during 2017, 605 shares, with
fair value of $55,000, were withheld in satisfaction of employee tax withholding obligations.
Dividends
During the year ended December 31, 2018, the Company declared and paid cash dividends of $0.24 per common share, or $11.3
(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:17)
On February 21, 2019(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:37)(cid:82)(cid:68)(cid:85)d of Directors declared a first quarter dividend of $0.10 per share of common stock.
Payment of the dividend will be made on March 29, 2019 to shareholders of record at the close of business on March 15, 2019.
13. ACCUMULATED OTHER COMPREHENSIVE LOSS:
Amounts related to the changes in accumulated other comprehensive loss were as follows (in thousands):
Unrealized
gain (loss) on
g
available-for-
sale-securities
Net unrealized
on
g
gain (loss)
retirement plan (2)(cid:3)
Changeg in cumulative
foreigng currencyy
translation adjustment
Total
Affected line items in the
consolidated statements of
operations
y
Balance January 1, 2016,
net of tax
Other comprehensive loss before
p
reclassification
$
(111) $
(9,708) $
(cid:178)(cid:178) $
(9,819)
(135)
(1,731)
(65 )
(1,931)
Reclassification to net income (1)
Change during period
Balance December 31 2016,
net of tax
Other comprehensive gain (loss)
before reclassification
(cid:178)(cid:178)
(135)
1,084
(647)
(cid:178)(cid:178)
(65 )
1,084
(847)
(246) )
(10,355) )
(65 ) )
(10,666) )
(12)
(2,184)
28
(2,168)
Reclassification to net income (1)
Change during period
Balance December 31, 2017,
net of tax
Other comprehensive gain (loss)
)
g
p
before reclassification
(
(cid:178)(cid:178)
(12)
1,370
(814)
(cid:178)(cid:178)
28
1,370
(798)
(258)
(11,169)
(37 )
(11,464)
268
(6,690)
(9)
(6,431)
Reclassification to net income (1)
Change during period
Balance December 31, 2018,
net of tax
(cid:178)(cid:178)
268
1,661
(5,029)
(cid:178)(cid:178)
(9)
1,661
(4,770)
$
10 $
(16,198) $
(46 ) $
(16,234)
Selling, general
g g
and administrative,
research and development
cost of material sales
p
and
Selling, general
g g
and administrative,
research and development
cost of material sales
p
and
Selling, general
g g
and administrative,
research and development
cost of material sales
p
and
(1)
(2)
The Company reclassified amortization of plan amendment cost, prior service cost, and actuarial loss for its retirement plan from accumulated
other comprehensive loss to net income of $1.7 million, $1.4 million and $1.1 million for the years ended December 31, 2018, 2017 and 2016,
respectively.
Refer to Note 15: Employee Retirement Plans
F-23
14.
STOCK-BASED COMPENSATION:
Equity Compensation Plan
In 1995, the Board of Directors of the Company adopted a stock option plan, which was most recently amended and restated in
2014 and is now called the Equity Compensation Plan. The Equity Compensation Plan provides for the granting of incentive and
nonqualified stock options, shares of common stock, stock appreciation rights and performance units to employees, directors and
consultants of the Company. Stock options are exercisable over periods determined by the Compensation Committee, but for no longer
than 10 years from the grant date. Through December 31, 2018(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:81)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)
shares reserved for issuance under the Equity Compensation Plan to 10,500,000, and have extended the term of the plan through 2024.
As of December 31, 2018, there were 2,403,523 shares that remained available to be granted under the Equity Compensation Plan.
(cid:80)
Stock Options
p
The following table summarizes the stock option activity during the year ended December 31, 2018 for all the grants under the
Equity Compensation Plan (in thousands, except share and per share data):
Outstanding at January 1, 2018
Granted
Exercised
Forfeited/ Expired
Cancelled
Outstanding at December 31, 2018
Vested and expected to vest
Exercisable at December 31, 2018
Options
g
Weighted
Averageg
Exercise
Price
500 $
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
500
500
500 $
10.04
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
10.04
10.04
10.04
No stock options were granted during the years ended December 31, 2018, 2017 or 2016.
A summary of stock options outstanding and exercisable by price range at December 31, 2018 is as follows (in thousands, except
share and per share data):
$10.04
Exercise Price
p
Number of
Options
Outstanding atg
December 31,
2018
Outstanding and Exercisable
Weighted
g
Averageg
Remainingg
Contractual
Life (Years)
Weighted
g
Averageg
Exercise
Price
Aggregate
gg g
Intrinsic
Value (A)
500
0.5 $
10.04 $
42
(A) (cid:55)(cid:75)(cid:72)(cid:3)(cid:71)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:69)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:82)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:72)(cid:91)(cid:72)(cid:85)(cid:70)(cid:76)(cid:86)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)
(cid:78)
(cid:72)(cid:3)(cid:70)(cid:79)(cid:82)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:68)(cid:87)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)8.
The total intrinsic value of stock options exercised during the years ended December 31, 2018, 2017 and 2016 was none, $146,000
and $507,000, respectively. There was no compensation expense recognized for the years ended December 31, 2018, 2017 and 2016.
During the years ended December 31, 2018, 2017 and 2016, no shares of common stock were tendered to net share settle the
exercise of options.
F-24
Stock Awards
(cid:55)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:86)(cid:88)(cid:80)(cid:80)(cid:68)(cid:85)(cid:76)(cid:93)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:92)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:88)(cid:81)(cid:76)(cid:87)(cid:3)(cid:11)(cid:179)(cid:53)(cid:54)(cid:56)(cid:180)(cid:12)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:29)
Unvested, January 1, 2018
Granted
Vested
Forfeited
Unvested, December 31, 2018
Number of
Shares
110,683 $
51,968
(69,670 )
(600)
92,381 $
Weighted-
Average
Grant-Date
Fair Value
88.91
115.48
97.14
103.09
97.56
The weighted average grant-date fair value of RSU awards granted was $115.48, $116.58 and $53.85 during the years ended
December 31, 2018, 2017 and 2016, respectively. The fair value as of the respective vesting dates of RSUs was $8.1 million, $8.3
million and $5.4 million for 2018, 2017 and 2016, respectively.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:86)(cid:88)(cid:80)(cid:80)(cid:68)(cid:85)(cid:76)(cid:93)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:92)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:68)(cid:90)(cid:68)(cid:85)(cid:71)(cid:3)(cid:11)(cid:179)(cid:53)(cid:54)(cid:36)(cid:180)(cid:12)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:29)
Unvested, January 1, 2018
Granted
Vested
Unvested, December 31, 2018
Number of
Shares
579,937 $
2,456
(172,444)
409,949 $
Weighted-
Average
Grant-Date
Fair Value
46.72
122.15
47.75
46.74
The weighted average grant-date fair value of RSA awards granted was $122.15, $83.25 and $65.37 during the years ended
December 31, 2018, 2017 and 2016, respectively. The fair value as of the respective vesting dates of RSAs was $17.7 million, $14.8
million and $8.6 million for 2018, 2017 and 2016, respectively.
Restricted Stock Awards and Units
The Company has issued restricted stock awards and units to employees and non-employees with vesting terms of one to six
mm
years. (cid:55)(cid:75)(cid:72)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:72)(cid:84)(cid:88)(cid:68)(cid:79)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:74)(cid:85)(cid:68)(cid:81)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:74)(cid:85)(cid:68)(cid:81)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)
s
and equal to the market price at the end of the reporting period for unvested non-employee awards or upon the date of vesting for vested
non-employee awards. Expense for restricted stock awards and units is amortized ratably over the vesting period for the awards issued
to employees and using a graded vesting method for the awards issued to non-employees.
ff
(cid:87)
For the years ended December 31, 2018, 2017 and 2016, the Company recorded, as compensation charges related to restricted
stock awards and units issued to employees and non-employees, selling, general and administrative expense of $7.6 million, $8.5 million
and $6.6 million, manufacturing expense of $758,000, $443,000 and $1.1 million and research and development expense of $2.0 million,
$1.6 million and $1.7 million, respectively.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:80)(cid:68)(cid:77)(cid:82)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:68)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)units that vested in 2018, 2017 and 2016 were net-share settled such
(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:75)(cid:72)(cid:79)(cid:71)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:89)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:86)(cid:182)(cid:3)(cid:80)(cid:76)(cid:81)(cid:76)(cid:80)(cid:88)(cid:80)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:88)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:83)(cid:83)(cid:79)(cid:76)(cid:70)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)me and
other employment taxes, and remitted the cash to the appropriate tax authorities. The total shares withheld were approximately 86,679,
89,661 and 84,135 for 2018, 2017 and 2016, respectively, and were based on the value of the restricted vesting dates as determined by
(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:70)(cid:79)(cid:82)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3) (cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:17)(cid:3)(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:86)(cid:182)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:68)(cid:91)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:88)(cid:87)(cid:75)(cid:82)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:90)(cid:72)(cid:85)(cid:72)(cid:3) (cid:7)9.2 million, $7.8
million and $4.5 million in 2018, 2017 and 2016, respectively, and are reflected as a financing activity within the consolidated statements
of cash flows.
For the years ended December 31, 2018, 2017 and 2016, the Company recorded as compensation charges related to all restricted
stock units to non-employee members of the Scientific Advisory Board whose unvested shares are marked to market each reporting
period, research and development expense of $64,000, $976,000 and $242,000, respectively.
F-25
Board of Directors Compensation
The Company has granted restricted stock units to non-employee members of the Board of Directors with vesting terms of
approximately one year. The (cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:72)(cid:84)(cid:88)(cid:68)(cid:79)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:74)(cid:85)(cid:68)(cid:81)(cid:87)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)
stock units are issued and expense is recognized ratably over the vesting period. For the years ended December 31, 2018, 2017 and
2016, the Company recorded compensation charges for services performed related to all restricted stock units granted to non-employee
members of the Board of Directors, selling and administrative expense of $4.3 million, $1.6 m
illion and $1.5 million, respectively.
x
Restricted stock issued to non-employee members of the Board of Directors during 2018, 2017 and 2016 was 25,000, 27,500 and 30,000
shares, respectively.
(cid:81)
As of December 31, 2018, the total unrecognized cost related to RSUs and RSAs was $19.4 million, which the Company expects
to recognize over a weighted average period of 1.84 years.
Performance Unit Awards
f
(cid:55)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:86)(cid:88)(cid:80)(cid:80)(cid:68)(cid:85)(cid:76)(cid:93)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:92)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:88)(cid:81)(cid:76)(cid:87)(cid:3)(cid:68)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:11)(cid:179)(cid:51)(cid:54)(cid:56)(cid:180)(cid:12)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:29)
Unvested, January 1, 2018
Granted
Vested
Unvested, December 31, 2018
Number of
Shares
Weighted-
Average
Grant-Date
Fair Value
73,315 $
40,601
(61,186 )
52,730 $
62.36
119.62
45.19
86.43
During the years ended December 31, 2018, 2017 and 2016, respectively, the Company granted 40,601, 24,664 and 25,045
performance units, of which 6,022, 7,817 and 12,520 are subject to performance-based vesting requirements and 6,025, 7,821 and 12,525
are subject to market-based vesting requirements, and will vest over the terms described below. During the years ended December 31,
2018 and 2017, there were also 28,554 and 9,026 incremental performance-based shares that vested resulting from an increased vesting
factor based on Company performance. The weighted average grant date fair value of the performance unit awards granted was $119.62,
$105.65 and $58.46 during the years ended December 31, 2018, 2017 and 2016(cid:15)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)
stock on date of grant for the units with performance-based vesting and a Monte-Carlo simulation for the units with market-based
vesting.
Each performance unit award is subject to both a performance-vesting requirement (either performance-based or market-based)
and a service-vesting requirement. The performance-based vesting requirement is tied to the Company's cumulative revenue growth
compared to the cumulative revenue growth of companies comprising the Nasdaq Electronics Components Index, as measured over a
specific performance period. The market-based vesting requirement is tied to the Company's total shareholder return relative to the total
shareholder return of companies comprising the Nasdaq Electronics Components Index, as measured over a specific performance period.
The maximum number of performance units that may vest based on performance is two times the shares granted. Further, if the
Company's total shareholder return is negative, the performance units may not vest at all.
For the years ended December 31, 2018, 2017 and 2016, the Company recorded, as compensation charges related to all
performance stock units, selling, general and administrative expense of $1.3 million, $1.2 million and $1.3 million, manufacturing
expense of $141,000, $119,000 and $133,000 and research and development expenses of $330,000, $276,000 and $356,000,
respectively. In connection with the vesting of performance units during the year ended December 31, 2018, 25,208 shares with an
aggregate fair value of $2.9 million were withheld in satisfaction of employee tax withholding obligations. During the year ended
December 31, 2017, 19,217 shares with an aggregate fair value of $1.6 million were withheld in satisfaction of employee tax withholding
obligations.
t
As of December 31, 2018, the total unrecognized compensation cost related to PSUs was $1.4 million, which the Company expects
t
to recognize over a weighted average period of 1.56.
Employee Stock Purchase Plan
On April 7, 2009, the Board of Directors of the Company adopted an Employee Stock Purchase Plan (ESPP). The ESPP was
(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3) (cid:69)(cid:92)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:69)(cid:72)(cid:70)(cid:68)(cid:80)(cid:72)(cid:3) (cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3) (cid:82)(cid:81)(cid:3) (cid:45)(cid:88)(cid:81)(cid:72)(cid:3) (cid:21)(cid:24)(cid:15)(cid:3) (cid:21)(cid:19)(cid:19)(cid:28)(cid:17) The Company has reserved 1,000,000 shares of
common stock for issuance under the ESPP. Unless terminated sooner by the Board of Directors, the ESPP will expire when all reserved
shares have been issued.
F-26
Eligible employees may elect to contribute to the ESPP through payroll deductions during consecutive three-month purchase
periods, the first of which began on July 1, 2009. Each employee who elects to participate will be deemed to have been granted an option
(cid:87)(cid:82)(cid:3)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:76)(cid:85)(cid:86)(cid:87)(cid:3)(cid:71)(cid:68)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:17) Unless the employee opts out during the
purchase period, the option will automatically be exercised on the last day of the period, which is the purchase date, based on the
(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:182)(cid:86)(cid:3)(cid:68)(cid:70)(cid:70)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:40)(cid:54)(cid:51)(cid:51)(cid:17) The purchase price will equal 85% of the lesser of the closing price per share of
common stock on the first day of the period or the last business day of the period.
Employees may allocate up to 10% of their base compensation to purchase shares of common stock under the ESPP; however,
each employee may purchase no more than 12,500 shares on a given purchase date, and no employee may purchase more than $25,000
of common stock under the ESPP during a given calendar year.
For the years ended December 31, 2018, 2017 and 2016, the Company issued 10,303, 9,730 and 9,386 shares, respectively, of its
common stock under the ESPP, resulting in proceeds of $798,000, $734,000 and $439,000, respectively. For the years ended December
31, 2018, 2017 and 2016, the Company recorded charges of $82,000, $69,000 and $45,000, respectively, to selling, general and
administrative expense, $81,000, $46,000, $15,000, respectively, to manufacturing expense and $130,000, $94,000 and $67,000,
respectively, to research and development expense, related to ESPP equal to the amount of the discount and the value of the look-back
feature.
15. EMPLOYEE RETIREMENT PLANS:
Defined Contribution Plan
The Company maintains the Universal Display Corporation 401(k) Plan (the Plan) in accordance with the provisions of Section
401(k) of the Internal Revenue Code (the Code). The Plan covers substantially all full-time employees of the Company. Participants
may contribute up to 90% of their total compensation to the Plan, not to exceed the limit as defined in the Code. Since January 1, 2017,
once an employee is eligible to participate in the Plan, the Company will make a non-elective contribution equal to 3% o(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:182)(cid:86)(cid:3)
total compensation. For the years ended December 31, 2018, 2017 and 2016, the Company contributed $1.2 million, $601,000 and
$459,000, respectively, to the Plan.
Defined Benefit Plan
On March 18, 2010, the Compensation Committee and the Board of Directors of the Company approved and adopted the Universal
Display Corporation Supplemental Executive Retirement Plan (SERP), effective as of April 1, 2010. On March 3, 2015, the
Compensation Committee and the Board of Directors amended the SERP to include salary and bonus as part of the plan. Prior to this
amendment, the SERP benefit did not take into account any bonuses. The purpose of the SERP, which is unfunded, is to provide certain
(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)key employees with supplemental pension benefits following a cessation of their employment. As of December 31,
2018 there were seven participants in the SERP.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:54)(cid:40)(cid:53)(cid:51)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:3)(cid:83)(cid:72)(cid:85)(cid:70)(cid:72)(cid:81)(cid:87)(cid:68)(cid:74)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:68)(cid:85)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:70)(cid:68)(cid:86)(cid:72)(cid:86)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)rticipant's average
annual bonus for the most recent three fiscal years ending prior to the participant's date of termination of employment with the Company
for the life of the participant. For this purpose, annual base salary means 12 times the highest monthly base salary paid or payable to the
participant during the 24-(cid:80)(cid:82)(cid:81)(cid:87)(cid:75)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3)(cid:76)(cid:80)(cid:80)(cid:72)(cid:71)(cid:76)(cid:68)(cid:87)(cid:72)(cid:79)(cid:92)(cid:3)(cid:83)(cid:85)(cid:72)(cid:70)(cid:72)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:82)(cid:85)(cid:15)(cid:3)(cid:76)(cid:73)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
date of a change in control of the Company.
Under the SERP, if a participant resigns or is terminated without cause at or after age 65 and with at least 20 years of service, he
(cid:82)(cid:85)(cid:3)(cid:86)(cid:75)(cid:72)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:69)(cid:72)(cid:3)(cid:72)(cid:79)(cid:76)(cid:74)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:3)(cid:54)(cid:40)(cid:53)(cid:51)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:3)(cid:83)(cid:72)(cid:85)(cid:70)(cid:72)(cid:81)(cid:87)(cid:68)(cid:74)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:68)ry and bonus
for the life of the participant. This percentage is 50%, 25% or 15%, depending on (cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:3)(cid:70)(cid:79)(cid:68)(cid:86)(cid:86).
If a participant resigns at or after age 65 and with at least 15 years of service, he or she will be eligible to receive a prorated SERP
benefit. If a participant is terminated without cause or on account of a disability after at least 15 years of service, he or she will be eligible
(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:3)(cid:83)(cid:85)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:40)(cid:53)(cid:51)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:3)(cid:85)(cid:72)(cid:74)(cid:68)(cid:85)(cid:71)(cid:79)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:74)(cid:72)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:72)(cid:76)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:70)(cid:68)(cid:86)(cid:72)(cid:3)(cid:90)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:69)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86) number of
years of service (up to 20), divided by 20. In the event a participant is terminated for cause, his or her SERP benefit and any future
benefit payments are subject to immediate forfeiture.
The SERP benefit is payable in installments over 10 years, beginn(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:68)(cid:87)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:74)(cid:72)(cid:3)(cid:25)(cid:24)(cid:3)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:86)(cid:72)(cid:83)(cid:68)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)
from service. Payments are based on a present value calculation of the benefit amount for the actuarial remaining life expectancy of the
participant. This calculation is made as of the date benefit payments are to begin (later of age 65 or separation from service). If the
(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:3)(cid:71)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3)(cid:85)(cid:72)(cid:68)(cid:70)(cid:75)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:74)(cid:72)(cid:3)(cid:25)(cid:24)(cid:15)(cid:3)(cid:68)(cid:81)(cid:92)(cid:3)(cid:73)(cid:88)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:85)(cid:72)(cid:80)(cid:68)(cid:76)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:80)(cid:68)(cid:71)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:70)(cid:76)(cid:68)(cid:85)(cid:92)(cid:3)(cid:82)(cid:85) estate. If the
participant dies before reaching age 65, the benefit is forfeited.
F-27
In the event of a change in control of the Company, each participant will become immediately vested in his or her SERP benefit.
(cid:56)(cid:81)(cid:79)(cid:72)(cid:86)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:68)(cid:79)(cid:85)(cid:72)(cid:68)(cid:71)(cid:92)(cid:3)(cid:73)(cid:88)(cid:79)(cid:79)(cid:92)(cid:3)(cid:89)(cid:72)(cid:86)(cid:87)(cid:72)(cid:71)(cid:15)(cid:3)(cid:76)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:79)(cid:72)(cid:86)(cid:86)(cid:3)(cid:87)han 20 years of service at the time of the change in
control, he or she will receive a prorated benefit based on his or her number of years of service (up to 20), divided by 20. If
f
the change
(cid:76)(cid:81)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:73)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:3)(cid:179)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:72)(cid:89)(cid:72)(cid:81)(cid:87)(cid:180)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:83)(cid:88)(cid:85)(cid:83)(cid:82)(cid:86)(cid:72)(cid:86) of Section 409A of the Internal Revenue Code, then each participant
(including former employees who are entitled to SERP benefits) will receive a lump sum cash payment equal to the present value of the
benefit immediately upon the change in control.
r
Certa(cid:76)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:72)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:82)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:71)(cid:72)(cid:86)(cid:76)(cid:74)(cid:81)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:3)(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:40)(cid:53)(cid:51)(cid:17)(cid:3)(cid:44)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:76)(cid:74)(cid:81)(cid:3)(cid:82)(cid:85)
are terminated without cause after 20 years of service, or at or after age 65 and with
be eligible to
h
at least 15 years of service, they will
receive a SERP benefit. If they are terminated without cause or on account of a disability, they will be eligible to receive a prorated
(cid:54)(cid:40)(cid:53)(cid:51)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:3)(cid:85)(cid:72)(cid:74)(cid:68)(cid:85)(cid:71)(cid:79)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:74)(cid:72)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:3)(cid:90)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:69)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:81)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)service (up to 20), divided
by 20.
f
The SERP benefit for special participants is based on 50% of their annual base salary and bonus for their life and the life of their
surviving spouse, if any. Payments are based on a present value calculation of the benefit amount for the actuarial remaining life
expectancies of the participant and their surviving spouse, if any. If they die before reaching age 65, the benefit is not forfeited if the
surviving spouse, if any, lives until the participant would have reached age 65. If their spouse also dies before the participant would
have reached age 65, the benefit is forfeited.
a
ff
The Company records amounts relating to the SERP based on calculations that incorporate various actuarial and other
assumptions, including discount rates, rate of compensation increases, retirement dates, and life expectancies. The net periodic costs are
recognized as employees render the services necessary to earn the SERP benefits.
n
In connection with the initiation and subsequent amendments of the SERP, the Company recorded cost related to prior service of
$20.4 million as accumulated other comprehensive loss as of December 31, 2018. The prior service cost is being amortized as a
component of net periodic pension cost over the average of the remaining service period of the employees expected to receive benefits
under the plan. The prior service cost expected to be amortized for the year ending December 31, 2019 is $3.2 million.
r
(cid:44)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:86)(cid:3)(cid:11)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:82)(cid:88)sands):
Change in benefit obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial loss
Plan amendment
Benefit obligation, end of year
Fair value of plan assets
Unfunded status of the plan, end of year
Current liability
Noncurrent liability
Year Ended December 31,
2018
2017
$
$
$
33,176 $
1,301
1,047
8,531
(cid:178)
44,055
(cid:178)
44,055 $
(cid:178)
44,055 $
27,563
1,214
1,013
2,952
434
33,176
(cid:178)
33,176
(cid:178)
33,176
The accumulated benefit obligation for the plan was approximately $41.3 million and $30.4 million as of December 31, 2018 and
2017, respectively.
The components of net periodic pension cost were as follows (in thousands):
Service cost
Interest cost
Amortization of prior service cost
Amortization of loss
Total net periodic benefit cost
2018
Year Ended December 31,
2017
2016
$
$
1,301 $
1,047
1,683
435
4,466 $
1,214 $
1,013
1,667
457
4,351 $
1,415
875
1,660
15
3,965
F-28
(cid:55)(cid:75)(cid:72)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:73)(cid:76)(cid:86)(cid:70)(cid:68)(cid:79)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:72)(cid:81)(cid:71)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:76)(cid:70)(cid:3)(cid:83)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:80)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)e
prior year end measurement date.
Assumptions used to determine the year end benefit obligation were as follows:
Discount rate
Rate of compensation increases
Assumptions used to determine the net periodic pension cost were as follows:
Discount rate
Rate of compensation increases
Year Ended December 31,
2018
2017
3.82%
3.50%
3.22%
3.50%
2018
Year Ended December 31,
2017
2016
3.22%
3.50%
3.41%
3.50%
3.57%
3.50%
Actuarial gains and losses are amortized from accumulated other comprehensive loss into net periodic pension cost over future
years based upon the average remaining service period of active plan participants, when the accumulation of such gains or losses exceeds
10% of the year end benefit obligation. The cost or benefit of plan changes that increase or decrease benefits for prior employee service
(cid:11)(cid:83)(cid:85)(cid:76)(cid:82)(cid:85)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:82)(cid:85)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:12)(cid:3)(cid:76)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:3)(cid:86)(cid:87)(cid:85)(cid:68)(cid:76)(cid:74)(cid:75)(cid:87)-line basis over the average remaining service
period of active plan participants.
The estimated amounts to be amortized from accumulated other comprehensive loss into the net periodic pension cost in 2019 are
as follows (in thousands):
Amortization of prior service cost
Amortization of loss
Total
$
$
1,595
1,642
3,237
Benefit payments, which reflect estimated future service, are currently expected to be paid as follows (in thousands):
Year
2019
2020
2021
2022
2023
2024-2028
Thereafter
$
Projected
Benefits
(cid:178)(cid:178)
3,551
3,640
4,122
4,427
25,977
23,647
16. COMMITMENTS AND CONTINGENCIES:
Commitments
Under the 2006 Research Agreement with USC, the Company is obligated to make certain payments to USC based on work
performed by USC under that agreement, and by Michigan under its subcontractor agreement with USC. See Note 10 for further
r
explanation.
Under the terms of the 1997 Amended License Agreement, the Company is required to make minimum royalty payments to
Princeton. See Note 10 for further explanation.
The Company has agreements with six executive officers and one employee which provide for certain cash and other benefits
upon termination of employment of the officer in connection with a change in control o(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:17)(cid:3)(cid:44)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:182)(cid:86)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)
is terminated in connection with the change in control, the executive is entitled to a lump-sum cash payment equal to two times the sum
of the average annual base salary and bonus of the officer and immediate vesting of all stock options and other equity awards that may
be outstanding at the date of the change in control, among other items.
t
F-29
In order to manage manufacturing lead times and help ensure adequate material supply, the Company entered into a New OLED
Materials Agreement (see Note 11) that allows PPG to procure and produce inventory based upon criteria as defined by the Company.
These purchase commitments consist of firm, noncancelable and unconditional commitments. In certain instances, this agreement allows
(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:86)(cid:70)(cid:75)(cid:72)(cid:71)(cid:88)(cid:79)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:81)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:82)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:73)(cid:76)(cid:85)(cid:80)(cid:3)(cid:82)(cid:85)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:69)eing
placed. As of December 31, 2018, 2017 and 2016, the Company had purchase commitments for inventory of $15.9 million, $14.2 million
and $5.0 million, respectively.
The Company had lease obligations of $10.9 million for each of the years ended December 31, 2018, 2017 and 2016 .
Patent Related Challenges and Oppositions
Each major jurisdiction in the world that issues patents provides both third parties and applicants an opportunity to seek a further
review of an issued patent. The process for requesting and considering such reviews is specific to the jurisdiction that issued the patent
in question, and generally does not provide for claims of monetary damages or a review of specific claims of infringement. The
conclusions made by the reviewing administrative bodies tend to be appealable and generally are limited in scope and applicability to
the specific claims and jurisdiction in question.
The Company believes that opposition proceedings are frequently commenced in the ordinary course of business by third parties
who may believe that one or more claims in a patent do not comply with the technical or legal requirements of the specific jurisdiction
in which the patent was issued. The Company views these proceedings as reflective of its goal of obtaining the broadest legally
permissible patent coverage permitted in each jurisdiction. Once a proceeding is initiated, as a general matter, the issued patent continues
(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:86)(cid:88)(cid:80)(cid:72)(cid:71)(cid:3)(cid:89)(cid:68)(cid:79)(cid:76)(cid:71)(cid:3)(cid:88)(cid:81)(cid:87)(cid:76)(cid:79)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:77)(cid:88)(cid:85)(cid:76)(cid:86)(cid:71)(cid:76)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:68)(cid:83)(cid:83)(cid:79)(cid:76)(cid:70)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:71)(cid:80)(cid:76)(cid:81)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:69)(cid:82)(cid:71)(cid:92)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:86)(cid:3)(cid:68)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:79)(cid:3)(cid:81)(cid:82)(cid:81)-appealable decision. Depending on the
jurisdiction, the outcome of these proceedings could include affirmation, denial or modification of some or all of the originally issued
claims. The Company believes that as OLED technology becomes more established and its patent portfolio increases in size, so will the
number of these proceedings.
Below are summaries of certain active proceedings that have been commenced against issued patents that are either exclusively
licensed to the Company or which are now assigned to the Company. The Company does not believe that the confirmation, loss or
(cid:80)(cid:82)(cid:71)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:81)(cid:92)(cid:3)(cid:76)(cid:81)(cid:71)(cid:76)(cid:89)idual claim or set of claims that are the subject of the following legal proceedings
(cid:90)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3) (cid:75)(cid:68)(cid:89)(cid:72)(cid:3) (cid:68)(cid:3) (cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3) (cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:3) (cid:82)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:86)(cid:3) (cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3) (cid:82)(cid:85)(cid:3) (cid:79)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3) (cid:82)(cid:85)(cid:3) (cid:82)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)l
statements, including its consolidated statements of income, as a whole. However, as noted within the descriptions, some of the following
(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:72)(cid:71)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:76)(cid:81)(cid:89)(cid:82)(cid:79)(cid:89)(cid:72)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:71)(cid:3)(cid:83)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:68)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3)(cid:83)(cid:75)(cid:82)(cid:86)(cid:83)(cid:75)(cid:82)(cid:85)(cid:72)(cid:86)(cid:70)(cid:72)(cid:81)(cid:87)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)
intends to vigorously defend against (cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:82)(cid:83)(cid:76)(cid:81)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:86)(cid:72)(cid:72)(cid:78)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:3)(cid:82)(cid:85)(cid:3)(cid:85)(cid:72)(cid:71)(cid:88)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:70)(cid:82)(cid:83)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:71)(cid:3)
(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:71)(cid:76)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:86)(cid:17)(cid:3)(cid:44)(cid:81)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:70)(cid:76)(cid:85)(cid:70)(cid:88)(cid:80)(cid:86)(cid:87)(cid:68)(cid:81)(cid:70)(cid:72)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:3)(cid:83)(cid:72)rmitted,
the Company may also utilize the proceedings to request modification of the claims to better distinguish the patented invention from
any newly identified prior art and/or improve the claim scope of the patent relative to commercially important categories of the invention.
The (cid:72)(cid:81)(cid:87)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:68)(cid:81)(cid:3)(cid:5)(cid:13)(cid:5)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:56)(cid:81)(cid:76)(cid:89)(cid:72)(cid:85)(cid:86)(cid:68)(cid:79)(cid:51)(cid:43)(cid:50)(cid:47)(cid:40)(cid:39)(cid:138)(cid:3)(cid:83)(cid:75)(cid:82)(cid:86)(cid:83)(cid:75)(cid:82)(cid:85)(cid:72)(cid:86)(cid:70)(cid:72)(cid:81)(cid:87)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:15)(cid:3)(cid:86)(cid:82)(cid:80)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)
be commercialized by the Company.
Opposition to European Patent No. 1390962
On November 16, 2011, Osram AG and BASF SE each filed a Notice of Opposition to European Patent No. 1390962 (the EP '962
(cid:83)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:12)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:90)(cid:75)(cid:76)(cid:87)(cid:72)(cid:3)(cid:83)(cid:75)(cid:82)(cid:86)(cid:83)(cid:75)(cid:82)(cid:85)(cid:72)(cid:86)(cid:70)(cid:72)(cid:81)(cid:87)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:40)(cid:51)(cid:3)(cid:10)(cid:28)(cid:25)(cid:21)(cid:3)(cid:83)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:41)(cid:72)(cid:69)(cid:85)(cid:88)(cid:68)(cid:85)y
16, 2011, is a European counterpart patent to U.S. patents 7,009,338 and 7,285,907. They are exclusively licensed to the Company by
Princeton, and the Company is required to pay all legal costs and fees associated with this proceeding.
The EPO combined the oppositions into a single opposition proceeding, and a hearing on this matter was held in December 2015,
wherein the EPO Opposition Division revoked the patent claims for alleged insufficiencies under EPC Article 83. The Company believes
the EPO's decision relating to the original claims is erroneous, and has appealed the decision. Subsequent to the filing of the appeal,
BASF withdrew its opposition to the patent. The patent, as originally granted by the EPO, is deemed valid during the pendency of the
appeals process.
At this time, based on its current knowledge, the Company believes that the patent being challenged should be declared valid and
that all or a significant portion of the Company's claims should be upheld. However, the Company cannot make any assurances of this
result.
Opposition to European Patent No. 1933395*
On February 24 and 27, 2012, Sumitomo, Merck Patent GmbH and BASF SE filed oppositions to the Company's European Patent
(cid:49)(cid:82)(cid:17)(cid:3)(cid:20)(cid:28)(cid:22)(cid:22)(cid:22)(cid:28)(cid:24)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:40)(cid:51)(cid:3)(cid:10)(cid:22)(cid:28)(cid:24)(cid:3)(cid:83)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:12)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:40)(cid:51)(cid:3)(cid:181)(cid:22)(cid:28)(cid:24)(cid:3)(cid:83)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:72)(cid:85)(cid:83)(cid:68)(cid:85)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:40)(cid:51)(cid:3)(cid:181)(cid:25)(cid:22)(cid:26)(cid:3)(cid:83)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:15)(cid:3)(cid:87)(cid:82)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:3)(cid:51)(cid:68)(cid:87)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:26)(cid:15)001,536;
6,902,830; and 6,830,828, and to JP patents 4358168 and 4357781. This patent is exclusively licensed to the Company by Princeton,
and the Company is required to pay all legal costs and fees associated with this proceeding.
F-30
At an Oral Hearing on October 14, 2013, the EPO panel issued a decision that affirmed the basic invention and broad patent
coverage in the EP '395 patent, but narrowed the scope of the original claims.
On February 26, 2014, the Company appealed the ruling to reinstate a broader set of claims. The patent, as originally granted by
the EPO, is deemed to be valid during the pendency of an appeals process. Two of the three opponents also filed their own appeals of
the ruling. In January 2015, Sumitomo withdrew its opposition of the '395 patent, and the EPO accepted the withdrawal notice. The
appeal proceedings were held in the second quarter of 2016. As a result of the proceedings, the board concluded the oral proceedings
and proposed to reinstate a broader set of claims pending the resolution of a remaining question of the applicable law, a question that
the board has deferred to the Enlarged Board of Appeals for review. In December 2017, the Enlarged Board of Appeals issued a written
(cid:82)(cid:83)(cid:76)(cid:81)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:92)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:68)(cid:86)(cid:82)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)regarding the question of law. The written opinion should be
used as guidance by the EPO opposition panel when the oral proceedings are rescheduled. The originally-granted claims remain in force
during the pendency of this process.
n
In addition to the above proceedings and now concluded proceedings which have been referenced in prior filings, from time to
time, the Company may have other proceedings that are pending which relate to patents the Company acquired as part of the Fujifilm
patent or BASF OLED patent acquisitions or which relate to technologies
that are not currently widely utilized in the marketplace.
ff
r
17. CONCENTRATION OF RISK:
Revenues and accounts receivable from the Company's largest customers for the years ended December 31, were as follows (in
thousands):
Customer
A
B
C
% of Total
Revenue
37%
33%
10%
2018
Accounts
Receivable
$
14,419
11,990
9,071
% of Total
Revenue
62%
24%
6%
2017
Accounts
Receivable
$
19,588
17,348
10,632
% of Total
Revenue
63%
28%
4%
2016
$
Accounts
Receivable
12,050
9,128
1,427
Revenues from outside of North America represented approximately 94%, 97%, and 98% of the consolidated revenue for the
years ended December 31, 2018, 2017 and 2016, respectively. Revenues by geographic area are as follows (in thousands):
Country
South Korea
China
Japan
Other non-U.S. locations
Total non-U.S. locations
United States
Total revenue
2018
Year Ended December 31,
2017
2016
$
$
171,915 $
51,931
6,823
2,967
233,636
13,778
247,414 $
289,418 $
24,892
8,542
2,438
325,290
10,339
335,629 $
181,771
7,180
4,310
1,849
195,110
3,776
198,886
The Company attributes revenue to different geographic areas on the basis of the location of the customer.
Long-lived assets (net), by geographic area are as follows (in thousands):
United States
Other
Total long-lived assets
2018
2017
$
$
64,560 $
5,179
69,739 $
53,991
2,459
56,450
Substantially all chemical materials were purchased from one supplier. See Note 11.
F-31
18.
INCOME TAXES:
The components of income before income taxes are as follows (in thousands):
United States
Foreign
Income before income tax
2018
Year ended December 31,
2017
2016
$
$
13,565
$
50,746
$
64,311
100,260
$
49,277
149,537 $
69,595
(997)
68,598
The components of the income tax expense are as follows (in thousands):
Current income tax expense:
Federal
State
Foreign
Deferred income tax (expense) benefit:
Federal
State
Foreign
Income tax expense
2018
Year ended December 31,
2017
2016
$
$
(9,097)
$
(511)
(8,677)
(18,285)
12,622
611
(419)
12,814
$
(5,471)
(5,817) $
(54)
(15,406)
(21,277)
(24,425)
(23)
73
(24,375)
(45,652) $
(4,485)
(47)
(12,902)
(17,434)
(2,683)
(503)
92
(3,094)
(20,528)
Reconciliation of the statutory U.S. federal tax rate to the Company's effective tax rate is as follows:
Statutory U.S. federal income tax rate
State income taxes, net of federal benefit
Effect of foreign operations
Accruals and reserves
Nondeductible employee compensation
Research tax credits
Change in valuation allowance
Stock based compensation
U.S. Tax Cuts and Jobs Act
U.S. International Tax (Sub F, GILTI, FDII)
Other
Effective tax rate
2018
Year ended December 31,
2017
2016
21.0 %
(0.2)%
(4.7)%
0.0 %
1.7 %
(2.7)%
0.0 %
(2.7)%
(3.5)%
(1.2)%
0.8 %
8.5 %
35.0%
0.0%
(7.1)%
0.1%
1.5%
(0.7)%
(4.1)%
(1.9)%
7.7%
0.0%
0.0%
30.5%
35.0 %
0.5 %
0.9 %
3.2 %
1.5 %
(1.3)%
(9.7)%
0.0 %
0.0 %
0.0 %
(0.2)%
29.9 %
rr
The following table summarizes Company tax loss and tax credit carry forwards for tax return pur
y
poses at December 31, 2018 (in
thousands):
Tax credit carry forwards:
State research tax credits
Total credit carry forwards
Related Tax
Deduction
Tax Benefit
Expiration Date
n/a
n/a
$
$
2,893 2026 to 2033
2,893
F-32
Significant components of the Company's net deferred tax assets and liabilities are as follows (in thousands):
Deferred tax asset:
Capitalized technology license
Capitalized research expenditures
Accruals and reserves
Retirement plan
Deferred revenue
Tax credit carry forwards
Stock-based compensation
Other
Valuation allowance
Deferred tax assets
Deferred tax liability:
Accruals and reserves
Deferred tax liabilities
Net deferred tax assets
December 31,
2018
2017
$
$
553
$
4,710
2,890
9,570
12,028
2,895
1,701
47
34,394
(2,893)
31,501
(7,124)
(7,124)
$
24,377
804
3,719
962
7,125
206
21,562
1,819
59
36,256
(2,460)
33,796
(6,774)
(6,774)
27,022
n or
t
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portio
all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on the Company's ability
to generate future taxable income to obtain benefit from the reversal of temporary differences, net operating loss carryforwards and tax
credits. As part of its assessment, management considers the scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies. At this time there is no evidence to release the valuation allowance that relates to the New Jersey
research and development credit.
On December 27, 2018 the Korean Supreme Court, citing prior cases, held that the applicable law and interpretation of the Korea-
US Tax Treaty were clear that only royalties paid with respect to Korean registered patents are Korean source income and subject to
Korean withholding tax. Based on this recent decision, the Company has decided to immediately litigate the Korean withholding on the
2018 royalty payments while continuing the US- Korean Mutual Agreement Procedure (MAP) for the years 2011 through 2017.
UDC has engaged a leading Korean law firm to litigate the 2018 withholding and has been advised that there is a more-likely-
than-not chance of success. As a result, UDC has recorded a long-term asset of $13.6 million representing the allocation of withholding
f
to non-Korean patents and a tax expense of $1.3 million representing an allocation of
withholding to Korean registered patents.
With respect to the Korean withholding for the years 2011 through 2017, UDI has decided to continue the MAP which was
accepted by the Korean National Tax Service on September 15, 2017. The Company believes that it is more-likely-than-not that a
favorable settlement will be reached resulting in a reduction of the Korean withholding taxes previously withheld since 2011. A
long-
term receivable of $36.9 million for estimated refunds due from the Korean government, a long-term payable of $16.2 million for
estimated amounts due to the U.S. Federal government based on amendment of prior year U.S. tax returns for the lower withholding
amounts, and a reduction of deferred tax assets for foreign tax credits and R&D credits of $20.7 million has been recorded on thet
December 31, 2018 balance sheet for this matter.
f
On October 30, 2018, the Korean National Tax Service (KNTS) concluded a tax audit with LG Display (LGD) that included the
licensing and royalty payments made to UDI during the years 2015 through 2017. KNTS questioned whether UDI was the beneficial
owner of these payments and assessed UDI a charge of $13.2 million for withholding and interest for the three-year period. UDI has
engaged a leading Korean law firm which believes it is more-likely-than-not that UDI has beneficial ownership of the underlining
intellectual property. As a result, a petition has been filed with the Tax Tribunal. Based on this authority, UDI has paid the assessment
which is recorded as a long-term asset as of December 31, 2018. The above estimates may change in the future and ultimately upon
settlement of these uncertain tax positions.
For the years ended December 31, 2018, 2017 and 2016, the Company has incurred Korean withholding tax of $14.9 million,
e interpretation of the Korean (cid:177) U. S. tax
$17.6 million and $14.4 million, respectively; which is currently being appealed based on th
treaty and recent Korean Supreme Court decisions.
(cid:177)
y
F-33
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:21)(cid:19)(cid:20)(cid:22)(cid:3)(cid:73)(cid:72)(cid:71)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:85)(cid:72)(cid:87)(cid:88)(cid:85)(cid:81)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:54)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:81)(cid:82)(cid:3)(cid:70)(cid:75)(cid:68)nge; the years 2014 to
2016 are open and subject to examination. The state and foreign tax returns are open for a period of generally three to four years.
19. REVENUE RECOGNITION:
(cid:36)(cid:71)(cid:82)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:36)(cid:54)(cid:38)(cid:3)(cid:55)(cid:82)(cid:83)(cid:76)(cid:70)(cid:3)(cid:25)(cid:19)(cid:25)(cid:15)(cid:3)(cid:179)(cid:53)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:38)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:180)
The Compa(cid:81)(cid:92)(cid:3)(cid:68)(cid:71)(cid:82)(cid:83)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:3)(cid:69)(cid:72)(cid:74)(cid:76)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:80)(cid:82)(cid:71)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:85)(cid:72)(cid:87)(cid:85)(cid:82)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:180)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:68)(cid:70)(cid:75)(cid:15)(cid:3)(cid:80)(cid:72)(cid:68)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:3)
was applied only to the most current period presented in the financial statements, with a cumulative adjustment to retained earnings.
Under this transition method, the Company elected to apply ASC Topic 606 only to contracts that were not complete at the initial
adoption date.
The new standard impacts how the Company recognizes revenue on its commercial license and material supply agreements with
customers. Previously, the Company recognized license fees on a straight-line basis or as received from the customer, and royal
ty
t
revenue one quarter in arrears based on sales information received from its customers typically received after disclosing (cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:182)(cid:86)
results. Under the new standard, total contract consideration is estimated and recognized over the contract term based on material units
sold at its estimated per unit fee. Total contract consideration includes fixed amounts designated in contracts with customers as license
fees as well as estimates of material fees and royalties to be earned.
Adoption of the new standard resulted in an increase in deferred revenue of $21.3 million offset by a reduction of retained earnings
of $17.1 million, net of tax of $3.9 million, and unbilled receivables of $0.3 million as of January 1, 2018. The impact of the new
standard to revenue for the year ended December 31, 2018 was a decrease of $78.9 million from the amount that would have been
reported under t(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:82)(cid:85)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:86)(cid:3)(cid:86)(cid:88)(cid:80)(cid:80)(cid:68)(cid:85)(cid:76)(cid:93)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:71)(cid:82)(cid:83)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:55)(cid:82)(cid:83)(cid:76)(cid:70)(cid:3)(cid:25)(cid:19)(cid:25)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)
consolidated financial statements for the year ended December 31, 2018.
r
i. Consolidated Balance Sheet (in thousands)
December 31, 2018
As reported
Adjustment
Balances without
adoption of
Topic 606
Impact of changes in accounting policies
ASSETS
Other assets (current and non-current)
Deferred income taxes
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred revenue (current and non-current)
Retained earnings
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
ii. Consolidated Statements of Income (in thousands)
$
70,892 $
24,377
933,424
(cid:178)(cid:178) $
(11,153)
(11,153)
70,892
13,224
922,271
122,567
129,552
933,424
(99,885)
88,732
(11,153)
22,682
218,284
922,271
Year Ended December 31, 2018
As reported
Adjustment
Balances without
adoption of
Topic 606
Impact of changes in accounting policies
REVENUE
Gross margin
OPERATING INCOME
INCOME BEFORE INCOME TAXES
INCOME TAX EXPENSE
NET INCOME
$
247,414 $
193,873
56,735
64,311
(5,471)
58,840
78,885 $
78,885
78,885
78,885
(7,252)
71,633
326,299
272,758
135,620
143,196
(12,723)
130,473
F-34
iii. Consolidated Statement of Cash Flows (in thousands)
Year Ended December 31, 2018
As reported
Adjustment
Balances without
adoption of
Topic 606
Net income
Amortization of deferred revenue and recognition of unbilled receivables
Deferred income tax expense
Other assets (current and non-current)
CASH FLOW FROM OPERATING ACTIVITIES
$
58,840 $
(68,905)
(12,814)
(59,062)
121,796
71,633 $
(81,991)
10,358
(cid:178)(cid:178)
(cid:178)(cid:178)
130,473
(150,896)
(2,456)
(59,062)
121,796
Impact of changes in accounting policies
For the years ended December 31, 2018, 2017 and 2016, the Company recorded 95%, 97% and 98% of its revenue from sales of
materials and 5%, 3% and 2% from the providing of services through Adesis, respectively.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:50)(cid:47)(cid:40)(cid:39)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:89)(cid:72)(cid:92)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:79)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)
and material supply agreements. The Company believes that the licenses and materials sold under these combined agreements are n
ot
distinct from each other for financial reporting purposes and as such, are accounted for as a single performance obligation. Accordingly,
total contract consideration, including material, license and royalty fees, is estimated and recognized over the contract term based on
material units sold at the estimated per unit fee over the life of the contract.
d
Various estimates are relied upon to recognize revenue. The Company estimates total material units to be purchased by its
customers over the contract term based on historical trends, industry estimates and its forecast process. Additionally, management
estimates the total sales-based royalties based on the estimated net sales revenue of its customers over the contract term. Management
is using the expected value method to estimate the material per unit fee.
Contract Balances
The following table provides information about assets and liabilities associated with our contracts from customers (in thousands):
Accounts receivable
Short-term unbilled receivables
Long-term unbilled receivables
Short-term deferred revenue
Long-term deferred revenue
$
As of December 31, 2018
43,129
1,020
(cid:178)(cid:178)
80,782
41,785
Short-term and long-term unbilled receivables are classified as other current assets and other assets, respectively, on the
Consolidated Balance Sheet. The deferred revenue balance at December 31, 2018 will be recognized as materials are shipped to
customers over the remaining contract periods. The significant customer contracts (individually representing greater than 10% of
revenue) expire in 2022. As of December 31, 2018, the Company had $13.1 million of backlog associated with committed purchase
orders from its customers for phosphorescent emitter material. These orders are anticipated to be fulfilled within the next 90 days.
Significant changes in the unbilled receivables and deferred liabilities balances during the period are as follows (in thousands):
Year Ended December 31, 2018
Unbilled Receivables
Increase (Decrease)
Deferred Revenue
(Increase) Decrease
Balance at December 31, 2017
Adoption of revenue standard on January 1, 2018
Adjusted balance on January 1, 2018
Revenue recognized that was previously included in deferred revenue
Increases due to cash received
Cumulative catch-up adjustment arising from changes in estimates of
transaction price
Unbilled receivables recognized
Transferred to receivables from unbilled receivables
Net change
Balance at December 31, 2018
$
$
70
$
307
377
(cid:178)(cid:178)
(cid:178)(cid:178)
(cid:178)(cid:178)
2,024
(1,381)
643
1,020 $
(38,883)
(21,307)
(60,190)
64,562
(130,639)
3,700
(cid:178)(cid:178)
(cid:178)(cid:178)
(62,377)
(122,567)
F-35
20. NET INCOME PER COMMON SHARE:
The Company computes earnings per share in accordance with ASC Topic 260, Earnings per Share ("ASC 260"), which requires
earnings per share for each class of stock to be calculated using the two-class method. The two-class method is an allocation of income
between the holders of common stock and the Company's participating security holders. Under the two-class method, income for the
reporting period is allocated between common shareholders and other security holders based on their respective participation rights in
undistributed income. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are
participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method.
Basic net income per common share is computed by dividing net income allocated to common shareholders by the weighted-
average number of shares of common stock outstanding for the period excluding unvested restricted stock units and performance units.
Net income allocated to the holders of the Company's unvested restricted stock awards is calculated based on the shareholders
proportionate share of weighted average shares of common stock outstanding on an if-converted basis.
For purposes of determining diluted net income per common share, basic net income per share is further adjusted to include the
effect of potential dilutive common shares outstanding, including stock options, restricted stock units and performance units, and the
impact of shares to be issued under the ESPP.
The following table is a reconciliation of net income and the shares used in calculating basic and diluted net income per common
share for the year ended December 31, 2018, 2017 and 2016 (in thousands, except share and per share data):
Numerator:
Net income
Adjustment for Basic EPS:
Earnings allocated to unvested shareholders
Adjusted net income
Denominator:
Weighted average common shares outstanding (cid:177) Basic
Effect of dilutive shares:
(cid:177)
Common stock equivalents arising from stock
options and ESPP
Restricted stock awards and units and performance
units
Weighted average common shares
outstanding (cid:177) Diluted
Net income per common share:
(cid:177)
Basic
Diluted
2018
Year Ended December 31,
2017
2015
$
$
$
58,840
103,885
48,070
(690)
58,150
(1,638)
102,247
(734)
47,336
46,849,588 46,725,289 46,408,460
1,956
2,611
5,398
45,222
77,294
122,122
46,896,766 46,805,194 46,535,980
$
$
1.24 $
1.24 $
2.19 $
2.18 $
1.02
1.02
For the year ended December 31, 2018, 2017, and 2016, the combined effects of unvested restricted stock awards, restricted stock
units, performance unit awards and stock options of 4,414, none and 2,981, respectively, were excluded from the calculation of diluted
EPS as their impact would have been antidilutive.
21. QUARTERLY SUPPLEMENTAL FINANCIAL DATA (UNAUDITED):
The following tables present certain unaudited consolidated quarterly financial information for each of the eight quarters in the
two-year period ended December 31, 2018. In the opinion of Company management, this quarterly information has been prepared on
the same basis as the consolidated financial statements and includes all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the information for the periods presented. The results of operations for any quarter are not necessarily
indicative of the results for the full year or for any future period.
F-36
Presented below is a summary of the unaudited quarterly financial information for the year ended December 31, 2018 (in
thousands, except per share data):
Revenue
Net income
Net income per common share:
Basic
Diluted
March 31,
2018
June 30,
2018
p
September 30,
2018
December 31,
2018
Three Months Ended
$
$
$
$
43,572
5,959
0.13
0.13
$
$
$
$
56,149 $
10,814 $
77,550 $
22,818 $
70,143
19,249
0.23 $
0.23 $
0.48 $
0.48 $
0.40
0.40
Total
247,414
58,840
1.24
1.24
$
$
$
$
Presented below is a summary of the unaudited quarterly financial information for the year ended December 31, 2017 (in
thousands, except per share data):
Revenue
Net income
Net income per common share:
Basic
Diluted
March 31,
2017
June 30,
2017 (1)
p
September 30,
2017
December 31,
2017 (1) (2)
Three Months Ended
$
$
$
$
55,566 $
10,365 $
102,513 $
47,187 $
61,683
13,520
0.22 $
0.22 $
0.99 $
0.99 $
0.28
0.28
$
$
$
$
115,867
32,813
0.70
0.69
$
$
$
$
Total
335,629
103,885
2.19
2.18
(1)
(2)
Prior to the adoption of ASC 606 on January 1, 2018, the Company recorded as revenue the receipt of the semi-annual license fee
payment of $45.0 million from SDC in the second and fourth quarters.
The enactment of the Tax Cuts and Jobs Act in December 2017 resulted in a one-time charge of $11.5 million in the fourth quarter.
Per share amounts for each quarter have been calculated separately. Accordingly, quarterly amounts may not add to annual
amounts.
22.
SUBSEQUENT EVENTS:
In January 2019, the Company closed on the purchase of an additional property in Ewing, New Jersey, adjacent to its corporate
headquarters, as part of its plans to expand operations. The Company is also planning to close on the purchase of additional property by
the end of the first quarter of 2019. When the purchases are complete, the new facilities will add approximately 88,000 square feet at a
cost of approximately $8.0 million. The new facilities will initially allow for expansion in the areas of research and development and
manufacturing logistics.
F-37
CORPORATE HEADQUARTERS
Princeton Crossroads Corporate Center
375 Phillips Boulevard
Ewing, NJ 08618
phone: 609.671.0980
fax: 609.671.0995
www.oled.com
CORPORATE COUNSEL
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
INDEPENDENT REGISTERED PUBLIC ACCOUNTANT
KPMG LLP
1601 Market Street
Philadelphia, PA 19103
TRANSFER AGENT & REGISTRAR
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
INQUIRIES
Inquiries concerning stock transfers, change of address and any
other account ques(cid:415)ons should be directed to:
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
phone: 800-937-5449 (toll-free), 718.921.8200 (local)
email: info@as(cid:414)inancial.com
All other investor inquiries should be directed to:
Universal Display Corpora(cid:415)on
Investor Rela(cid:415)ons Department
375 Phillips Boulevard
Ewing, NJ 08618
phone: 609-964-5123
email: investor@oled.com