The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited Consolidated Financial Statements and related notes above.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This discussion and analysis contains some "forward-looking statements." Forward-looking statements concern possible or assumed future results of operations, including descriptions of our business strategies and customer relationships. These statements often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "seek," "will," "may" or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors that we believe are appropriate in these circumstances.
As you read and consider this discussion and analysis, you should not place
undue reliance on any forward-looking statements. You should understand that
these statements involve substantial risk and uncertainty and are not guarantees
of future performance or results. They depend on many factors that are discussed
further in the sections entitled (Risk Factors) in our Annual Report on Form
10-K for the year ended
All forward-looking statements speak only as of the date of this report or the documents incorporated by reference, as the case may be. We do not undertake any duty to update any of these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
OVERVIEW
We are a leader in the research, development and commercialization of organic light emitting diode (OLED) technologies and materials for use in display applications, such as mobile phones, televisions, wearables, tablets, portable media devices, notebook computers, personal computers, and automotive applications, as well as specialty and general lighting products. Since 1994, we have been engaged and expect to continue to be primarily engaged, in funding and performing research and development activities relating to OLED technologies and materials, and commercializing these technologies and materials. We derive our revenue primarily from the following:
• sales of OLED materials for evaluation, development and commercial manufacturing; • intellectual property and technology licensing; • technology development and support, including third-party collaboration efforts and providing support to third parties for commercialization of their OLED products; and • contract research services in the areas of chemical materials synthesis research, development and commercialization for non-OLED applications.
Material sales relate to our sale of OLED materials for incorporation into our customers' commercial OLED products or for their OLED development and evaluation activities. Material sales are generally 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, we entered into a commercial patent license agreement with
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installments over the agreement term of five years. The agreement conveys to SDC the non-exclusive right to use certain of our intellectual property assets for a limited period of time that is less than the estimated life of the assets.
At the same time that we entered into the current commercial license agreement with SDC, we also entered into a material purchase agreement with SDC. Under the material purchase agreement, SDC agrees to purchase from us a minimum amount of phosphorescent emitter materials for use in the manufacture of licensed products. This minimum commitment is subject to SDC's requirements for phosphorescent emitter materials and our ability to meet these requirements over the term of the supplemental agreement.
In 2015, we entered into an OLED patent license agreement and an OLED commercial
supply agreement with LG Display Co., Ltd. (LG Display), which were effective as
of
In 2021, we entered into amendments of the OLED patent license agreement and the
OLED commercial supply agreement with LG Display, which were effective as of
In 2016, we entered into long-term, multi-year OLED patent license and material
purchase agreements with
In 2017, we entered into long-term, multi-year agreements with BOE Technology Group Co., Ltd. (BOE). Under these agreements, we have granted BOE non-exclusive license rights under various patents owned or controlled by us to manufacture and sell OLED display products. We also supply phosphorescent OLED materials to BOE for use in its licensed products.
In 2018, we entered into long-term, multi-year OLED patent license and material
purchase agreements with Visionox Technology, Inc. (Visionox). Under the license
agreement, we have granted certain of Visionox's affiliates a non-exclusive
license rights under various patents owned or controlled by us to manufacture
and sell OLED display products. The license agreement calls for license fees and
running royalties on licensed products. Additionally, we supply phosphorescent
OLED materials to Visionox for use in its licensed products. On
In 2016, we acquired
In
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In
We also generate technology development and support revenue earned from development and technology evaluation agreements and commercialization assistance fees, along with, to a minimal extent, government contracts. Relating to our government contracts, we may receive reimbursements by government entities for all or a portion of the research and development costs we incur. Revenues are recognized as services are performed, proportionally as research and development costs are incurred, or as defined milestones are achieved.
We anticipate fluctuations in our annual and quarterly results of operations due to uncertainty regarding, among other factors:
• the timing, cost and volume of sales of our OLED materials; • the timing of our receipt of license fees and royalties, as well as fees for future technology development and evaluation; • the timing and magnitude of expenditures we may incur in connection with our ongoing research and development and patent-related activities; and • the timing and financial consequences of our formation of new business relationships and alliances.
Further, we continue to monitor the impact of COVID-19 on our business. Our
global operations, and the global nature of our customer base and their
respective customers, expose us to risks associated with public health crises,
such as pandemics and epidemics. The ongoing COVID-19 pandemic had a substantial
impact on our operations and financial results during the year ended
At this time, the crisis has not had a significant impact on our ability to fulfill shipments of commercial materials as required by our customers. However, the sustainability of maintaining our testing and manufacturing operations at levels needed to meet fluctuating customer demand is uncertain and is dependent upon the rapidly evolving situations being encountered by our logistics and supply chain partners. In an effort to protect the health and safety of our employees, we have taken proactive measures to adopt social distancing policies at all of our locations, employing nurses to check everyone entering our buildings, working from home, reducing the number of people in our sites at any one time, and suspending employee travel.
While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business operations and results of operations, including our revenues, net income and cash flows, will continue to be adversely impacted for at least the first half of 2021, including as a result of:
• temporary closure of electronics and other retail stores through which our customers sell the products for which they use our technology and materials; • consumer confidence and consumer spending habits, including spending for the products that our customers sell and negative trends in consumer purchasing patterns due to consumers' disposable income, credit availability and debt levels; • possible disruption to the supply chain caused by distribution and other logistical issues, which may impact suppliers of our raw materials as well as our ability to ship our materials to customers on a timely basis; • decreased productivity due to travel ban, work-from-home policies or shelter-in-place orders; • a slowdown in theU.S. economy, and uncertain global economic outlook or a credit crisis; and • uncertain trade restrictions amongst jurisdictions seeking to manage their respective exposure to risks, including the COVID-19 pandemic.
We are focused on navigating these recent challenges presented by COVID-19 through preserving our liquidity and managing our cash flow. We continue to actively monitor the COVID-19 situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business,
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including the effects on our customers, employees, and on our financial results for the remainder of the 2021 fiscal year.
Comparison of the Three Months Ended
Three Months Ended March 31, Increase 2021 2020 (Decrease) REVENUE: Material sales$ 79,808 $ 66,575 $ 13,233 Royalty and license fees 50,886 43,078 7,808 Contract research services 3,306 2,624 682 Total revenue 134,000 112,277 21,723 COST OF SALES 23,298 22,459 839 Gross margin 110,702 89,818 20,884 OPERATING EXPENSES: Research and development 23,305 19,497 3,808 Selling, general and administrative 16,404 15,403 1,001 Amortization of acquired technology and other intangible assets 5,488 5,490 (2 ) Patent costs 1,835 1,638 197 Royalty and license expense 112 3,284 (3,172 ) Total operating expenses 47,144 45,312 1,832 OPERATING INCOME 63,558 44,506 19,052 Interest income, net 133 2,147 (2,014 ) Other income, net 59 202 (143 ) Interest and other income, net 192 2,349 (2,157 ) INCOME BEFORE INCOME TAXES 63,750 46,855 16,895 INCOME TAX EXPENSE (12,063 ) (8,700 ) (3,363 ) NET INCOME$ 51,687 $ 38,155 $ 13,532 Revenue
Our total material sales were
• Green emitter sales for the three months endedMarch 31, 2021 , which include our yellow-green emitters, were$60.5 million as compared to$52.6 million for the three months endedMarch 31, 2020 , with unit material volumes increasing by 11%. • Red emitter sales for the three months endedMarch 31, 2021 were$19.1 million as compared to$13.9 million for the three months endedMarch 31, 2020 , with unit material volumes increasing by 21%.
Revenue from royalty and license fees was
Contract research services revenue was
Cost of sales
Cost of sales for the three months ended
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products. As a result of the increase in revenue from material sales and royalty
and license fees, gross margin for the three months ended
Research and development
Research and development expenses increased to
Selling, general and administrative
Selling, general and administrative expenses increased to
Amortization of acquired technology and other intangible assets
Amortization of acquired technology and other intangible assets was
Patent costs
Patent costs increased to
Royalty and license expense
Royalty and license expense decreased to
Interest and other income, net
Interest income, net was
Income tax expense
We are subject to income taxes in both
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents and our
short-term investments. As of
Cash provided by operating activities for the three months ended
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to non-cash items including amortization of deferred revenue, amortization of
intangibles and stock-based compensation. Changes in our operating assets and
liabilities related to an increase in deferred revenue of
Cash provided by operating activities for the three months ended
Cash provided by investing activities was
Cash used in financing activities was
Working capital was
We anticipate, based on our internal forecasts and assumptions relating to our operations (including, among others, assumptions regarding our working capital requirements, the progress of our research and development efforts, the availability of sources of funding for our research and development work, and the timing and costs associated with the preparation, filing, prosecution, maintenance, defense and enforcement of our patents and patent applications), that we have sufficient cash, cash equivalents and short-term investments to meet our obligations for at least the next 12 months. However, the extent to which the COVID-19 pandemic and our precautionary measures in response thereto may impact our business and thus our liquidity will depend on future developments, which are highly uncertain and cannot be precisely estimated at this time.
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. It should be noted, however, that additional funding may be required in the future for research, development and commercialization of our OLED technologies and materials, to obtain, maintain and enforce patents respecting these technologies and materials, and for working capital and other purposes, the timing and amount of which are difficult to ascertain. There can be no assurance that additional funds will be available to us when needed, on commercially reasonable terms or at all, particularly in the current economic environment.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
is based on our Consolidated Financial Statements, which have been prepared in
accordance with
We believe that our accounting policies related to revenue recognition and
deferred revenue, inventories, and income taxes are our "critical accounting
policies" as contemplated by the
Refer to our Annual Report on Form 10-K for the year ended
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Contractual Obligations
Refer to our Annual Report on Form 10-K for the year ended
Off-Balance Sheet Arrangements
As of
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