16.	REVENUE RECOGNITION:

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

The Company adopted the standard beginning January 1, 2018 using the “modified retrospective” approach, meaning the standard 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 are 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 royalty revenue one quarter in arrears based on sales information received from its customers typically received after disclosing that quarter’s 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 $17.9 million, net of tax of $3.1 million, and unbilled receivables of $0.3 million as of January 1, 2018. The impact of the new standard to revenue for the three and nine months ended September 30, 2018 was a decrease of $14.1 million and $56.2 million, respectively, from the amount that would have been reported under the prior accounting standard. The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements for the three and nine months ended September 30, 2018.

i. Consolidated Balance Sheet (in thousands)

	Impact of changes in accounting policies
September 30, 2018	As reported		Adjustment			Balances without adoption of Topic 606
ASSETS
Other assets (current and non-current)	$	51,094	$	(2,049	)	$	49,045
Deferred income taxes		13,910		(13,640	)		270
TOTAL ASSETS		883,744		(15,689	)		868,055

LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred revenue (current and non-current)		109,827		(79,226	)		30,601
Retained earnings		112,337		63,537			175,874
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		883,744		(15,689	)		868,055

ii. Consolidated Statements of Income (in thousands)

	Impact of changes in accounting policies
Three Months Ended September 30, 2018	As reported			Adjustment			Balances without adoption of Topic 606
REVENUE	$	77,550		$	14,054		$	91,604
Gross margin		61,427			14,054			75,481
OPERATING INCOME		26,032			14,054			40,086
INCOME BEFORE INCOME TAXES		28,143			14,054			42,197
INCOME TAX EXPENSE		(5,325	)		(2,670	)		(7,995	)
NET INCOME		22,818			11,384			34,202

	Impact of changes in accounting policies
Nine Months Ended September 30, 2018	As reported			Adjustment			Balances without adoption of Topic 606
REVENUE	$	177,271		$	56,177		$	233,448
Gross margin		142,055			56,177			198,232
OPERATING INCOME		41,462			56,177			97,639
INCOME BEFORE INCOME TAXES		46,551			56,177			102,728
INCOME TAX EXPENSE		(6,960	)		(10,534	)		(17,494	)
NET INCOME		39,591			45,643			85,234

iii. Consolidated Statement of Cash Flows (in thousands)

	Impact of changes in accounting policies
Nine Months Ended September 30, 2018	As reported			Adjustment			Balances without adoption of Topic 606
Net income	$	39,591		$	45,643		$	85,234
Amortization of deferred revenue and recognition of unbilled receivables		(52,325	)		(61,332	)		(113,657	)
Deferred income tax expense		15,820			13,640			29,460
Other assets (current and non-current)		(37,885	)		2,049			(35,836	)
CASH FLOW FROM OPERATING ACTIVITIES		94,956			-			94,956

For both three month periods ended September 30, 2018 and 2017, the Company recorded 96% of its revenue from sales of materials and 4% from the providing of services through Adesis, respectively. For the nine months ended September 30, 2018 and 2017, the Company recorded 95% and 97% of its revenue from sales of materials and 5% and 3% from the providing of services through Adesis, respectively.

The rights and benefits to the Company’s OLED technology are conveyed to the customer through technology license agreements and material supply agreements. The Company believes that 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, 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.

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):

	As of September 30, 2018
Accounts receivable	$	43,207
Short-term unbilled receivables		1,621
Long-term unbilled receivables		778
Short-term deferred revenue		69,143
Long-term deferred revenue		40,684

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 September 30, 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 September 30, 2018, the Company had $5.9 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):

	Nine Months Ended September 30, 2018
	Unbilled Receivables Increase (Decrease)		Deferred Revenue (Increase) Decrease
Balance at December 31, 2017	$	70	$	(38,883	)
Adoption of revenue standard on January 1, 2018		307		(21,307	)
Adjusted balance on January 1, 2018		377		(60,190	)
Revenue recognized that was previously included in deferred revenue		-		46,016
Increases due to cash received		-		(99,940	)
Cumulative catch-up adjustment arising from changes in estimates of transaction price		-		4,287
Unbilled receivables recognized		2,022		-
Transferred to receivables from unbilled receivables		-		-
Net change		2,022		(49,637	)
Balance at September 30, 2018	$	2,399	$	(109,827	)