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 six months ended June 30, 2018 was a decrease of $17.5 million and $42.1 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 six months ended June 30, 2018.

i. Consolidated Balance Sheet (in thousands)

	Impact of changes in accounting policies
June 30, 2018	As reported		Adjustment			Balances without adoption of Topic 606
ASSETS
Other assets (current and non-current)	$	60,395	$	(2,246	)	$	58,149
Deferred income taxes		10,534		(10,970	)		(436	)
TOTAL ASSETS		833,249		(13,216	)		820,033

LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred revenue (current and non-current)		97,591		(65,368	)		32,223
Retained earnings		92,346		52,152			144,498
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		833,249		(13,216	)		820,033

ii. Consolidated Statements of Income (in thousands)

	Impact of changes in accounting policies
Three Months Ended June 30, 2018	As reported			Adjustment			Balances without adoption of Topic 606
REVENUE	$	56,149		$	17,470		$	73,619
Gross margin		44,514			17,470			61,984
OPERATING INCOME		10,911			17,470			28,381
INCOME BEFORE INCOME TAXES		12,665			17,470			30,135
INCOME TAX EXPENSE		(1,851	)		(3,180	)		(5,031	)
NET INCOME		10,814			14,290			25,104

	Impact of changes in accounting policies
Six Months Ended June 30, 2018	As reported			Adjustment			Balances without adoption of Topic 606
REVENUE	$	99,721		$	42,123		$	141,844
Gross margin		80,628			42,123			122,751
OPERATING INCOME		15,430			42,123			57,553
INCOME BEFORE INCOME TAXES		18,408			42,123			60,531
INCOME TAX EXPENSE		(1,635	)		(7,864	)		(9,499	)
NET INCOME		16,773			34,259			51,032

iii. Consolidated Statement of Cash Flows (in thousands)

	Impact of changes in accounting policies
Six Months Ended June 30, 2018	As reported			Adjustment			Balances without adoption of Topic 606
Net income	$	16,773		$	34,259		$	51,032
Amortization of deferred revenue and unbilled receivables recognized		(29,266	)		(47,475	)		(76,741	)
Deferred income tax expense		19,312			10,970			30,282
Other assets (current and non-current)		(28,633	)		2,246			(26,387	)
CASH FLOW FROM OPERATING ACTIVITIES		49,952			-			49,952

For the three months ended June 30, 2018 and 2017, the Company recorded 93% and 98% of its revenue from sales of materials and 7% and 2% from the providing of services through Adesis, respectively. For the six months ended June 30, 2018 and 2017, the Company recorded 94% and 98% of its revenue from sales of materials and 6% and 2% 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 June 30, 2018
Accounts receivable	$	35,583
Short-term unbilled receivables		1,047
Long-term unbilled receivables		1,571
Short-term deferred revenue		69,247
Long-term deferred revenue		28,344

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 June 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 June 30, 2018, the Company had $15.4 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):

	Six Months Ended June 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	—			22,669
Increases due to cash received	—			(64,423	)
Cumulative catch-up adjustment arising from changes in estimates of transaction price	—			4,353
Unbilled receivables recognized		2,241	—
Transferred to receivables from unbilled receivables	—		—
Net change		2,241		(37,401	)
Balance at June 30, 2018	$	2,618	$	(97,591	)