ITEM 2. 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 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 December 31, 2020, as supplemented by disclosures in Item 1A of Part II below. 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 in the 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 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 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, we are 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 our intellectual property assets for a limited period of time that is less than the estimated life of the assets.
26
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 January 1, 2015. The terms of the agreements were 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 our 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. We generate revenue under these agreements that are predominantly tied to LG Display’s sales of OLED licensed products. The OLED commercial supply agreement provides for the sales of materials for use by LG Display, which may include phosphorescent emitters and host materials.
In 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 January 1, 2021. The amended agreements included a term extension and are set to expire by the end of 2025.
In 2016, we entered into long-term, multi-year OLED patent license and material purchase agreements with Tianma Micro-electronics Co., Ltd. (Tianma). Under the license agreement, we have granted Tianma 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 Tianma’s sales of licensed products. Additionally, we supply phosphorescent OLED materials to Tianma for use in its licensed products. In 2021, we mutually agreed to extend the terms of both the patent license and material purchase agreements for an additional multi-year term.
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 April 22, 2021, we announced an extension of the Visionox agreement by entering into new five-year OLED material supply and license agreements with a new affiliate of Visionox, Visionox Hefei Technology Co. Ltd.
In 2019, we entered into an evaluation and commercial supply relationship with Wuhan China Star Optoelectronics Semiconductor Display Technology Co., Ltd. (CSOT). In 2020, we entered into long-term, multi-year agreements with CSOT. Under these agreements, we have granted CSOT 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 CSOT for use in its licensed products.
In 2016, we acquired Adesis, Inc. (Adesis) with operations in New Castle, Delaware. Adesis is a contract research organization (CRO) that provides support services to the OLED, pharma, biotech, catalysis and other industries. As of September 30, 2021, Adesis employed a team of 118 research scientists, chemists, engineers and laboratory technicians. Prior to our acquisition of Adesis in 2016, we utilized more than 50% of Adesis’ technology service and production output. We continue to utilize a significant portion of its technology research capacity for the benefit of our OLED technology development, and Adesis uses the remaining capacity to operate as a CRO in the above-mentioned industries by providing contract research services for non-OLED applications to those third-party customers. Contract research services revenue is earned by providing chemical materials synthesis research, development and commercialization for non-OLED applications on a contractual basis for those third-party customers.
In June 2020, a wholly-owned subsidiary, OVJP Corporation (OVJP Corp) was formed as a Delaware corporation. Based out of California, OVJP Corp was founded to advance the commercialization of our proprietary Organic Vapor Jet Printing (OVJP) technology. 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 believe the successful implementation of the
27
OVJP technology has the potential to increase the addressable market for large-size OLED panels while also serving another potential growth market for our proprietary phosphorescent organic light-emitting diode (PHOLED) materials and technologies.
In February 2021, we announced the establishment of a new manufacturing site in Shannon, Ireland and an agreement between UDC Ireland Limited and PPG for the production of our OLED materials. The new facility is expected to double our production capacity and allow for the diversification of our manufacturing base for phosphorescent emitters. We anticipate the facility to be operational by mid-year 2022.
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.
28
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 December 31, 2020 and continued to have an impact in the three and nine months ended September 30, 2021. We expect that as the pandemic continues to evolve, it may potentially have a further adverse impact on our results of operations due to uncertainties involving the continued disruption of the global economy, uncertainties associated with consumer demand for finished OLED goods, and the potential resulting impact on our customers and their demand for our phosphorescent emitters.
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 fourth quarter 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 the U.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, including the effects on our customers, employees, and on our financial results for the remainder of the 2021 fiscal year.
29
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2021 and 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Increase (Decrease)
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
Material sales
|
|
$
|
75,609
|
|
|
$
|
68,709
|
|
|
$
|
6,900
|
|
Royalty and license fees
|
|
|
63,939
|
|
|
|
44,550
|
|
|
|
19,389
|
|
Contract research services
|
|
|
4,070
|
|
|
|
3,820
|
|
|
|
250
|
|
Total revenue
|
|
|
143,618
|
|
|
|
117,079
|
|
|
|
26,539
|
|
COST OF SALES
|
|
|
31,481
|
|
|
|
23,378
|
|
|
|
8,103
|
|
Gross margin
|
|
|
112,137
|
|
|
|
93,701
|
|
|
|
18,436
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
25,327
|
|
|
|
20,814
|
|
|
|
4,513
|
|
Selling, general and administrative
|
|
|
20,960
|
|
|
|
13,579
|
|
|
|
7,381
|
|
Amortization of acquired technology and other intangible assets
|
|
|
5,505
|
|
|
|
5,494
|
|
|
|
11
|
|
Patent costs
|
|
|
2,359
|
|
|
|
2,095
|
|
|
|
264
|
|
Royalty and license expense
|
|
|
258
|
|
|
|
3,293
|
|
|
|
(3,035
|
)
|
Total operating expenses
|
|
|
54,409
|
|
|
|
45,275
|
|
|
|
9,134
|
|
OPERATING INCOME
|
|
|
57,728
|
|
|
|
48,426
|
|
|
|
9,302
|
|
Interest income, net
|
|
|
137
|
|
|
|
1,029
|
|
|
|
(892
|
)
|
Other (loss) income, net
|
|
|
(102
|
)
|
|
|
262
|
|
|
|
(364
|
)
|
Interest and other income, net
|
|
|
35
|
|
|
|
1,291
|
|
|
|
(1,256
|
)
|
INCOME BEFORE INCOME TAXES
|
|
|
57,763
|
|
|
|
49,717
|
|
|
|
8,046
|
|
INCOME TAX EXPENSE
|
|
|
(11,654
|
)
|
|
|
(9,217
|
)
|
|
|
(2,437
|
)
|
NET INCOME
|
|
$
|
46,109
|
|
|
$
|
40,500
|
|
|
$
|
5,609
|
|
Revenue
Our total material sales were $75.6 million for the three months ended September 30, 2021, as compared to $68.7 million for the three months ended September 30, 2020, an increase of 10% with a commensurate increase in unit material volume of 20%. The increase in material sales was due to strengthened demand for OLED products utilizing our emitter material.
Green emitter sales for the three months ended September 30, 2021, which include our yellow-green emitters, were $57.8 million as compared to $52.9 million for the three months ended September 30, 2020, with unit material volumes increasing by 22%.
Red emitter sales for the three months ended September 30, 2021 were $17.7 million as compared to $15.2 million for the three months ended September 30, 2020, with unit material volumes increasing by 11%.
Revenue from royalty and license fees was $63.9 million for the three months ended September 30, 2021 as compared to $44.6 million for the three months ended September 30, 2020, an increase of 44%. This increase was primarily due to an overall strengthening of our customers’ sales of royalty-bearing OLED licensed products. In addition, there was an increase in the cumulative catch-up adjustment arising from changes in estimates of transaction price, net arising from a reduction in the forecast of emitters to be procured over the contract life by one of our customers that resulted from a change in their near-term production needs, as well as improved forecasted royalty consideration resulting from higher levels of current and anticipated customer sales of OLED products.
Contract research services revenue was $4.1 million for the three months ended September 30, 2021 as compared to $3.8 million for the three months ended September 30, 2020, an increase of 7%. Revenue from contract research services consists of revenue earned by our subsidiary, Adesis, which provides support services to the pharma, biotech, catalysis and other industries on a contractual basis for those third-party customers.
Cost of sales
Cost of sales for the three months ended September 30, 2021 increased by $8.1 million as compared to the three months ended September 30, 2020, primarily due to an increase in the level of material sales. Included in the cost of sales for the three months ended September 30, 2021 and 2020 was an increase in inventory reserve of $1.0 million and $198,000, respectively, due to excess inventory levels in certain products. As a result of the increase in revenue from material sales and royalty and license fees, gross margin for the
30
three months ended September 30, 2021 increased by $23.8 million as compared to the three months ended September 30, 2020, with gross margin as a percentage of revenue decreasing to 78% from 80%. The decrease in gross margin as a percentage of revenue was primarily due to the increase in costs associated with the introduction of new red and green emitters to our customers.
Research and development
Research and development expenses increased to $25.3 million for the three months ended September 30, 2021, as compared to $20.8 million for the three months ended September 30, 2020. The increase in research and development expenses was primarily due to higher employee-related compensation expenses and operating costs, including those associated with OVJP technology development, increased contract research, and PPG development activity.
Selling, general and administrative
Selling, general and administrative expenses increased to $21.0 million for the three months ended September 30, 2021, as compared to $13.6 million for the three months ended September 30, 2020. The increase in selling, general and administrative expenses was primarily due to higher employee-related compensation expenses, increased pre-production costs associated with the new manufacturing facility in Shannon, Ireland, as well as an increase in depreciation expenses resulting from corporate expansion.
Amortization of acquired technology and other intangible assets
Amortization of acquired technology and other intangible assets was $5.5 million for both three-month periods ended September 30, 2021 and 2020.
Patent costs
Patent costs increased to $2.4 million for the three months ended September 30, 2021, as compared to $2.1 million for the three months ended September 30, 2020. The results in the current quarter reflected higher internal patent prosecution related costs.
Royalty and license expense
Royalty and license expense decreased to $258,000 for the three months ended September 30, 2021, as compared to $3.3 million for the three months ended September 30, 2020. 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 9 in Notes to the Consolidated Financial Statements for further discussion.
Interest and other (loss) income, net
Interest income, net was $137,000 for the three months ended September 30, 2021, as compared to $1.0 million for the three months ended September 30, 2020. The decrease in interest income, net was primarily due to a decrease in bond yields on available-for-sale investments held in the current year over bond yields on available-for-sale investments held in the comparable period in 2020. Other (loss) income, net primarily consisted of net exchange gains and losses on foreign currency transactions and rental income. We recorded other loss, net of $102,000 for the three months ended September 30, 2021 as compared to other income, net of $262,000 for the three months ended September 30, 2020.
Income tax expense
We are subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was an expense of 20.2% and 18.5% for the three months ended September 30, 2021 and 2020, respectively, and we recorded income tax expense of $11.7 million and $9.2 million, respectively, for those periods.
31
Comparison of the Nine Months Ended September 30, 2021 and 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Increase (Decrease)
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
Material sales
|
|
$
|
232,855
|
|
|
$
|
167,211
|
|
|
$
|
65,644
|
|
Royalty and license fees
|
|
|
163,037
|
|
|
|
110,008
|
|
|
|
53,029
|
|
Contract research services
|
|
|
11,386
|
|
|
|
10,105
|
|
|
|
1,281
|
|
Total revenue
|
|
|
407,278
|
|
|
|
287,324
|
|
|
|
119,954
|
|
COST OF SALES
|
|
|
82,748
|
|
|
|
58,480
|
|
|
|
24,268
|
|
Gross margin
|
|
|
324,530
|
|
|
|
228,844
|
|
|
|
95,686
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
72,733
|
|
|
|
61,708
|
|
|
|
11,025
|
|
Selling, general and administrative
|
|
|
57,603
|
|
|
|
45,129
|
|
|
|
12,474
|
|
Amortization of acquired technology and other intangible assets
|
|
|
16,490
|
|
|
|
16,474
|
|
|
|
16
|
|
Patent costs
|
|
|
6,003
|
|
|
|
5,591
|
|
|
|
412
|
|
Royalty and license expense
|
|
|
519
|
|
|
|
8,195
|
|
|
|
(7,676
|
)
|
Total operating expenses
|
|
|
153,348
|
|
|
|
137,097
|
|
|
|
16,251
|
|
OPERATING INCOME
|
|
|
171,182
|
|
|
|
91,747
|
|
|
|
79,435
|
|
Interest income, net
|
|
|
345
|
|
|
|
4,444
|
|
|
|
(4,099
|
)
|
Other income, net
|
|
|
178
|
|
|
|
634
|
|
|
|
(456
|
)
|
Interest and other income, net
|
|
|
523
|
|
|
|
5,078
|
|
|
|
(4,555
|
)
|
INCOME BEFORE INCOME TAXES
|
|
|
171,705
|
|
|
|
96,825
|
|
|
|
74,880
|
|
INCOME TAX EXPENSE
|
|
|
(33,368
|
)
|
|
|
(17,355
|
)
|
|
|
(16,013
|
)
|
NET INCOME
|
|
$
|
138,337
|
|
|
$
|
79,470
|
|
|
$
|
58,867
|
|
Revenue
Our total material sales were $232.9 million for the nine months ended September 30, 2021, as compared to $167.2 million for the nine months ended September 30, 2020, an increase of 39% with a commensurate increase in unit material volume of 41%. The increase in material sales was due to the recovery in sales that were adversely impacted due to the COVID-19 pandemic during the nine months ended September 30, 2020, as well as strengthened demand for OLED products utilizing our emitter material. Even though we believe we have experienced the worst effects of the COVID-19 pandemic, we remain uncertain as to the possibility of its re-emergence and corresponding negative impact on OLED market demand.
Green emitter sales for the nine months ended September 30, 2021, which include our yellow-green emitters, were $176.2 million as compared to $129.6 million for the nine months ended September 30, 2020, with unit material volumes increasing by 41%.
Red emitter sales for the nine months ended September 30, 2021 were $56.3 million as compared to $36.6 million for the nine months ended September 30, 2020, with unit material volumes increasing by 42%.
Revenue from royalty and license fees was $163.0 million for the nine months ended September 30, 2021 as compared to $110.0 million for the nine months ended September 30, 2020, an increase of 48%. This increase was due primarily to an overall strengthening of our customers’ sales of royalty-bearing OLED licensed products. In addition, there was an increase in the cumulative catch-up adjustment arising from changes in estimates of transaction price, net arising from a reduction in the forecast of emitters to be procured over the contract life by one of our customers that resulted from a change in their near-term production needs, as well as improved forecasted royalty consideration resulting from higher levels of current and anticipated customer sales of OLED products.
Contract research services revenue was $11.4 million for the nine months ended September 30, 2021 as compared to $10.1 million for the nine months ended September 30, 2020, an increase of 13%. Revenue from contract research services consists of revenue earned by our subsidiary, Adesis, which provides support services to the pharma, biotech, catalysis and other industries on a contractual basis for those third-party customers.
Cost of sales
Cost of sales for the nine months ended September 30, 2021 increased by $24.3 million as compared to the nine months ended September 30, 2020, primarily due to an increase in the level of material sales. Included in the cost of sales for the nine months ended September 30, 2021 and 2020 was an increase in inventory reserve of $2.1 million and $808,000, respectively, due to excess inventory
32
levels in certain products. As a result of the increase in revenue from material sales and royalty and license fees, gross margin for the nine months ended September 30, 2021 increased by $95.7 million as compared to the nine months ended September 30, 2020, with gross margin as a percentage of revenue remaining stable at 80%.
Research and development
Research and development expenses increased to $72.7 million for the nine months ended September 30, 2021, as compared to $61.7 million for the nine months ended September 30, 2020. The increase in research and development expenses was primarily due to higher employee-related compensation expenses and operating costs, including those associated with OVJP technology development, increased contract research, and PPG development activity.
Selling, general and administrative
Selling, general and administrative expenses increased to $57.6 million for the nine months ended September 30, 2021, as compared to $45.1 million for the nine months ended September 30, 2020. The increase in selling, general and administrative expenses was primarily due to higher employee-related compensation expenses, increased pre-production costs associated with the new manufacturing facility in Shannon, Ireland, as well as an increase in depreciation expenses resulting from corporate expansion.
Amortization of acquired technology and other intangible assets
Amortization of acquired technology and other intangible assets was $16.5 million for both nine-month periods ended September 30, 2021 and 2020.
Patent costs
Patent costs increased to $6.0 million for the nine months ended September 30, 2021, as compared to $5.6 million for the nine months ended September 30, 2020. The results in the current year reflected higher internal patent prosecution related costs.
Royalty and license expense
Royalty and license expense decreased to $519,000 for the nine months ended September 30, 2021, as compared to $8.2 million for the nine months ended September 30, 2020. 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 9 in Notes to the Consolidated Financial Statements for further discussion.
Interest and other income, net
Interest income, net was $345,000 for the nine months ended September 30, 2021, as compared to $4.4 million for the nine months ended September 30, 2020. The decrease in interest income, net was primarily due to a decrease in bond yields on available-for-sale investments held in the current year over bond yields on available-for-sale investments held in the comparable period in 2020. Other income, net primarily consisted of net exchange gains and losses on foreign currency transactions and rental income. We recorded other income, net of $178,000 for the nine months ended September 30, 2021 as compared to $634,000 for the nine months ended September 30, 2020.
Income tax expense
We are subject to income taxes in both the United States and foreign jurisdictions. The effective income tax rate was an expense of 19.4% and 17.9% for the nine months ended September 30, 2021 and 2020, respectively, and we recorded income tax expense of $33.4 million and $17.4 million, respectively, for those periods.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents and our short-term investments. As of September 30, 2021, we had cash and cash equivalents of $535.1 million and short-term investments of $253.8 million, for a total of $788.9 million. This compares to cash and cash equivalents of $630.0 million and short-term investments of $100.0 million, for a total of $730.0 million, as of December 31, 2020.
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Cash provided by operating activities for the nine months ended September 30, 2021 was $134.3 million resulting from $138.3 million of net income and $94.1 million due to changes in our operating assets and liabilities, partially offset by a $98.1 million reduction due to non-cash items including amortization of deferred revenue, amortization of intangibles and stock-based compensation. Changes in our operating assets and liabilities related to an increase in deferred revenue of $160.0 million and an increase in other liabilities of $30.5 million, partially offset by an increase in other assets of $47.1 million, an increase in inventory of $32.0 million, an increase in accounts receivable of $14.0 million and a decrease in accounts payable and accrued expenses of $3.3 million.
Cash provided by operating activities for the nine months ended September 30, 2020 was $75.8 million resulting from $79.5 million of net income and $61.8 million due to changes in our operating assets and liabilities, partially offset by a $65.5 million reduction due to non-cash items including amortization of deferred revenue, amortization of intangibles and stock-based compensation. Changes in our operating assets and liabilities related to an increase in deferred revenue of $144.2 million and an increase in other liabilities of $8.6 million, partially offset by an increase in accounts receivable of $38.9 million, an increase in inventory of $21.0 million, a decrease in accounts payable and accrued expenses of $19.6 million and an increase in other assets of $11.5 million.
Cash used in investing activities was $187.0 million for the nine months ended September 30, 2021, as compared to $10.1 million for the nine months ended September 30, 2020. The increase was due to the timing of maturities and purchases of investments resulting in net purchases of $157.1 million for the nine months ended September 30, 2021, as compared to net sales of $9.1 million for the nine months ended September 30, 2020, and an increase in purchases of intangibles and property, plant and equipment of $10.7 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The increase in property, plant and equipment purchases during 2021 was primarily due to improvements to our Ewing facilities in New Jersey.
Cash used in financing activities was $42.2 million for the nine months ended September 30, 2021, as compared to $34.8 million for the nine months ended September 30, 2020. The increase was due to an increase in the cash payment of dividends in the current year of $7.1 million and an increase in the payment of withholding taxes related to stock-based compensation to employees of $587,000, partially offset by an increase in proceeds from the issuance of common stock of $267,000.
Working capital was $874.9 million as of September 30, 2021, as compared to $759.6 million as of December 31, 2020. The increase was primarily due to an increase in short-term investments, an increase in inventory and an increase in other current assets, partially offset by a decrease in cash and cash equivalents.
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 U.S. generally accepted accounting principles. The preparation of these Consolidated 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 are our “critical accounting policies” as contemplated by the SEC.
Refer to our Annual Report on Form 10-K for the year ended December 31, 2020, for additional discussion of our critical accounting policies.
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Contractual Obligations
Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of our contractual obligations.
Off-Balance Sheet Arrangements
As of September 30, 2021, 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.