Universal Display claims “obsolescence” as an excuse for its accounting irregularities.

Wednesday, November 6, 2013.   According to documents recently made public Universal Display Corp. (“UDC”; NASDAQ: OLED) has been the target of U.S. Securities and Exchange Commission (“SEC”) inquiries since April of this year, investigating UDC’s accounting of its Samsung contract. UDC’s responses to the SEC show that there is considerable uncertainty about whether Samsung will continue making license payments to UDC. UDC itself revealed this in its responses to the SEC’s inquiry into UDC’s irregular revenue recognition practices.

Since UDC started receiving semi-annual Samsung license payments, UDC has followed the highly irregular accounting practice of reporting that revenue only when it actually receives the cash from Samsung in the quarter in which the cash payment is made. Faced with the SEC inquiry into this matter, UDC defended this accounting policy by stating that the license fees are “not fixed and determinable,” according to UDC’s SEC filings. The SEC targeted UDC’s revenue recognition in a letter dated April 30th that tells UDC to explain “why you [UDC] believe the amounts due from SDC [Samsung Display] are not fixed or determinable until they become due and payable.” UDC’s incredibly complicated response to the SEC’s simple inquiry points to the uncertainty surrounding the payments from Samsung, which UDC has not discussed with its investors.

To defend its accounting practices in response to the SEC inquiry, UDC pointed to the supposed risk of “obsolescence.” UDC stated that it chose its irregular revenue recognition “[b]ecause …. the risk of technological obsolescence can be considered high.”

We believe that UDC’s “obsolescence” justification really points to the termination rights in Samsung’s contract and the increasing likelihood that Samsung could use these termination rights as a result of recent and future negative rulings on UDC’s key patents. UDC has not disclosed Samsung’s termination rights in its August 2011 contract.

The SEC inquiry letters also point out that UDC is avoiding accruing for any contingency loss related to patent litigation. The SEC pointed specifically to a recent negative patent ruling to ask why UDC did not disclose contingency losses in the notes to the financial statements. The SEC’s letters suggest that UDC should be capitalizing the full amount of licensing payments and evenly amortizing the capitalized amount over the life of the contract. Instead, UDC refuses to capitalize its Samsung contract payment due, which it argues allow it to avoid disclosing contingencies related to patent invalidation or early termination of the Samsung contract.

UDC’s evasive explanations to the SEC are only part of much broader disclosure problems addressed in prior asensio.com reports, ranging from patent litigation disclosures to sales breakdowns to promotional statements to investors about its management’s past that misrepresent its patent management expertise.

The SEC’s inquiries and UDC’s responses can be found in the asensio.com data room and via the links below.

30 June 24, 2013 Letter from UDC to SEC, providing amended financial disclosures
29 June 3, 2013 Letter from SEC to UDC, requesting changes to UDC’s financial disclosures.
28 May 23, 2013 Letter from UDC to SEC, responding to SEC’s initial request for information
27 April 30, 2013 Letter from SEC to UDC, requesting information regarding accounting of Samsung contract revenues and patent litigation risk