Stocklemon Updates iMergent
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IMergent vs. Microsoft….You be the Judge
It is no surprise to any reader that Stocklemon has long been skeptical of the business of iMergent (AMEX:IIG). We have considered this company to have a “terminal business model”. We tip our hats to the management of the company who has been able to juggle legal problems, SEC Investigation, and negative publicity and keep the seminars going and the revenue flowing.
Admittedly, we believed that the eventual end of iMergent was going to come at the hand of regulators but we were wrong. We now believe that the end of iMergent will come at the hand of fair competition.
Yesterday, November 15 2006, Microsoft launched Office Live. While iMergent was using the Microsoft logo without authorization on their marketing materials, Microsoft was busy developing a web based platform aligned with the way software is now distributed to consumers.
Office Live has been called the “best of web 2.0” and is making small business websites efficient commodities.
1. Starting Jan 1, Office Live will be preloaded on Toshiba and Sony Computers.
2. Through a partnership with Best Buy, customers of new computers will be offered a free 3 month trial to the premium offerings of Office Live
3. Customer support for Office Live will be offered through Best Buy’s Geek Squad.
NOW THAT IS DISTRIBUTION!
Stocklemon has put forward a chart so one can compare Storesonline’s product to Office Live:
(more…)
Stocklemon updates Syntax-Brillian
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Syntax-Brillian (BRLC) - A Roadmap for a Money Losing Business
As Black Friday approaches, it is no surprise that the must have item of the year is an LCD -Television. This known fact has caused the recent run up in stock price of low cost LCD middleman Syntax- Brillian (BRLC). We can only hope that the picture given off by the televisions of Syntax is brighter than the picture given by their most recent balance sheet.
As CBS Marketwatch just reported,
“Many analysts had been forecasting that flat-screen TV prices this holiday season would be down 25% to 30% from last year, said Joe Feldman, managing director and the senior retailing analyst at research firm Telsey Advisory Group.”
Stocklemon Updates iMergent
| stock ticker: IIG | ||
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Stocklemon Comments on iMergent (IIG) Earnings November 7
Stocklemon has long been critical of iMergent management but yesterday’s conference call takes the cake. The company had its normal cheerleading and then quickly brought the call to an abrupt end before any challenging questions could be asked. Among many mistakes made by management, Stocklemon noticed 3 obvious deceptions that simply must be addressed.
DECEPTION #1 - CHANNEL STUFFING
Normally, the company does not conduct any seminars in the last 3 days of the quarter. The reason is the distortion introduced by their accounting with regard to the 3 day right-of-rescission extended to all its customers. (The company cannot book seminar sales as revenue until after customers’ 3-day rescission period is past.)
Stocklemon Reports on Syntax-Brillian
| stock ticker: BRLC | ||
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Stocklemon Reports on Syntax-Brillian (BRLC), Something Seems Really Wrong Here
On November 2, 2006, Syntax Brillian (NASDAQ:BRLC) put out what appeared to be record revenue for the previous quarter. Yet, Stockelmon believes that BRLC did not have the quarter that investors were hoping for, but rather had a press release that allows them to carry on accounting shenanigans.
The main problem with Syntax-Brillan is its relationship with its primary vendor, creditor, and shareholder all rolled into one (kind of reminds us of ESCL minus the stamps). Kolin is one of the largest shareholders of BRLC, holding 6.1 million shares. This has created a form of daisy chain relationship that is not forthright to investors.
Stocklemon Updates iMergent
| stock ticker: IIG | ||
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iMergent (AMEX:IIG) About To Face it Toughest Challenge To Date
Two weeks ago the software industry was shaken up by Oracle’s announcement to enter Red Hat’s Linux business. On just the announcement and the threat of competition, RHAT’s value was decreased by 25%. iMergent is staring down the same barrel of the gun, yet on the other side is not Oracle, but rather the ubiquitous Microsoft.
This “1000 pound gorilla” of the software industry has left a trail of tears in small software companies whose products they have commoditized over the years. Later this month, they launch Office Live. Already beta tested by over 175,000 users, Office Live is a web suite that integrates web site operations for small business, tying it closely to the computer platform and tools that most small businesses already use.
Stocklemon updates iMergent
| stock ticker: IIG | ||
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IMergent Has Their Hands Caught In the Cookie Jar
In our last comments on iMergent, we promised further discussion of the company’s accounting vulnerabilities. When a short seller calls “accounting irregularities” on a company, they might just be accused of pounding the table on their own position. Yet, when the company in question is currently the subject of numerous Attorney General Investigations, a Formal SEC Investigation, and a business that Forbes Magazine singled out this month as a paradigm for dirty companies on the AMEX, a warning of accounting irregularities begs to be given additional weight.
Stocklemon believes that iMergent is guilty of using cookie jar accounting to pad current earnings. This “voodoo” accounting employed by iMergent could be the reason why the company has lost all coverage from major brokerage houses and is now reports numbers to the public without independent scrutiny.
Cookie Jar Accounting defined:
http://www.investopedia.com/terms/c/cookiejaraccounting.asp
http://www.investorwords.com/1121/cookie_jar_accounting.html
First Hand Caught in the Cookie Jar
In 2005, iMergent confessed a huge restatement of prior earnings, and rolled up a mass of prior years’ unreported losses. The losses were due to overestimating collectability of receivables from its installment contract sales to its typically poor quality credit risk customers.
Hidden by these massive adjustments were their repeated acts of “cookie jar” accounting, where they shuttled dollars in and out of receivables, reserves, and net profit, as necessary to massage their earnings for the benefit of shareholders.
As the stock tanked from 25 to 4 last year, iMergent issued these multi-year restatements under the cover of late filing and the absence of a conference call to discuss them.
For a “normal” company, a massive confession/restatement like this one would be an opportunity to “clean house”, to sweep out the closets, dump out all the bad news and take a fresh start.
Not iMergent. They simply used the revision of their entire accounting policy and all the confusion created by a set of massive one-time adjustments (which obstruct investors’ ability to draw meaningful comps to prior periods) to start a whole new cookie jar.
Most cookie jar accounting serves to “smooth earnings” and, although subtle, is banned corporate behavior. But cookie jars also have a more sinister use – misleading investors to believe there is a pattern of increasing earnings when actually the business is stagnant or declining. With the amount of complaints online and government regulation along with dissatisfied customers, it does not take Warren Buffet to figure out this is a terminal business model.
And now, the other hand….
This strategy only works until the cookie jar runs out…and the jar at iMergent is running low.
In a call with First Albany (before they dropped coverage), management of iMergent was astoundingly candid about the company’s reserve policy. They implied that the company was at times over-reserving against bad debt, which could, in future periods improve earnings. SEC files show the agency was curious enough about this to inquire further as to its validity.
http://www.sec.gov/Archives/edgar/data/1075736/000110465905034488/filename1.htm
In the company’s reply to SEC questions, they clarified how exactly the reserves are figured out and also supplied statistics for defaults. This Rosetta Stone, posted on the SEC website not more than 2 weeks ago. The company explained the issue to the SEC with facts it had never previously disclosed to investors.
Their better credits (the “A”s) defaulted at a 26% rate and the lower quality credits (the “B”s) defaulted at a 53% rate. The company also stated that they didn’t make a determination of reserves when finance receivables were perfected (created), rather they would look at the pool of receivables at quarter-end and then determine what reserve level was appropriate. The result was that when the prior reserve was deemed higher than necessary, the recently added reserves would get a lower reserve allocated — which has the direct result of improving non-GAAP earnings!
Hidden under the massive restatements of June 2005, an anomaly appears which raises serious questions about IIG’s use of reserves to benefit future earnings. Buried in the restatement, and not explicitly disclosed, IIG reserved an astounding 79% of revenues for bad debt reserves, dropping their new contracts written (from which the reserve has been deducted) to a historic low $14.6 million. This made their loss for the quarter even worse (because of the restatement it was already gigantic, so nobody noticed).
It also created a brand new cookie jar to pad future quarters. Strangely, at the same time, the company, explaining why their sales conversion rate had dropped, stated that new policy changes were resulting in increased credit quality. This is contradictory to a reserve rate nearly double its historical levels. Stocklemon believes iMergent’s current results have been benefiting from the new cookie jar.
As recently as March 2005 the company stated that the eventual default rate for finance receivables was 47%, which begs the question as to why higher reserves were ever materially above that. The company refuses to update the overall default rate, as they say it won’t impact GAAP earnings. True enough, but it directly impacts non-GAAP earnings. Since the September 2005 quarter with a 57.5% reserve ratio, the company has grown gross receivables by $14.8 million, yet reserves have only grown by $1.2 million for an 8% suggested reserve ratio. While the company will suggest that that is mainly due to losing the lower quality credits (which we showed may have been artificially created last year) it suggests very strongly that the company was using those higher reserves to benefit current earnings.
In fact, were the ending June 2006 reserve materially higher, it would have had a dramatic impact on non-GAAP earnings as demonstrated by this table: Most companies would report non-GAAP so as to give a clear picture of profitability without options expenses or goodwill. iMergent wants you to focus on non- GAAP so you do not factor in their customer with a 550 FICO Score who may or may not pay 18% interest on his “software loan”.
| Ending reserve rate | non-GAAP EPS | GAAP EPS | Delta from GAAP |
| 34.5% | $.32 | $.17 | 89% |
| 37.5% | $.28 | $.17 | 62% |
| 40% | $.24 | $.17 | 40% |
| 42.5% | $.20 | $.17 | 17% |
| 45% | $.16 | $.17 | -6% |
| 47% | $.13 | $.17 | -24% |
Therefore, it is the opinion of Stocklemon that if this company reserved properly, their NON-GAAP would be 24% lower than their GAAP earnings.
Receivables still not visible
Imergent’s receivables and reserves accounting can only be relied upon if the company’s cash is indeed “unrestricted” and the receivables are real. Considering the company they sold their receivables to was:
- set up with a Storesonline Website
- doesn’t seem to have any factoring business beyond iMergent
- run out of a 2000 sq ft house in Incline Village NV
- bought the receivables on a “non-recourse” basis, but still periodically puts bad contracts back to iMergent for “replacement”
… this transaction fails to dispel the questions looming over the quality of iMergent’s receivables.
http://www.adpfund.com/news.htm
History repeats?
Imergent bears very strong resemblance to former Stocklemon subject Housevalues.com (SOLD). At the heart of both is an accounting model that systematically leaves out certain key metrics needed by the investing public to determine the true health of the company. Add to that an unending litany of consumer complaints, and you have the reason for the reporting omissions – an unsustainable business model – the last thing management wants to admit.
When Stocklemon reported on Housevalues.com, the stock was $15 a share and Avondale and Piper both had lofty price targets on the stock. Today it is $5.65, trading not far above its cash.
In contrast to Housevalues.com, iMergent has no analyst coverage. There’s no independent scrutiny holding management to a standard of reporting sufficient to shed light on their real business operations.
At the Edge of Unprofitability
Besides the consumer complaint red flags, and the ongoing stream of state AG investigations, the company is sliding towards unprofitability. Their sales conversion rates are flat to declining (the company blames this on sticking to better credit risks, a story unsupported by the reserves analysis). In fact, were it not for interest on its cash, and the commissions from third-party upsales, the company would not now be profitable.
With the current trend in Imergent’s business, Stocklemon believes that IIG is worth no more than a number slightly higher than their cash position (which also is a hazy topic).
Audit committee revolving door
If anyone needs any more clarity on this issue, just email Stocklemon and we will present even more compelling evidence. Maybe this voodoo accounting is also the reason that 2 of the 3 audit committee members just left iMergent. To replace them we have been introduced to Craig Rauchle, president of Inter-Tel and Todd Goergen, manager of Ropart Asset Management. Maybe the shareholders of Intertel should note that while the President and COO should be busy building shareholder value, he is going to dedicate his time to “creating internet tycoons” and giving away free lunches so lower income consumers can sign up for 18% financing.
It is the belief of Stocklemon that neither Rauchle of Goergen are representing the best interests of their investors and shareholders as they join an enterprise that has this much scrutiny from the US and foreign governments.
We have to give iMergent credit on one front. They have found a novel way to save money on customer service…they just outsourced it to the Utah Division of Consumer Protection.
http://www.commerce.utah.gov/releases/06-08-28_imergent-cease.pdf
Stocklemon welcomes iMergent to refute any of the above statements and we will give them fair space on Stocklemon to issue any statement related to this issues discussed above.
Cautious investing to all.