iMergent Practicing 'Cookie Jar Accounting'? 7 comments
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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: Investopedia , Investorwords.
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.
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”.
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:
1) was set up with a Storesonline Website
2) doesn’t seem to have any factoring business beyond iMergent
3) runs out of a 2000 sq ft house in Incline Village NV
4) 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.
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
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 (see .pdf file).
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.
Disclosure: Author is short IIG
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This article has 7 comments:
Check out what Rip-off report has to say about Imergent regarding "...disgruntled ex-employees, competitors and persons who have taken a short position in [Imergent] Stock who have tried to victimize StoresOnline repeatedly."
(Note that the author has a short position in this stock and in previous articles at Stocklemon.com has linked to Rip-off Reports as evidence of how badly their clients have been treated.)
www.ripoffreport.com/r...
"...many of the complainants are not StoresOnline's customers at all" say Rip-off Reports, " but some of the aforementioned miscreants"
And check out what Zack.com has to say about IIG (a number 1 buy")
"What is impressive about IIG�s recent price action is that the stock has been in a long, gradual uptrend since bottoming out in Oct 2005. Yesterday�s breakout to the upside indicates that the speed at which IIG�s stock is gaining is accelerating."
www.zacks.com/rank/com...;type_id=13
The seller may do well to beware lest s/he get squeezed by this "lemon")
Cary Parker
Cary Parker
long at 8, 13, and now at over 20
Cary Parker
long at 8, 13 and now at over 23
1. Imergent is listed as a software / tech company in the ecommerce focus. To read more at Reuters: stocks.us.reuters.com/...
However, this isn't really true. Yes, they provide software, but there is no competitive advantage. They make their money by hosting all day seminars or "training sessions." At these training sessions they convince individuals and businesses how "easy" it is to start or expand an online company, then talk them out of $3,000-5,000 for setup and training.
Here is the secret you may already know; nothing is that easy. There is no get-rich-quick.
2. In the process of doing "business" Imergent has had to settle numerous lawsuits and complaints regarding their "free" seminars and practices. They can't even practice their craft in their home state of Utah.
The Salt Lake Tribune: Reporting in IL investigation 12/06
www.sltrib.com/ci_4911...
Attorney General of Texas Settlement May 06
www.oag.state.tx.us/co...
Better Business Bureau Warning:
www.spokane.bbb.org/al...
Critique by SeekingAlpha and Investigated by SEC
smallcap.seekingalpha....
3. So lets pretend this is an amazing software company and you want to attend a seminar. Lets visit the site and see when they're coming to town! www.imergentinc.com
But you wont find anything there, because imergent doesn't want you to know what they really do.
So let's see if we can find any information on their subsidiaries mentioned in Reuters. "Stores Online" and "Galaxy Mall." Well, Galaxy Mall has been shut down, but you can still Google it. Stores Online is still alive, but you should Google it too. WHY? You'll see nothing but complaints, fraud reports and warnings.
StoresOnline.com - poor service experience - have asked for refund of $10284
complaints.com/may2003...
Rip Off Report:StoresOnline Merchants Forum And Storesonline
ripoffreport.com/repor...
www.stocklemon.com/art...
It goes on for days.
Could you imagine if this were Apple, or Cisco, GSIC or anyone else? Upset customers, lawsuits, SEC investigations? Subsequently 50% of the available stock is being shorted by wall street. Please don't get caught in the stampede when the big money leaves. Even the CEOs have sold all of their stock, you can read it on Reuters of SEC website...
Imergent has one CEO, who has never sold a single share. Donald Danks owns 578,771 shares which
bought with his own money. He recently purchased 5,000 shares at 18.60
holdings.nasdaq.com/as...;HolderName=&L...
Don Danks, Chairman and CEO of Imergent, Inc. Files $15 Million Lawsuit Against StockLemon.com and Its Principals for Libel and Defamation
Market Wire, April, 2005
Don Danks, the Chairman and CEO of Imergent, Inc. (AMEX: IIG) has filed suit in Los Angeles Superior Court against Stocklemon.com and its principals for $15 million. The suit also seeks punitive damages in an amount to be determined at the time of trial.
Among other things, the suit asserts a cause of action for defamation based on false, misleading and damaging allegations published over the Internet that has significantly damaged the reputation and standing of Mr. Danks as the CEO of Imergent, Inc., a publicly traded company. The suit also asserts causes of action for Interference with Prospective Economic Advantage, violations of California Corporate Code 25400c and Violations of 15USC 101 et seq., conspiracy and infliction of emotional distress.
Barry K. Rothman, attorney for Mr. Danks said, "Litigation has been filed against StockLemon.com and its principals, which litigation we intend to be the test case to disclose the fact that certain websites that profess to be consumer watchdog sites are really sites who manipulate the stock price of a given stock they have a vested financial interest in by intentionally publishing false and negative information regarding the stock, which causes StockLemon.com to make substantial profits when stock prices fall as a result of the false and negative information having been published. As well this litigation is intended to be a test case that will make it mandatory for principals of these self-professed consumer watchdog sites to disclose their identities, and the true identities of the fictitious names of the people who post. Most importantly this litigation is intended to be a test case that these websites have a financial motive in publishing the false and negative information they publish and they cannot hide behind Freedom of Speech and 1st Amendment Rights and we intend to have the court impose severe punitive damages against all defendants as a result of the outrageous defamation that has been published "for profit."
Said Mr. Danks, "The information published by Stocklemon.com is false, misleading and has been emotionally and financially devastating to me, my family, employees of Imergent as well as the majority of stockholders of Imergent. I intend to vigorously and aggressively prove that the statements made about me are false and I am prepared to take this case to trial if necessary to clear my name and reputation and to demonstrate that one cannot publish defamatory information for financial gain without consequences. I have conducted my entire professional career honestly and ethically and to be personally targeted like this by StockLemon.com will not be tolerated."
The entire text of the lawsuit can be found at lasuperiorcourt.org