On November 2, 2006, Syntax Brillian (NASDAQ:BRLC) put out what appeared to be record revenue for the previous quarter. Yet I believe 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.
Syntax has had a nice move over the past week due to what appeared to be a successful quarter. Here are some highlights of the previous quarter.
For those who are return readers to Stocklemon, you know that we are sticklers for cash. Don’t tell us how great your quarter was unless you have the cash to back it up. Ending cash was just $8.3 mil -- up just $900 K from prior quarter.
Inventories up to $40 mil from $13.15 mil
Accounts Receivable up to $76 mil from $50 mil
... and this is our favorite
Accounts Payable ballooned to 60.137 mil from 3.9 million
What’s up with this?
Improved overall gross margins to 18.13%. I found this to be of particular interest. At a time when margins on LCD products are in rapid decline, they were able to improve them to over 18%. Compare this to Sharp, a leading maker of LCD’s whose margins are at 5.5% according to a recent Morgan Stanley report. How are the margins so high?
Maybe because they are guaranteed by their largest shareholder (Kolin, a Korean company):
“For the years ended June 30, 2006 and 2005, Kolin agreed to grant us rebates for price protection of $61.0 million and $27.9 million, representing 27.2% and 25.4% of actual purchases from Kolin, respectively, which were credited to cost of sales in the period received as these price protection grants related to inventory purchased from Kolin that had been sold to our customers during the respective periods.”
BRLC's auditor is an outfit called Grobstein, Horwath & Company. They recently replaced Epstein Weber (who has been the topic of previous Stocklemon reports). Both auditing firms primary clients are small pink sheet and otc companies. It is the opinion of Stocklemon that neither one has exercised any professional skepticism when looking at these numbers and therefore is not fulfilling SAS 99 requirements as stated by the American Institute of Certified Public Accountants.
While the investing public is supposed to get excited about the previous quarter, insiders have not been bashful about unloading stock. According to Stocklemon’s computation, insiders have sold close to $7 million in stock all during the previous quarter, when business was supposed to be “booming.”
It is the opinion of Stocklemon that Syntax-Brillian is nothing more than an abuse of the public marketplace. They appear to have been indulging in wash transactions with their largest shareholder. These related party transactions give the company an appearance of financial strength that is nothing more than smoke and mirrors. For now, we wait for the 10-Q, hoping that we can get some answers to some of the disturbing accounting questions.
Cautious Investing To All.
Disclosure: Author is short BRLC