InPhonic: Time To Follow the Paper Trail

When I last wrote about InPhonic (INPC), on February 12, the issue was a discrepancy between what the profitless company had reported as cash flow in an earnings report and what it reported in operating cash flow in its 10-Q three days later.

The change, which caused operating cash flow to fall by half, with free cash flow barely staying positive, was attributed by the company to a debt deal done the day after earnings were reported (never mind that cash flow is supposed to be as of the end of a given quarter).

Fast-forward to Tuesday: In an 8-K filing with the SEC, the company said its audit committee concluded that the company's unaudited financial statements from the second and third quarters, as well as for the full year, "should no longer be relied upon as a result of certain errors discovered subsequent" to the release of year-end results. The company identified several issues, including one dealing with revenue recognition, but said "certain additional matters are also subject to review."

What are those matters? Hard to say, but considering the changes were found by new auditors, investors might be wondering about several things, including: The wireless-services company's desire to capitalize labor costs. This is one way, critics believe, the company uses the balance sheet to make earnings look better. Had the labor costs been expensed, last year, the company would've been Ebitda negative - not good for a company that is valued based on Ebitda.

This is also a company with a history of one-time charges. Because it's supposedly "one-time" in nature, it tends to get ignored by investors. But the only time you can tell one-time isn't really one-time is when you take the time to follow the trail. For example, one short-seller of InPhonic points out, the company took what it described on its earnings call was a "one-time" $3.8 million charge in the third quarter relating to an attorney general settlement in the District of Columbia. Only problem: In the fourth quarter it took another $4 million charge related to the settlement.

The list, and the beat, goes on....

INPC 1-yr chart