Syntax-Brillian Corp. (BRLC) announced that they had completed their offering of 29.4 million shares at $5.75, which includes the exercise of all the 3.84 million overallotment option granted to underwriters. It doesn’t sound like Syntax-Brillian “struggled to bring off a $125 million follow-on offering of stock last Wednesday,” as claimed by Bill Alpert in his “Sometimes, It's a Numbers Game” article in Barron’s, if all of the overallotment options were exercised.
The article also raised other concerns, one of which questions the profits reported by Syntax-Brillian in the last three quarters and the fact of the company having “negative cash flow from operations totaling $90 million in the past six quarters”. The negative cash flow from operations can be mainly attributed to their large increase in accounts receivable, which totaled $220.98 million at the end of the Q3 March 31 and has increased by $128.8 million the over the last two quarters. A large part of the receivables are from South China House of Technology [SCHOT] which totaled $178 million, according to Syntax-Brillian’s Q3 2007 earnings conference call. The company has 120 day payment terms with SCHOT and said that as of May 9 around $69 million of invoices where past due from SCHOT. However, the company expects SCHOT will be back into compliance with their 120 day terms by June 30, 2007.
Another point raised by the article is the pricing protection and rebates Syntax-Brillian receives from Taiwan Kolin, one of its main panel suppliers. In the article, Alpert said that “Kolin [was] so generously helping Syntax-Brillian plump its results” because “Kolin and its affiliates are Syntax-Brillian's largest shareholders, with an 11% stake before last week's deal. Kolin sold $5 million worth of that stock in the offering, and it's registered to be able to sell half of its remaining stake after a 90-day lockup”. Without “Kolin's $165 million of credits since December 2005, Syntax-Brillian would've had a negative gross profit-otherwise known as a loss-of almost $64 million.”
The article seems to allege that Kolin is helping Syntax-Brillian because it wants to sell its Syntax-Brillian stock at higher prices. Alpert said that Kolin “may make better profits on the stock than on the TVs”. With the Form 4 filing on 5/29/07 Kolin owns 5,129,138 of Syntax-Brillian after their 1 million shares sale in the offering. The numbers doesn’t seem to add up with the claims that the main reason for Kolin giving Syntax-Brillian price protection and rebates is because they have intentions of selling their stock soon. Before the offering, Kolin owns 6.1 million shares of Syntax-Brillian. Even at Syntax-Brillian’s 52 week high of $11.70, those 6.1 million shares of Syntax-Brillian would only be worth around $71 million. Now, would Kolin use $165 million in rebates and price protection since December 2005 to help out Syntax-Brillian with the intention of offloading their shares of Syntax-Brillian soon when they are worth no more then $71 million at its peak?
The profit from the $5 million worth of stock sold by Kolin in the offering doesn't appear to be too significant to Kolin when their price protection credit given to Syntax-Brillian was $13.6 million for Syntax's 3rd quarter alone. Being registered to be able to sell half of its remaining stake after a 90-day lockup doesn't translate to Kolin automatically selling those shares after the period.
Kolin’s price protection doesn’t appear as unconventional or unethical as the article would suggest. Kolin gets their raw panels largely from LG. Phillips (NYSE:LPL) and processes them to production-ready panels before selling them. When LPL issues rebates to Kolin, then Kolin is in turn able to pass along the rebates to Syntax-Brillian. The reason for the rebates and price protection offered by Kolin seems to be that Kolin wants Syntax-Brillian to be successful and produce more televisions given the nature of their relationship. Kolin is Syntax-Brillian’s largest shareholder and Syntax-Brillian is one of Kolin’s largest customers. The price protection and rebates from Kolin is aid to Syntax-Brillian, rather then used to help Syntax-Brillian "cook their books" and then sell their shares as some would suggest.
Now that the company “struggled” to finish its offering there is great importance in the upcoming Q4 guidance update and earnings release. Both longs and shorts will get a sense of how well the company is utilizing the money from the offering and whether or not they were able to collect many of the overdue receivables as claimed.
Disclosure: Author has a long position in BRLC
BRLC 1-yr chart