Syntax-Brillian: The Signal is Still Scrambled

In November 2006, I wrote an article which stated that Syntax-Brillian Corporation (BRLC) had artificially reduced its cost of sales and increased its gross margins through the use of inventory reserves for the quarter ended September 30, 2006. In a follow-up article a couple of weeks later, I questioned what the cost of sales will come in at for the quarter ended December 31, 2006 since the lower inventory reserves at September 30, 2006 left little room for manipulation.

For the year ended June 30, 2006, the cost of sales as a percentage of sales was 88%. For the quarter ended September 30, 2006, the reported cost of sales percentage dropped to 82%, although I calculated that the cost of sales percentage remained at 88% after eliminating the boost from the inventory reserves. For the quarters ended December 31, 2006 and March 31, 2007, the reported cost of sales percentage was 84% ($205 million [M]/$242M) and 82% ($133M/$163M), respectively.

Teaching an Old Dog New Tricks

I believe the lower cost of sales percentage for the quarters ended December 31, 2006 and March 31, 2007 may be explained by examining the "Deposit with Kolin (a related party)" account. Note E of the March 31, 2007 financial statements reads as follows:

At March 31, 2007, we had deposits of $39.6 million with Kolin for molds used in the manufacture of our LCD HDTVs. To offset these deposits we recorded payables in the same amount. Upon achievement of stipulated unit volumes for each mold, the deposits are refunded. We anticipate that we will meet production minimums for substantially all such molds in the current fiscal year. Therefore, we have not amortized the cost of the molds since it is probable that they will be removed from our balance sheet when the related accounts payable to Kolin is extinguished through achievement of the stipulated unit volumes. The total amount of tooling deposits recorded during the nine months ended March 31, 2007 was $42.6 million. As of March 31, 2007, we had met the stipulated unit volumes with respect to $3.0 million of these deposits.

The deposits of $5.1 million at June 30, 2006 represented a deposit with Kolin for purchase of inventory, and is unrelated to the deposits for molds described above.

Note E of the December 31, 2006 financial statements asserts that the "deposits recorded during the six months ended December 31, 2006 was $42.6 million" and that stipulated unit volumes had been met with respect to $16.3 million of these deposits.

First of all, the "deposit" with Kolin is not actually a deposit. In fact, the cash flow statements list the "[i]ncrease in deposits with Kolin and its related accounts payable" as a non-cash activity. Second, no tooling deposits appeared prior to the quarter ended September 30, 2006. This phenomenon reduces the comparability of the financial statements for the fiscal year ended June 30, 2006 with the subsequent quarters since any tooling deposit prior to June 30, 2006 was absorbed in the cost of sales.

Third and most alarming, the total amount of the tooling deposits was $42.6 M both for the six months ended December 31, 2006 and for the nine months ended March 31, 2007. However, the refunded deposits went from $16.3 M for the six months ended December 31, 2006 to $3.0 million for the nine months ended March 31, 2007.

One Step Forward, Two Steps Back

The decrease in refunded deposits is counter-intuitive since refunded deposits should increase or stay the same as unit volumes increase cumulatively. In addition, the decrease in refunded deposits for the quarter ended March 31, 2007 is at least partly attributable to the refunded deposits booked for the quarter ended September 30, 2006 since stipulated unit volumes of $7.0M and $16.3M were said to be met as of September 30, 2006 and December 31, 2006, respectively.

The decrease in the refunded deposits also calls into question the anticipation that BRLC will meet production minimums for substantially all such molds in the current fiscal year. If BRLC does not meet the production minimums, the "deposits" would wind up as cost of sales. The recent movements in the stock price of BRLC seem to be unrelated to any possible shift of assets to expenses.

Disclosure: Author is short BRLC

BRLC 1-yr chart

Comments

[RC Martin:]

Well, let's try posting a complimentary message again. Seems the folks who monoitor these boards take ofense when someone writes a notte and says, "Nice discovery Mr Chapski"

I concur with Mr Chapski in that the accounting is somewhat magical in nature.

2007 Jun 18 01:17 PM

[Samuel:]

I agree with you and your analysis that Syntax-Brillian is one of the largest stock scams in history next to Enron.

Oh Sandy, quit pretending you have no position. You are obiviously shorting BRLC and/or own puts or else you wouldn't be bashing BRLC everyday on yahoo message boards, on here, and probably many other places. However, I won't disagree with your short position. It is indeed a wise move. BRLC will be below 3.50 in the short term and under 50 cents trading otc within a two years.

2007 Jun 19 02:20 AM