Copperfield Res...'s  Instablog

Next week, we will share a detailed report on SolarCity. To be clear, we love Elon Musk and find Tesla (TSLA) a fascinating company. However, SCTY is NOT Tesla, and while Elon Musk's cousins do run SCTY (this relationship is rarely disclosed), Elon does NOT run SCTY. While the business of residential solar installs is hyper-competitive, we believe that investors/traders are completely ignoring fundamentals - our report may change that.

In our report, we will meticulously detail the seemingly arbitrary assumptions management has made to calculate the NPV (retained value). Additionally, we will show why we believe management quietly changed a key assumption from the IPO that effectively inflates NPV (disclosing material changes in fine print without reference to those changes is not appropriate disclosure). We will also discuss the sensitivity to changes in rates and the implied installation growth SCTY must achieve to ever justify the current valuation.

Further, we will highlight discrepancies between SCTY financial press releases and their SEC filings. We will also show how a bulk of their retained value is contingent on aggressive assumptions around pricing (assuming they can raise prices on customers almost every year by nearly 3% for 29 years), as well as a 6% discount rate that seems completely disconnected from their internal cost of capital and what a similar yield asset would command. This discount rate has not been adjusted by management despite a nearly 18 BP rise in the 10-year yield since they came public.

We will also discuss the reliance on tax equity and the lawsuit the Treasury has filed accusing SCTY of overstating the FMV of their solar systems to obtain higher tax credits than fair market value would warrant. Other topics will be included such as the implied ROIC on Q1'13 solar system capex of NEGATIVE 18% and the decision to stop disclosing metrics that are unfavorable...

Again, Elon Musk is an American success story, but SolarCity is not Elon Musk (although Elon does own shares, roughly 6 million of which he curiously pledged as collateral with Goldman Sachs - which happens to be providing tax equity for SCTY and has been the lead banking relationship on TSLA).

We expect our report to be released next week, but in the interim, we would strongly caution traders and retail investors from overstaying their welcome (unless of course this is 1999 again). Our analysis of fair value is somewhere between the IPO price ($8.00) and $12.00 per share.

Today we published a report on magicJack (CALL), our most comprehensive repo. It can be found in its entirety at:

Below is a piece of the report. THE REPORT SHOULD BE READ IN ITS ENTIRETY AS THE SEGMENT BELOW ONLY CONTAINS HIGHLIGHTS AND THE APPROPRIATE REFERENCES ARE FOUND IN THE FULL REPORT:

www.scribd.com/doc/119635111/magicJack-V...-History

Fair Value: $4.95 - $7.15 per share

(click to enlarge) (Below is an image from our full report)

Countless companies have come public over the last decade through reverse mergers that effectively bypass regulatory scrutiny. The annals of the stock market are littered with costly stories of companies blatantly misleading investors with fictitious financial results, inaccurate press releases, and incomplete disclosures. And of course there are the management teams that were previously accused of fraud, misrepresentation, or attempted stock manipulation that magically reappear years later with a new logo and story to sell. But it is the endangered species, the Black Rhino of the equity markets, that can masterfully combine all of these attributes and remain under the regulatory radar. We believe magicJack (CALL) is such an animal, and until now it has not been exposed. With this report, our most comprehensive ever, we aim to lift the curtain on the amazingly misrepresented story of magicJack.

During our exhaustive review of magicJack, we have uncovered a myriad of significant red flags in the business and the financial tale. In the wake of the Chinese reverse merger fraud era, it has been easy for market participants to become desensitized to accounting abuses and management misrepresentations. However, the incomprehensible activity at magicJack rivals most Chinese reverse merger, creating unprecedented risk for the predominantly retail shareholder base, while simultaneously lampooning the integrity of the U.S. Equity markets. We will unequivocally show that magicJack has presented its retail investor base with earnings press releases and financial tables that are overstated and later altered based on the corresponding SEC filings. It is our belief that the company wantonly misrepresented its financial results in front of a proposed secondary offering, and has continued to provide investor correspondence that is blatantly misleading and inaccurate. This brazen stock manipulation has been exacerbated by a series of ploys to attract and pump retail investors. We believe that an SEC investigation is not only warranted, but is a necessity as magicJack's Board of Directors appears deeply conflicted and agnostic towards oversight. Based on past and present business relationships and insider dealings, which include sub-market wealth transfers, we believe the Board has completely failed to protect the shareholders whom they legally represent. A quick trip to their "high-tech" innovation offices, which is located next to a rug and upholstery cleaner, is an eye-opening sight.

The (recently resigned) CEO of magicJack, Dan Borislow, has notoriously played by his own set of public market rules and continues to "seem less like a CEO than an ineffectual Mob boss."[i] Our report will detail how Dan Borislow was sued by shareholders of his previous company for allegedly orchestrating a model that diverted costs and manipulated the actual health of the business. Equally alarming is the fact that the current CFO of magicJack was actually the CFO of one of the companies accused of conspiring with Borislow to misrepresent its costs. Additionally, Mr. Borislow and his management team have been highly selective in their risk disclosures, choosing NOT to disclose a lawsuit against the company in Madison County, which we believe could eliminate 100% of its questionable "earnings" stream and all of its cash. And this is just the tip of the iceberg as the picture below the surface is replete with a multitude of financial shenanigans and deceit.

Given our belief that magicJack has irrefutably violated Section 17(a) of the Securities Act of 1933, as well as Sections 9(a) and 10(b) of the Securities Exchange Act of 1934, we have forwarded our report to multiple regulatory bodies, including the Securities and Exchange Commission.[ii] We believe that the NASDAQ and SEC should halt trading immediately in magicJack to ensure investors finally have accurate answers to many of the questions and issues we raise (including which set of financial results investing decisions should be based on and providing more disclosure about various related party equity transactions that we believe have been misrepresented). With unquantifiable downside risk, we believe investors would be wise to ask themselves, "What exactly is it that I own, what are the real numbers, and how do I really value magicJack?"

This report will highlight:

1) Poof!! magicJack appears out of thin air - A reverse merger of YMax and a $19 million Israeli shell is how Borislow took magicJack public. The company claims to produce world class products despite spending less than $2.6 million on R&D. Its center for innovation in the U.S. appears to be a warehouse next to a shack housing a rug and upholstery cleaning business.

2) Accusations of Securities Fraud and false/misleading earnings - The CEO of magicJack, Dan Borislow, was previously sued for securities fraud for "utilizing improper methods of accounting" to issue earnings reports that were "false and misleading." The lawsuit accused him of working with other telecom resellers to hide marketing costs while inflating his company's profits. The CFO of magicJack was the CFO of one of the "partition" companies accused of conspiring with Borislow's former company to hide costs. We do not believe magicJack has disclosed the former charges against its CEO/Chairman in its public filings. It appears magicJack is now offering "reseller applications" that leads us to question whether a similar expense scheme may be on the horizon.

3) Playing by his own set of rules - Borislow created two Trusts that were used as vehicles to liquidate public equity in his former company. Based on tax records, nearly half of the spending of the D&K charitable foundation has gone to pay Borislow and his foundation's CFO. Borislow also had a foray into Women's Professional Soccer, which led to accusations he made "public statements that reflect a blatant disregard for the truth."

4) Bi-Polar or just in-your-face stock manipulation? - We meticulously detail a range of attempts to manipulate magicJack's stock, which includes issuing financial statements in front of a proposed secondary that we feel were fictitious when compared to the corresponding quarterly filings with the SEC. After announcing a secondary offering, the company proceeded to cancel the offering a week later. A buyback was then announced, followed by a misleading rights offering (in conjunction with a buyback nonetheless) that was subsequently cancelled two week later after altering the terms in the interim. Several promotional press releases intended to squeeze shorts contained financials that failed to reconcile with the results filed in subsequent quarterly filings.

5) Back in time: Tel-Save.com's market chicanery - We detail the amazing similarities between magicJack and Borislow's first company, Tel-Save.com. At Tel-Save, Borislow issued numerous promotional press releases concerning a process to sell the entire company. The process was ultimately cancelled; an acquisition was announced of a company that was run by a convicted cocaine dealer - only to be cancelled a week later, and an encouraging buyback ensued. After buying back nearly $200 million of stock, Borislow announced just six weeks later a massive secondary offering. In less than a year, the stock fell nearly 80% from the "public sale" announcement to the secondary stock sale announcement. Borislow unceremoniously resigned and Tel-Save was ultimately purchased for a price 90% below where it was when the company first announced it was for sale.

6) Financial shenanigans, every shade of slimy - Beyond the misleading and promotional press releases, magicJack has used accounting gimmicks to create a myriad of unsustainable earnings. We show that magicJack issued a press release with financial tables that overstated revenue and earnings by $4 million compared to the tables presented in quarterly SEC filings. In the first quarter, 39% of earnings were attributable to a change in revenue recognition on prepaid minutes. The company has somehow generated as much as a 30% return on its marketable securities, which we believe are invested in a highly unconventional manner. In the 10Q for Q3'12, the company confesses it has actually been using short sales as part of its investment strategy, which may have overstated cash on the balance sheet. The company also paid its CEO $1.1 million for a "one-time investment advisory fee." Additionally, magicJack has used allowance for doubtful accounts and billing adjustments to aid earnings. In Q3'12, as a percentage of revenue, this ratio fell 80% year-over-year. We also illustrate an aggressive change in the depreciation schedule for switches, with the company's estimate of useful life going from 3 years to 10-15 years.

7) Moving beyond shenanigans and into erroneous financial reporting - In our opinion magicJack has repeatedly released financial tables in press releases that overstate what is presented in quarterly SEC filings. We detail how the cash flow table presented to investors in the earnings press release overstated cash flow by 23% when compared to the statements filed with the SEC just one week later.

8) An Inventory Reserve fudge or lying to the SEC and investing public - which is worse? - magicJack blamed a large Q3'12 inventory write-down on excess chips that were ordered after the Japanese Tsunami. This appears to be dishonest as raw material inventory increased while finished goods inventory saw a significant decrease - suggesting it was actually magicJack units that were written down. Further, the write-down occurred nearly 18 months after the tsunami and magicJack has filed SEC documents that claim the company's retail inventory turns are only 30 days. The company also implies in a press release that contra revenues were recorded in Q3'12, which could suggest retailers are returning product to magicJack.

9) Using put options for earnings and more misrepresentations - the company has used an esoteric put option strategy that has systematically overstated reported net earnings when compared to operating earnings. In response to a critical Wall Street Journal article, the company appears to have violated the Securities Act by failing to adhere to SEC guideline Item 8.01 on other events by issuing a blatantly misleading 8K that made inaccurate and reckless statements ("registrants should have due regard for the accuracy, completeness and currency of the information in registration statements filed under the Securities Act which incorporate by reference information in reports filed pursuant to the Exchange Act, including reports on this form [8K]").[iii]

10) A massive undisclosed liability in a damaging undisclosed lawsuit - Madison County has sued magicJack for failing to collect and remit 911 fees from its customers. The lawsuit alleges that magicJack has created multiple corporate shells to avoid collections and could have liabilities that exceed the cash on its balance. The lawsuit, which contends magicJack's actions were "negligent, grossly negligent, or reckless" could have a materially adverse effect on magicJack's business, operating results, and cash flow. Despite the potential materiality, magicJack has not yet disclosed this lawsuit.

11) A deceit-riddled 8K with related party sales and mysterious shareholders - Dan Borislow disclosed in an 8K in May (late on a Friday after the market closed) that he had sold stock at a 30% discount to several other shareholders. We believe the SEC may view the 8K as a blatant example of securities fraud because it contained false statements and misleading context. The stock was sold because Borislow had used his common equity on margin as collateral for debt. Despite stating in the 8K he would no longer use his stock as collateral, he once again had to release shares used as collateral against personal debt just seven months later. A careful examination of the Form 4's and beneficial ownership from the proxy suggests that Borislow mischaracterized his share sales as well. Assuming the public filings are accurate, the 5 buyers referred to in the 8K can not exist as holders to the same degree Borislow claimed.

12) Who is Menachem Goldstone, also known as Michael Goldstone? - At Borislow's first company, a shareholder named Menachem Goldstone was listed as a consultant. He was also the owner of a company called Eastern Telecommunications, which was bought by Tel-Save.com's large reseller, Group Long Distance (GLD). Goldstone's small telco controlled 1.34 million warrants in Borislow's company that were then transferred to the current magicJack CFO's company upon the acquisition. Inexplicably, Goldstone was listed in a Tel-Save.com 10K as having been issued 500,000 shares of Borislow's company's stock "in connection with a settlement." Goldstone appears in magicJack's beneficial ownership table as being the second largest shareholder, and was previously listed simply as "consultant." The description of his affiliation with the company changed, and for an unknown reason, so did his name in magicJack's 2011 10K. Despite no description or details on Goldstone in magicJack's filings, his mailing address is listed as the exact same as Borislow's in his 13G - which happens to be magicJack's U.S. headquarters.

13) A possible motivation for accounting shenanigans & material misinformation? - The Board has blessed a share grant for Borislow that creates completely perverse incentives to take material risks to drive a one-time earnings number in 2012. The bonus accrual for Borislow's compensation in the earnings release does not reconcile with the information in the 10Q.

14) The basic business and financial model - neither can survive - magicJack has benefitted from a one-time 50% price increase that appears to have pulled new sales and renewals into Q1'12. Since the one-time sales benefit, cash bookings have collapsed by 44%. The company seems to operate with incredible efficiency, generating nearly 3x the revenue/employee as a broad peer group. Yet, for a high tech company, R&D is non-existent and has actually declined year-over-year despite purported investments in a new product, magicJack Wi-Fi. The company spent ZERO capex in Q1'12 and Q3'12, and has only spent $217,000 in total capex during the first nine months of 2012. Finally, we believe the company may be incorrectly accounting for any magicJack Wi-Fi development expenses (assuming there are any).

15) The marketing jingle vs. real customer reviews - Despite claims of unparalleled voice quality, a broad review of consumer complaints paints a very negative consumer perception towards magicJack. With over 3,498 complaints with the Better Business Bureau alone, magicJack has recently been accused of continuing to charge customers after they claim to have cancelled their service.

16) Using history as a guide, the final bag holding act has already begun - Borislow resigned from Tel-Save.com and proceeded to enter into several egregious agreements with his former company. Based on public records, he transferred most of his Tel-Save (TALK) stock to trusts that sold the stock and bought TALK bonds. He then terminated a voting trust arrangement and resigned along with his spouse as directors of his foundation. We believe this action permitted the Trustee to sell his stock outside the purview of Insider/Director reporting requirements. On December 28, 2012, Borislow resigned as CEO and Chairman of magicJack. On the same day his resignation was announced, he established two trusts and "gifted" 2,250,000 shares to these trusts (one of which was called "DB"). The Trustee is Mark Pavol, who claims to be the COO of magicJack.[iv] The company does not once reference Mr. Pavol in its most recent 10K or proxy. Mr. Pavol was the same Trustee for Borislow's previous trusts that were used to liquidate his Tel-Save.com stock. It seems reasonable to assume a nearly identical roadmap is being followed to liquidate his magicJack (CALL).

17) The new CEO - Gerald Vento was named CEO to replace Borislow. Besides being based in Boston, while magicJack is based in West Palm Beach, it is also odd that he previously lived a few miles away from Borislow and bought stock directly from Borislow at a 30% discount. Vento was accused of accepting secret bribes while at TeleCorp and never disclosing the "secret deals" to shareholders or TeleCorp's Board. While the detailed claims against him in a shareholder lawsuit may be without merit, 8 former TeleCorp executives (including Vento) and AT&T settled for $47.5 million to ensure the suit did not go to trial.

18) Fair Value is $4.95 - $7.15 - Borislow's parting words on his departure call were, "I really don't know why this won't be a $100 stock in the next 12 months." We disagree. Normalizing magicJack's earnings for all of the shenanigans, we believe a more reasonable annual earnings run-rate is approximately $0.55 per share. Using several scenarios based on different comp sets, CALL's existing multiple, and its closest competitor Vonage, we arrive at fair value as much as 70% below where the stock is currently trading.

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[i] http://www.slate.com/articles/business/moneybox/1998/11/dotcom_delusion.html

[ii] www.sec.gov/about/laws/sa33.pdf

[iii] http://www.sec.gov/about/forms/form8-k.pdf

[iv] www.linkedin.com/pub/mark-pavol/26/150/495

Disclosure: I am short CALL.

Additional disclosure: IMPORTANT Disclaimer – You should do your own research and due diligence before making any investment decision with respect to securities covered herein. As of the publication date, the author of this report has a short position in the company covered herein and stands to realize gains in the event that the price of the stock declines. The author does not discuss unpublished reports, or provide any advanced warning of future reports to others. Following publication of this report, the author may transact in the securities of the company, and may be long, short, or neutral at any time hereafter regardless of our initial opinion. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind – whether express or implied. The author of this report makes no representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice and the author does not undertake to update or supplement this report or any of the information contained herein. This is not an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction.

Today we published a report on Ebix (EBIX). It can be found in its entirety at:

www.scribd.com/doc/115628889/EBIX-If-the...-suspect

Below is a piece of the report. THE REPORT SHOULD BE READ IN ITS ENTIRETY AS THE SEGMENT BELOW ONLY CONTAINS HIGHLIGHTS AND THE APPROPRIATE REFERENCES ARE FOUND IN THE FULL REPORT:

On March 24th, 2011, we shared our first research report on Ebix in a three part series that was published on the main page of Seeking Alpha.[1] We argued among other things that Ebix had: misrepresented organic growth, been reporting questionable cash flow generated by a potentially illegal tax scheme, multiple auditor resignations, governance abuses, and a highly promotional, contentious CEO. We concluded that Ebix was nothing more than a roll-up with a misrepresented business model. Further, our analysis detailed a lack of de novo growth, which was supplemented with two tactics: tax arbitrage and destructive cost cuts (headcount reductions and offshoring). We questioned the sustainability of this strategy and notified the IRS and SEC of the material abuses we believed were so pervasive at Ebix. Since our original report, damaging information has materialized, including accusations from former employees of Peak that Ebix made "Fraudulent Misrepresentations" and "acted with utter disregard and recklessness." It is our opinion that the malfeasance at Ebix is even more egregious than what occurred at OCZ, which we wrote about last year.[2] Since our report on OCZ, the CEO and CFO have resigned, the stock has declined by 85%, and the company disclosed an SEC investigation on November 21, 2012.[3]

Earlier this month, Bloomberg News reported that the SEC is currently conducting an investigation into Ebix in a story titled "Ebix Accounting Practices Said to Be Probed by SEC."[4] According to Bloomberg, the SEC investigation has been ongoing for the past year and is "focused on revenue recognition, internal controls and the accuracy of the company's public statements to shareholders." The Bloomberg article cited information from four different sources, including three former Ebix employees who had conducted interviews with the SEC, as well as naming the specific SEC attorney leading the investigation. The article implied the investigation also focused on "Ebix's strategy of booking U.S. revenues to units based in Singapore and India" which we criticized as the heart of Ebix's potentially illegal tax scheme. Since our initial report, we believe the ingredients for a full blown SEC investigation have only grown. In this brief report, we will discuss: 1) The SEC Correspondence History and a Vociferous Denial. Despite ardently denying any knowledge of an SEC investigation, Ebix has filed 40 comment and response exchanges with the SEC. Mysteriously, the public exchanges with the SEC stopped around the same time Bloomberg reports that an investigation began. 2) The Continued Misrepresentation of Growth and Altered Disclosures. Based on recent public disclosures, we believe Ebix has continued to misrepresent its growth, and in fact organic growth was NEGATIVE in Q3'12. Ebix reported 1H'12 pro-forma organic growth in the most recent 10Q that does not reconcile with the figures provided in the 10Q's from the first and second quarter. An amended 10Q from the first quarter introduced new disclosures for pro-forma revenues that were not presented in the original filing. Based on our analysis, Ebix may have misrepresented its pro-forma revenue growth in the first and second quarter 10Q's by 30x compared to the 0.2% that was implied in the third quarter 10Q. Investors that bought Ebix stock in the first two quarters of 2012 may have done so on the basis of organic growth numbers that were overstated. 3) The Damning Accusations made in the Peak Lawsuit. Another acquired company is suing Ebix for failing to make earn-out payments. The plaintiff's testimony describes countless examples of dysfunction, misrepresentation, and insufficient internal accounting controls at Ebix. The lawsuit provides vivid accusations of behavior that ranges from unscrupulous to incompetent, including an example where "Ebix's own CFO and Controller [were] unable to agree on Peak's revenue….and in fact disagree[d] by more than $800,000 over a one year period." Despite the severity of the accusations, we have been unable to find disclosures of the Peak lawsuit in Ebix's most recent SEC quarterly filings. Should the allegations levied against Ebix be true (failure to manage billing, collection, sales, taxes, regulatory payments, and accounting for Peak), then it would seem probable that those same failures would be found by the SEC at the corporate level. 4) Additional Lawsuits and Contingent Payments. Ebix is facing at least two class action lawsuits that appear headed to trial. One class action complaint includes testimony from a former senior Ebix employee who corroborates the dysfunction and weak internal controls alleged in the Peak lawsuit. This incriminating evidence may be integral to any investigation the SEC has launched. Further, Ebix also faces at least two lawsuits accusing them of failing to pay earn-outs. With $30 million of balance sheet earn-out liabilities, investors may begin to view this line as a debt-equivalent, and question "one-time" P&L benefits from reversing the earn-outs. 5) Our Original $9.00 Target Did Not Consider SEC or IRS Action. For a roll-up business with negative organic growth, overstated margins given limited investment in the business, quality of earnings issues, the potential for a massive overhang from regulatory investigations, lawsuits, and the possibility of significant liability or fines relating to the questionable tax strategy, we now believe that a more appropriate multiple should be 4x to 5x LTM EBITDA. This would be approximately $5.50 to $7.70 per share, or downside risk of 55% to 68%.

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[1] scribd.com/doc/51304576/Ebix-Not-a-Chine...-Nonetheless

[2] scribd.com/doc/53435574/OCZ-The-Master-o...-Deceitful

[3] marketwire.com/press-release/ocz-technol....htm

[4] bloomberg.com/news/2012-11-05/Ebix-accou....html

Disclosure: I am short EBIX.

Additional disclosure: IMPORTANT Disclaimer – You should do your own research and due diligence before making any investment decision with respect to securities covered herein. As of the publication date, the author of this report has a short position in the company covered herein and stands to realize gains in the event that the price of the stock declines. The author does not discuss unpublished reports, or provide any advanced warning of future reports to others. Following publication of this report, the author may transact in the securities of the company, and may be long, short, or neutral at any time hereafter regardless of our initial opinion. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind – whether express or implied. The author of this report makes no representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice and the author does not undertake to update or supplement this report or any of the information contained herein. This is not an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction.