Has Green Mountain Coffee Roasters (GMCR) fumbled in managing its inventory or has it engaged in an inventory fraud to inflate earnings?

Background

As the criminal CFO of Crazy Eddie, I learned that the overstatement of inventory levels was the easiest way to inflate earnings. Auditors don't always supervise the counting of each and every physical inventory item to confirm their existence. Even if the auditors confirm the physical existence of all inventory items, they don't always trace how every single item arrived in a company's storage facilities. Therefore, the same inventory items can be moved from location to location and counted several times to inflate earnings.

In September 2010, the Securities and Exchange Commission started a probe of Green Mountain Coffee's revenue accounting practices. Shortly afterward, a class action lawsuit was filed against the company alleging that it engaged in securities fraud by inflating its inventory numbers

Last Thursday, a lawsuit seeking class action status was filed against ZAGG INCORPORATED (ZAGG), certain members of its board of directors, and certain officers of the company. It alleges that they violated federal securities laws by improperly concealing certain stock pledges made by ZAGG's former CEO and Chairman Robert J. Pedersen. Other law firms who specialize in bringing class action lawsuits have announced that they are contemplating filing complaints against ZAGG. (Download the complaint here).

ZAGG makes protective coverings for Apple's (AAPL) iPhone and iPad and other devices. Big-box retailers such as Best Buy (BBY) and Wal-Mart (WMT) carry ZAGG's product.

Background

On Friday August 17, 2012 ZAGG issued a press release saying that its co-founder Robert Pedersen resigned from his posts as CEO and Chairman. It did not mention any reason for his resignation. Later that day, Robert Pedersen was interviewed by

Earlier Tuesday, ZAGG Inc. (NADAQ: ZAGG) held a conference call with investors in an effort explain the sudden resignation of its co-founder Robert Pedersen as its CEO and Chairman of the Board of Directors on August 17, 2012. However, the company's explanation of the reasons behind Pedersen's resignation raises more questions than it answers.

Background

On Friday August 17, 2012, Robert Pedersen resigned from his posts as CEO and Chairman of ZAGG. The company's press release did not mention any reason for his resignation. However, on that very same day after the market closed, Robert Pedersen filed a Form 4 with the Securities and Exchange Commission. It disclosed that he sold 515,000 shares at an average price of $8.2214 per share on August 14, just three days before ZAGG announced that he resigned from the company. Pedersen sold 512,240 of those shares to "to meet margin

Green Mountain Coffee Roasters (GMCR) can't seem to get its act together. It appears to have made a significant error in a recent revision of its segment numbers. Specifically, $15.2 million of purported revenue adjustments for a twenty-six period in 2011 are unaccounted for. Its revenue adjustments do not match revenue numbers disclosed in other financial reports.

Background

Green Mountain Coffee Roasters operates its business under three segments: Specialty Coffee business unit ("SCBU"), Keurig business unit ("KBU") and a Canadian business unit ("CBU"). Starting in fiscal year 2012, GMCR moved its Timothy's subsidiary out of the SCBU segment and into the CBU segment. At the same time it moved a portion of the At Home ("AH") single cup business from its KBU segment to its CBU segment.

In subsequent 10-Q reports issued during fiscal year 2012, Green Mountain Coffee revised its previous fiscal year 2011 segment numbers to show

Last April, the Securities and Exchange Commission Division of Corporation Finance sent Green Mountain Coffee Roasters (GMCR) a comment letter requesting certain information about its segment reporting in its 10-K report for the fiscal year ended September 24, 2011. The S.E.C.'s comment letter and the company's response were just made public this week.

Green Mountain Coffee has three operating segments: Specialty Coffee business unit ("SCBU"), Keurig business unit ("KBU") and a Canadian business unit ("CBU"). The company provided certain financial information to the S.E.C. examiners relating to its Timothy's subsidiary for the five-quarter period ended September 24, 2011 when it was included in the SCBU reportable segment. However, Timothy's numbers appear to be erroneous when compared to financial disclosures made by the company in other S.E.C. filings.

If Green Mountain Coffee's numbers are to be believed, then its income before taxes for its Timothy's subsidiary exceeded

There is a saying among white collar criminals, “When you are caught in the act of doing something wrong, play stupid. Tell them that you made an inadvertent error. Never admit to any deliberate wrongdoing. Being stupid is not a crime in America.”

The board of directors and executives running Green Mountain Coffee Roasters (GMCR) appear to want the Securities and Exchange Commission which is investigating the company, the judge presiding over class action lawsuits alleging securities fraud, and investors to believe they are incredibly incompetent or grossly negligent, rather than admit to any deliberate wrongdoing. There can be either one of two answers for the continuing mishaps plaguing Green Mountain Coffee. Either they are dumb or they engaged in deliberate wrongdoing. Unfortunately, none of those answers bode well for the company. In any case, a rational question to ask is “Why are these clowns still running a $3.74 billion

In the days leading up to Green Mountain Coffee's (GMCR) latest earnings report released yesterday, this blog published two reports warning investors about a toxic level of inventory building up at the company. (Details of those reports here and here.)

I detailed how in every quarter since the start of fiscal year 2011, Green Mountain Coffee's inventory turnover had decreased when each quarter's numbers are compared to the same quarter of the previous fiscal year. In four of those five quarters, Green Mountain Coffee's reported revenues exceeded the guidance it gave investors just weeks earlier. Its inventory turnover should have increased because it delivered more products than anticipated to its customers before the close of each quarter to meet unexpected excess demand. Instead, Green Mountain Coffee's inventory turns decreased, reflecting a longer time to sell its inventory despite reporting revenues that exceeded it projections.

Yesterday, Green Mountain

In four of the last five quarters since the beginning of fiscal year 2011, Green Mountain Coffee’s (GMCR) reported revenues exceeded the revenue guidance it gave investors just weeks before the close of each quarter. In those quarters, its inventory turnover should have increased compared to the same quarter of the previous year because it delivered more products than anticipated to its customers before the close of each quarter to meet unexpected excess demand. Instead, Green Mountain Coffee’s inventory turns decreased, reflecting a longer time to sell its inventory despite reporting revenues that exceeded it projections.

Furthermore, in every quarter since the start of fiscal year 2011, Green Mountain Coffee's inventory turns have increased when each quarter’s numbers are compared to the same quarter of the previous fiscal year. It's taking Green Mountain Coffee longer to sell its inventory when you compare each quarter to the same quarter of

Does Green Mountain Coffee Roasters (GMCR) have a problem managing its inventory levels, or is the company inflating its inventories to overstate its reported profits as alleged in a class action lawsuit against the company? The Securities and Exchange Commission is investigating Green Mountain Coffee's accounting practices.

Decreasing inventory turnover

Over the last two fiscal years, Green Mountain Coffee's inventory turnover substantially decreased to 3.74 turns per year in the fiscal year ended September 24, 2011 compared to 4.72 turns per year in the previous fiscal year ended September 25, 2010. It took the company an average of 97.69 days to sell its inventory in fiscal year 2011 company compared to 77.36 days to sell its inventory in fiscal year 2010. In other words, it took about 22 days longer for the company sell its inventory in fiscal year 2011 than in fiscal year 2010.

The above consolidated

Green Mountain Coffee Roasters (GMCR) claims to have gone to great lengths to remediate its internal control and compliance problems since the Securities and Exchange Commission started an inquiry of the company in September 2010 and since it restated its financial reports due to material accounting errors. However, certain contradictory disclosures by the company call into question the sincerity of its remedial efforts.

In a press release dated February 22, 2011, Green Mountain Coffee announced:

WATERBURY, Vt.--(BUSINESS WIRE)-- Green Mountain Coffee Roasters, Inc., a leader in specialty coffee and coffee makers, announced today the appointment of Linda Kazanova as Vice President and Chief Human Resources Officer effective Thursday, February 17, 2011. [Emphasis added.]

On November 14, 2011 Green Mountain Coffee filed its fiscal year ended September 24, 2011 10-K report with the Securities and Exchange Commission. On page F-43, the company reiterated that Linda Kazanova started

Last Friday, Overstock.com (NASDAQ: OSTK) reported a fourth quarter net loss of $3.4 million compared to net income of $14.9 million in the previous year’s fourth quarter. Its revenues declined 10% to $314.1 million compared to $348.9 million in the previous year's fourth quarter. Details of the fourth quarter financial results were so bad, that Overstock.com did not present a full income statement for that quarter in its press release.

Instead it only provided key metrics of its fourth quarter numbers and presented a full year income statement. For the entire year, Overstock.com reported a net loss of $19.4 million compared to net income of $13.9 million in the previous year. Its 2011 revenues decreased 3% to $1.054 billion compared to $1.090 billion in the previous year.

As of December 31, 2011, the company reported a net working capital deficit (current assets less current liabilities) of $14.1 million.

Yesterday, I described how Overstock.com (NASDAQ: OSTK) defaulted on its loan covenants with U.S. Bank because of its failure to a file timely report with the Securities and Exchange Commission. In addition, I detailed how the company improperly delayed disclosure of the loan default until it could obtain a waiver from the bank. Now it appears that Overstock.com’s failure to file a timely report with the S.E.C. made it ineligible to file its Form S-3 registration statement on December 9, 2011 where it is seeking to raise additional funds to keep the company afloat. In addition, Overstock.com's continuing failure to comply with S,E.C. rules could indicate that is has a material weakness in internal controls. The company seems to be incapable of complying with S.E.C. rules even as it faces a continuing investigation by the regulator into previous financial shenanigans.

Background

On March 21, 2011,

Last Friday after the stock market closed, Overstock.com (OSTK) filed an 8-K report and disclosed that it defaulted on its loan covenants with U.S. Bank. The loan default resulted from Overstock.com's failure to file timely reports with the Securities and Exchange Commission. The bank granted the company a waiver of default. However, a close examination of the company’s various S.E.C. filings reveals that Overstock.com committed another securities law violation. The company improperly delayed the disclosure of the loan default to investors for several more weeks until it could resolve the default issue with the bank. Even in the face of an ongoing S.E.C. investigation into previous financial shenanigans, Overstock.com continues to flout securities law right under the nose of regulators.

Since public companies have up to four business days to file an 8-K report, they often choose to disclose negative news on a Friday, after the stock

Various mutual funds managed by Canadian investor Francis Chou have lost about $34.328 million to date on their collective investments in Overstock.com (NASDAQ: OSTK) based on an examination of publicly available documents. Those mutual funds currently own 3,260,738 shares of Overstock.com common stock at a total approximate cost of $56,989,945, an average cost of $17.48 per share. On Monday, Overstock.com shares closed at $6.95 per share, placing the total market value of shares held by Chou’s mutual funds at $22,662,129. That's a decline of about 60% from their original cost. (Link to my calculations).

Back in 2004, Chou said, "If you stick to the principle of value investing, things will work out well for you. If you breach that principle, it will hurt you badly." In the past, Overstock.com has been caught fabricating profits and its CEO Patrick Byrne has attacked me for pointing out

In an interview last Monday with veteran investigative reporter and best-selling author Gary Weiss, I described how executives at Green Mountain Coffee Roasters (NASDAQ:GMCR) apparently received higher bonuses in 2011. This is because computations for annual cash incentive rewards did not take into legal and accounting expenses relating to an ongoing Securities and Exchange Commission probe into its financial reporting and class action litigation alleging securities fraud. Those executives are already indemnified for legal fees to defend themselves in any SEC. investigation and class action lawsuit.

It’s equivalent to management double dipping into corporate coffers at the expense of shareholders. While the company has the burden of paying for the ongoing SEC. probe and management’s legal defense in class action lawsuits, their bonuses don’t take into account such costs. It’s like tossing a coin and if it lands on heads, management wins, or if it lands on tails, investors

Yesterday, Overstock.com (OSTK) disclosed that it was forced to pay off its existing obligations under a Master Lease Agreement with US Bank to avoid an anticipated default under its covenants on December 31, 2011. So far, Overstock.com has lost $16 million in the first nine months of the year compared to only a $1.1 million loss during the previous year's nine month period. The termination of the Master Lease Agreement by Overstock.com to avoid a pending default appears to confirm that it will report dismal fourth quarter 2011 numbers.

According to the 8-K report filed with the Securities and Exchange Commission after the market closed on December 28, 2011:

On December 27, 2011 Overstock.com, Inc. (the “Company”) and U.S. Bancorp Equipment Finance, Inc. - Technology Finance Group (“Lessor”), agreed to terminate a Master Lease Agreement, dated September 17, 2010 (“Master Lease Agreement”) and all related schedules. The

Last week, I suggested that j2 Global Communications Inc. (NASDAQ:JCOM) could have misinterpreted certain accounting rules and that it should consider restating its financial reports issued in 2010. My analysis was based on a report issued by independent research firm Gradient Analytics and an examination of accounting rules and company disclosures. This blog post will examine how j2 Global has attempted to downplay certain problems in its financial reporting and provide even more compelling reasons for the company to consider restating its financial reports.

Background

Up to 2010, j2 Global apparently estimated the remaining life under its annual contracts with eFax customers to compute its deferred revenues, revenues, and earnings. In the first quarter 2011 10-Q report j2 Global disclosed that it upgraded its accounting systems and started using the actual useful life under its annual contracts with eFax customers to compute those numbers:

In the first

j2 Global Communications Inc. (JCOM) may have misinterpreted certain accounting rules and needs to consider restating its financial reports issued in 2010 based on certain new information it obtained from a “systems upgrade” in early 2011 that “permitted an accurate measurement of the remaining useful life” in its annual contacts with eFax customers.

Background

If a customer pays an annual fee in advance, a company reports a deferred revenue liability (unearned fees) because the fee is not yet earned. As time progresses on the annual contract, the company reduces its deferred revenue liability and increases its revenues as those fees are earned. Up to 2010, j2 Global apparently estimated the actual remaining life under those contracts to compute its deferred revenues, revenues, and earnings.

In the first quarter of 2011, j2 Global upgraded its accounting systems and started using the actual useful life under its annual contracts with eFax

Overstock.com (OSTK), also known as O.co, faces possible insolvency if current earnings trends continue and it cannot restructure two loans with U.S. Bank (USB), its biggest creditor, by March 31, 2012 at the latest. In an apparent effort to mask its weakening net working capital position, it played a shell game to window dress its balance sheet at the end of the third quarter (September 30, 2011). Overstock.com owed U.S. Bank $20.329 million under the “Master Lease Agreement” (sale-leaseback) and another $17 million under a “Financing Agreement” (line of credit). Therefore, the company owes U.S. Bank $37.329 million under two loan agreements.

Last week Overstock.com surprised investors by reporting a third quarter $7.8 million net loss (diluted earnings per share of negative $0.33) compared to a net loss of $3.4 million (diluted earnings per share of negative $0.15) in the previous year’s third quarter. Its net loss was $0.10 per

Green Mountain Coffee Roasters (NASDAQ: GMCR) finally released additional information about its accounting for reserves to all investors in its website, in response to my letter to the Securities and Exchange Commission detailing what I believe are violations of Regulation FD and accounting irregularities by the company. The company admitted its reserve numbers were "misinterpreted" because of inconsistent reporting in its Statement of Cash Flows.

However, its numbers still don't add up. See below (click to enlarge images):

Green Mountain Coffee reported separate balances for its sales returns reserve and its allowance for doubtful accounts in the fiscal year ended September 25, 2010 10-K of $12.742 million and $1.314 million, respectively. However, the company combined the balances