MeetMe (NASDAQ:MEET) recently traded at a four-year high of $7.49 a share, giving the company a market cap of over $350 million. I believe investors should carefully scrutinize recent events and disclosures that raise questions worth considering. These issues were not addressed in (1) Pinnacle Fund's Seeking Alpha article of July 5 authored by Greg Kitt, which was a long-focused article that nicely summarized the positive aspects of MeetMe's pending acquisition of Skout and the associated monetization opportunities, (2) the Seeking Alpha article of July 26 posted by Tyler Griffin, which comprehensively addressed MEET's valuation issues and also addressed the Skout acquisition, and (3) the August 2 Seeking Alpha article by Christopher F. Davis, whose article covered the recent stock price breakout and Q2 earnings. Allow me, if you will, the opportunity to provide a somewhat different perspective on MeetMe.
Note: MeetMe was formerly known as Quepasa Corporation from July 9, 2003, through May 25, 2012. To avoid confusion and to simplify references to the company in this article, I have used "MeetMe" in lieu of Quepasa in any references to the company that predated May 25, 2012.
Professor Beneish's Manipulator Score - Where MeetMe Ranks
Using The Original Beneish Model: Eight and Five Variables
In 1999, Professor Messod D. Beneish issued a paper (available here) entitled, "The Detection of Earnings Manipulation," which first introduced the concept of the Manipulator Score. Known as the M-Score, the original M-Score used an eight variable equation to determine if a company was manipulating its earnings. Although Professor Beneish later simplified the formula to five variables (the differences between the eight variable model and the five variable model were immaterial, as discussed here), Professor Beneish's M-Score correctly identified 76% of companies that engaged in earnings manipulations in the Compustat database from between 1982 and 1992. Non-manipulators were incorrectly identified as manipulators in 17.5% of the cases.
An interesting fact that is not well known is that students at Cornell University's Business School issued an analysis in May 1998 (available here) using the M-Score to advise investors to sell Enron before the fraud was uncovered in October 2001. It is only fair to mention that Enron's stock increased substantially in value in 1999 and 2000, so an investor who sold Enron stock based on the students' report left some money on the table. On the other hand, investors who sold when the Cornell students' report came out - when the stock was at $48 per share - would have avoided a nearly 100% loss when you consider Enron's stock closed at $.67 per share on November 28, 2001.
As stated by Business Insider, "A[n M-]score greater than -2.22 (i.e. less negative than this) indicates a strong likelihood of a firm being a manipulator." (Emphasis added)
I ran both the eight variable and five variable M-Scores for MeetMe, using the relevant financial information from the 2014 and 2015 audited financial statements contained in the 10-K filed March 8, 2016 (available here). If my calculations are correct (and I invite anyone to re-run those calculations), then MeetMe's M-Score is -1.95 using the five variable model and -1.91 using the eight variable model. For purposes of comparison, the Cornell students calculated the five variable M-Score for Enron as being -2.26 and the eight variable M-Score as being -1.89.
I also calculated the M-Score for MeetMe using the 2013 and 2014 financial information. Those calculations indicated an M-Score of -2.99 using the five variable model and -2.96 using the eight variable model. Investors should note two very important facts: the very significant decline (34.7%) in the five variable M-Score from 2013/2014 to 2014/2015, and the very significant decline (35.4%) in the eight variable M-Score for the same periods. MeetMe's "non-manipulator" status in 2013/2014, in other words, offers cold comfort. If MeetMe was categorically unlikely to have been a "manipulator" using the 2013/2014 data, the material decline in the 2014/2015 M-Score into "manipulator" territory is cause for concern.
Using Updated 2013 Beneish Model
On June 30, 2015, Red Team Analytics posted a nice article on Seeking Alpha (available here) concerning the updated M-Score model which Professor Beneish wrote about in 2013. In that article, Red Team Analytics noted that older versions of the M-Score model are not supported by Professor Beneish's current model, which now utilizes a different eight variable model. Using the latest M-Score model, I came up with an M-Score of -1.99 for MeetMe. Professor Beneish, as Red Team Analytics points out, classifies a company as a manipulator if its M-Score is greater than (i.e., less negative than) -1.78.
Based on the M-Score for MeetMe derived from Professor Beneish's 2013 model, it appears MeetMe would not be classified as a manipulator. While this conclusion may give long investors some comfort, I would suggest that investors consider the movement in the M-Score from year to year as material. I calculated MeetMe's M-Score as equaling -2.92 using 2014 and 2013 financial information. The movement from -2.92 to -1.99 equals a 31.8% change in MeetMe's M-Score - a very significant decrease that should be cause for concern.
Professor Beneish was careful to note that the M-Score can yield false positives and is not a 100% predictor of earnings manipulation. To state the obvious, no formula or equation could ever predict all financial statement fraud - or no financial statement fraud would exist. We know that is not reality in today's world. However, as one tool in the investor's toolbox, the M-Score can provide interesting insights into the potential that a company is manipulating its earnings.
Calculation notes: When calculating the M-Score, I used actual numbers as reflected in the financial statements without rounding. Fractions were used out to six decimal places without rounding. Depreciation was sourced from note 5 to the financial statements. Long-term debt included both long-term debt and long-term capital leases.
Why Has Turnover Been So High In The C-Suite and Among Directors?
The following list reflects turnover in the C-Suite and among MeetMe directors from March 1, 2012, through July 3, 2015. It is worth noting that each departing executive resigned (and was not terminated) and, in the case of several of the directors, the directors resigned and declined to stand for re-election.
|Jim Bugden||CAO and SVP-Finance||March 2, 2012|
|Michael Matte||CFO||February 12, 2013|
|Michael Matte||EVP - Finance||March 31, 2013|
|Gavin Roy||CTO||Sept. 3, 2013|
|Richard Lewis||Director||April 24, 2013|
|Terry Herndon||Director||June 3, 2013|
|Steven M. Besbeck||Director||Nov. 1, 2013|
|Lars Batista||Director||Dec. 19, 2013|
|Malcolm Jozoff||Director||Dec. 19, 2013|
|Richard Friedman||CTO||July 3, 2015|
As you can see, MeetMe is now on its third CTO in four years and experienced a 100% turnover in top accounting officers in 2012 and 2013. What is equally intriguing is that Mr. Bugden, the CAO, resigned exactly 12 days before the 2012 10-K was filed (although he gave two weeks' prior notice of his resignation), and Mr. Matte resigned as CFO 32 days before the 2013 10-K was filed.
Turnover in Top Accounting Officers in 2012 and 2013
It is not uncommon to see turnover among the CFO, CAO and controller positions after financial executives have exhausted themselves completing a 10-K. You can see why, as these officers are responsible for:
- Closing year-end,
- completing year-end financials,
- assembling company schedules,
- preparing analyses and information requested by the auditors,
- drafting and revising the 10-K,
- interfacing with counsel,
- working through issues and questions from the audit committee,
- securing approval to file the 10-K from the audit committee and the board, and
- beginning work on the 10-Q for the first quarter.
It is common sense that financial executives leaving the employ of a public company early in the year generally don't want to leave their employer until after the 10-K is filed. There are two interrelated reasons for this. Resigning shortly before the 10-K is to be filed may result in the employer's filing being delayed if the company is unable to easily replicate the executive's knowledge of specific matters. The submission of a notification of late filing on Form 12b-25 is not catastrophic, but accelerated filers such as MeetMe strive to timely file their periodic reports to avoid raising questions about the company's financial statements, disclosures, financial statement closing process, or internal controls. And because financial executives want positive references from their soon-to-be former employer - which definitely will not be forthcoming if the employer is delayed in filing the 10-K - the executives will avoid departing in a way that could adversely affect the employer's timely filing of the 10-K.
Both Messrs. Bugden and Matte signed the signature page of Amendment No. 1 to the Form S-3 which MeetMe filed on November 23, 2011. The S-3 described the acquisition of Insider Guides, which operated the social networking site myyearbook.com, on November 10, 2011.
The S-3 included unaudited pro forma financial statements for MeetMe and Insider Guides, Inc., and also included unaudited financial information for Insider Guides for the three and nine months ended September 30, 2011. Audited financial statements for Insider Guides for 2010 and 2009 also were included in the S-3.
With Mr. Bugden having resigned before the 2011 10-K was filed, Mr. Bugden was not required to sign the signature page of that 10-K. It is not possible to ascertain if Mr. Bugden had concerns about being associated with the consolidated 2011 MeetMe financial statements and if those concerns led to his resignation.
On March 14, 2013, Mr. Matte signed the 2012 10-Ks signature page (available here) in his capacity as Executive Vice President of Finance, the position from which he had already tendered his resignation. However, that resignation was not effective until March 31, 2013, or 17 days after the 2012 10-K was filed. The 2012 10-K signature page states that Mr. Matte, as Executive Vice President of Finance, signed the 10-K as MeetMe's principal financial officer.
The Non-Compliant 10-Ks and Their Incorporation by Reference Into Offering Documents
The instructions to Form 10-K require that a 10-K be signed by the registrant "and on behalf of the registrant by its principal executive officer or officers, its principal financial officer or officers, its controller or principal accounting officer, and by at least the majority of the board of directors..."
It is understandable that Mr. Clark, who became the new CFO on February 13, 2013, might have been reluctant to sign the signature page of the 2012 10-K as principal accounting officer. As someone who joined the company only after the 2012 fiscal year, he rightly would be concerned about signing off on a filing covering a period during which he was not even employed by MeetMe.
Because Mr. Matte had resigned as CFO on February 13, however, MeetMe was required to have its controller or principal accounting officer sign the 2012 10-K's signature page in the capacity of principal accounting officer. No signature of the controller or principal accounting officer appears on the 2012 10-K's signature page. This non-compliant filing was incorporated by reference into MeetMe's S-3 registration statement that was declared effective by the SEC on September 9, 2013.
Similarly, as Mr. Bugden had resigned as CAO before the 2011 10-K was filed and Mr. Matte only signed the 2011 10-K signature page as principal financial officer, the controller or principal accounting officer was required to sign the signature page of the 2011 10-K. Neither the controller nor the principal accounting officer's signature appears on the signature page of the 2011 10-K.
Assuming the offering described in MeetMe's previously filed S-3 registration statement - declared effective by the SEC on December 5, 2011 - was not yet terminated when the 2011 10-K was filed on March 14, 2012, then the non-compliant 2011 10-K was incorporated by reference into the S-3 (per the statement in the S-3 that, "all documents subsequently filed pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act prior to the termination of the offering shall be deemed to be incorporated by reference into the prospectus").
The non-compliant 2011 and 2012 10-Ks were also incorporated by reference into the S-8 registration statements filed by MeetMe on July 1, 2011, and June 18, 2012, pursuant to Part II, Item 3 of each S-8. Those registration statements incorporate by reference all subsequently filed Section 13(a) reports, including annual reports on Form 10-K.
Frankly, I'm less concerned about violations of Form 10-K signature requirements and the filing of S-3 and S-8 registration statements that incorporated non-compliant filings, and more concerned about what this "oversight" - combined with the peculiar timing of Messrs. Bugden's and Matte's resignations - may imply about then-existential concerns about MeetMe's accounting.
Surely, MeetMe then employed a controller who could have signed off as principal accounting officer with respect to these two 10-Ks. And with MeetMe being represented by Mr. Beckley, the general counsel, and Morgan, Lewis & Bockius in connection with the S-3 filed in 2013, one can safely assume that MeetMe had extremely competent counsel who would have identified the missing signature when reviewing the filings incorporated by reference into the 2013 S-3 and the outstanding S-8 registration statements.
Something about this series of events leaves me feeling more than vaguely uncomfortable.
Director Turnover: The Wave of 2013 Resignations
As you can see in the table above, five directors of MeetMe resigned from the board of directors from April to December of 2013. If you review the 8-Ks related to these resignations (available here, here and here), you will see that none of these directors submitted a resignation letter that required disclosure by MeetMe (as none were disclosed). In addition, none of the 8-Ks disclose the reasons the directors resigned. To forestall speculation about why multiple directors choose to resign in a short period, public companies typically cite "personal reasons" or "personal obligations" as the reason for the resignations - when, of course, this is the case. MeetMe provided no explanation at all for any of the directors' resignations.
It is important to note that Messrs. Geoffrey Cook, Richard Lewis and Terry Herndon were appointed to MeetMe's board on November 10, 2011, as board designees of Insider Guides, which MeetMe acquired on that date. According to MeetMe's disclosure of the acquisition's terms, MeetMe "agreed to include the Designees on the slate of directors recommended for election by the Company's shareholders for a period of three years following the Merger." (Emphasis added)
When MeetMe appointed new directors to replace Messrs. Lewis and Herndon on April 24, 2013, and June 3, 2013, the accompanying disclosure read as follows:
"Pursuant to the November 10, 2011, merger of the Company with Insider Guides, Inc., d/b/a myYearbook.com, the Company agreed to nominate Mr. Cook and two other of Mr. Cook's designees to serve as directors for three years. [Name of nominee] is serving as such a designee." (Emphasis added)
If you review Section 5.19 of the Agreement and Plan of Merger between MeetMe, a subsidiary, and Insider Guides dated July 19, 2011 (available here), you will see that the board nomination right is one assigned to Insider Guides, not to Mr. Cook individually. While someone arguably has the right to act on behalf of Insider Guides - which no longer exists - I believe the disclosure about "Mr. Cook's designees" is somewhat misleading.
Note one very important fact: Messrs. Lewis and Herndon were contractually granted board seats until November 11, 2014, as Insider Guides' nominees. Yet, both of these directors chose voluntarily to resign approximately halfway through their terms. These resignations - on the heels, if you will, of Mr. Matte's resignations as CFO and Executive Vice President of Finance - raise more questions:
- Why would Messrs. Lewis and Herndon resign after approximately 18 months if they had the right to serve for three years?
- Is it coincidence that a majority of the MeetMe board members resigned in the nine months after Mr. Matte's resignation?
- Why would all five directors resign without submitting resignation letters?
- If the directors resigned for personal reasons or due to personal obligations, why didn't MeetMe describe the resignations using customary disclosure?
- If the directors resigned for other reasons, what were those reasons? Was disclosure required as to those reasons or not? Why not?
I believe investors should take careful note of the timing, undisclosed reasons for, and number of director resignations in 2013. Additionally, the turnover in principal accounting personnel in 2012 and 2013 provides important context that should be factored into this analysis.
Background: 10b5-1 Plans
First, a little background about Rule 10b5-1, which the SEC adopted in August 2000.
Rule 10b5-1 allows insiders who (1) regularly possess material nonpublic information, and (2) wish to buy or sell the company's securities, to establish an affirmative defense to insider trading charges by adopting a written plan to buy or sell the company's securities. Insiders include executive officers, directors and control shareholders privy to material nonpublic information, among others. Rule 10b5-1 plans must be established in good faith and when the insider is not in possession of material nonpublic information about the company or its securities and the plan must:
- Specify the price, number of shares, and dates of sale or purchase, or
- include a formula or algorithm for determining the price, number of shares, and dates of sale or purchase, or
- provide the administering broker the exclusive right to decide when, how and whether to make trades so long as the broker is not aware of material nonpublic information at the time of the trades.
The affirmative defense against insider trading charges is only available if:
- The insider who establishes the plan subsequently exercises no influence over when, how or whether to make trades, and
- the trades are made pursuant to the plan.
An insider may cancel a 10b5-1 plan even if an insider is aware of material nonpublic information, as the SEC has taken the position that insider trading charges cannot be brought in the absence of the purchase or sale of a security.
The CEO's 10b5-1 Plans
Geoffrey Cook was appointed CEO of MeetMe on March 11, 2013, a position he continues to hold today.
Mr. Cook filed a Form 4 on October 28, 2015, which stated in relevant part:
"The sales reported in this Form 4 were effected pursuant to a Rule 10b-5-1 trading plan. There will be no additional sales under Mr. Cook's 10b-5-1 trading plan, dated as of December 1, 2014." (Emphasis added)
This disclosure is the only disclosure I could locate which actually referenced when Mr. Cook adopted his first 10b5-1 plan. Remember that a 10b5-1 plan can be adopted when the insider is not in possession of material nonpublic information about the company. I have one concern about the date on which Mr. Cook's plan was adopted, i.e., at the time of adoption, the fourth fiscal quarter was then 2/3rds complete. The press release summarizing 2014 results was filed by MeetMe under cover of an 8-K filed with the SEC on February 27, 2015. That press release (incorrectly dated February 27, 2014, rather than 2015) noted, among other things, that:
- Mobile revenue for the fourth quarter was up 50% "year over year"
- Mobile revenue in the fourth quarter represented the highest percentage of total revenue ever attained by MeetMe
- Mobile average revenue per daily active user was up 27% from the fourth quarter of 2013
- Net income increased to $847,000 compared to $15,000 for the fourth quarter of 2013
Each of these key performance indicators (KPIs) would be considered as material by investors, at least in my view. So the questions I have include: what was Mr. Cook's visibility into these KPIs when the fourth quarter was two-thirds complete (the date on which he adopted his 10b5-1 plan)? As MeetMe issued its Q3 earnings release on November 6, 2014, why didn't Mr. Cook adopt his plan on November 7 or 8, when the fourth quarter was only approximately one-third complete? Why the delay?
Interestingly, MeetMe filed an 8-K and issued a press release on January 26, 2015, stating that Mr. Cook had "sold 30,000 shares of the Company's common stock" under a previously adopted 10b5-1 plan. The press release indicated that under the plan, Mr. Cook was going to make periodic sales of MeetMe's common stock up to a maximum of 480,000 shares during the course of 2015.
The Form 4s filed by Mr. Cook indicate that all 480,000 shares had been sold under his 10b5-1 plan by October 28, 2015. The October 28, 2015, Form 4 stated, "There will be no additional sales under Mr. Cook's 10b-5-1 trading plan, dated as of December 1, 2014."
This disclosure does not mean, however, that Mr. Cook's sales ceased. Au contraire, Mr. Cook's pace of selling has nearly doubled from 2015 to 2016, with his Form 4s indicating that he has sold 429,893 shares in the six months ended June 30, 2016. Notably, each Form 4 filed by Mr. Cook relating to his 2016 sales refers to the sales being made under a 10b5-1 plan, but none of the Form 4s refers to the date of adoption of the plan. We know, however, that the sales were not made under his plan of December 1, 2014, as the October 28, 2015, Form 4 stated that there would be no additional sales under that 10b5-1 plan.
In a slight variation from 2015, MeetMe did not issue a press release in January 2016 concerning Mr. Cook's planned sales, but did file a Form 8-K on January 21, 2016. That 8-K referred to Mr. Cook's sale of 50,000 shares on January 19, 2016, "pursuant to a stock-trading plan previously adopted in accordance with Rule 10b5-1." The 8-K did not indicate when the new trading plan was adopted but stated that Mr. Cook would be making periodic sales under the plan "over the course of this calendar year, up to a maximum of 400,000 shares."
This 8-K gets "four Pinocchios." The reason: by June 7, 2016, Mr. Cook had already sold 429,893 MeetMe shares - exceeding the total the 8-K stated he was to have sold during the entire calendar year.
Why Did the CEO Diversify His Assets While the Skout Acquisition was Being Negotiated?
As is customary in such cases, MeetMe's press release issued in 2015 indicated that Mr. Cook had adopted his initial 10b5-1 plan in order to diversify his assets. The 8-K filed in 2016, incidentally, made no such statement.
In his Seeking Alpha post of July 12, Greg Kitt theorized that MeetMe's general and administrative expenses were elevated in Q1 of 2016 and "that spend was probably associated with the Skout acquisition." I believe that Greg's reasoning is correct. That statement, however, raises a some key questions:
- Why would the CEO adopt a new 10b5-1 plan and sell a substantial number of MeetMe's shares while the Skout acquisition was being negotiated?
- Was Mr. Cook already in negotiations with Skout when he adopted his latest 10b5-1 plan? When did he actually adopt the new plan?
- Knowing a major acquisition was pending, many insiders would have suspended or terminated their 10b5-1 plans because (1) as a practical matter, sales preceding a major acquisition would leave "money on the table" (Note: I am not endorsing this practice, but am trying to be realistic about why insiders often choose to suspend or terminate a 10b5-1 plan), and (2) the diversification of assets would be more effective if completed on a post-acquisition basis. Why didn't Mr. Cook suspend or terminate his 10b5-1 plan, or even choose not to place it into effect to begin with?
- Why would the CEO have included in his new 10b5-1 plan a formula or selling criteria that resulted in his selling almost as many shares in the first six months of 2016 as in all of 2015?
As you'd expect, I am not privy to Mr. Cook's personal financial situation. However, I note that when MeetMe acquired Insider Guides in 2011, MeetMe paid out $18 million in cash. I believe it is fair to assume that Mr. Cook received a share of this cash payment. Admittedly, this payment was made five years ago. More recently, however, Mr. Cook's 2015 sales of MeetMe stock netted him over $938,000 in 2015 (in other words, before any 2016 sales of stock), and his combined 2015 salary and 2015 bonus (paid in March 2016) exceeded $880,000. So having received over $1.8 million in cash compensation and stock sale proceeds in the 12 months ended March 31, 2016, Mr. Cook is not the picture of a CEO who needs cash, to be sure. Note that I'm just talking about his cash compensation and stock sale proceeds, not the value of any newly granted stock or options.
I understand that some of you holding long positions in MeetMe may be saying, "Well, he wanted to diversify his assets. What is wrong with that?"
To this, I respond as follows: Normally, nothing. What is problematic about this, in my view, is that you see a CEO selling shares while a major acquisition is being negotiated - one that is almost sure to drive up MeetMe's stock price. Insiders are often cited for their trading savvy, but here you have a CEO selling shares in what I perceive to be an irrational manner. Why?
Insider sales for asset diversification purposes are not per se unusual. Nonetheless, I find Mr. Cook's actions at odds with rational insider behavior and question why he would want to diversify when the stock price was almost surely guaranteed to be higher following the Skout acquisition. MeetMe is a relatively young company, and with its August 1, 2016, report of second-quarter results reflecting a 48% increase in total revenue and a 103% increase in non-GAAP net income, you would think that the last thing Mr. Cook would want - or need - is to sell stock in the first six months of 2016.
Like the officer and director resignations, Mr. Cook's actions leave me wary. I understand asset diversification, but its timing in this case is strange.
The Former CEO and Former Chairman's 10b5-1 Plan
John Abbott was the CEO of MeetMe from October 2007 through March 11, 2013. At that time, he stepped down as CEO and was appointed the non-Executive Chairman of the Board. Mr. Abbott remained non-Executive Chairman until he resigned June 27, 2016.
In a Form 4 filed by Mr. Abbott on February 11, 2014 (available here), Mr. Abbott's sales were described as being "effected pursuant to a Rule 10b5-1 trading plan adopted by the reporting person on March 13, 2012, as amended on June 13, 2013."
Recall that a 10b5-1 plan when the insider is not in possession of material nonpublic information about the company. I have two concerns about the dates on which Mr. Abbott's 10b5-1 plan was adopted and amended. First, according to an 8-K filed by MeetMe on April 3, 2012 (available here), Mr. Abbott stated in the rebranding conference call of that date that "the Company believes it will have positive EBITDA (earnings before interest, taxes, and depreciation) by the end of 2012."
Setting aside the 8-K's incorrect definition of EBITDA, note that the statement concerning the Company's expectation for positive EBITDA made by Mr. Abbott followed the adoption of his 10b5-1 plan by approximately three weeks. If Mr. Abbott was aware of this information when he adopted his 10b5-1 plan, then it is clear that he was in possession of material nonpublic information when he adopted his plan.
The reason I can confidently make this statement is because MeetMe obviously felt the positive EBITDA information was material, as it filed the 8-K the same day as the conference call. And the 8-K was devoted exclusively to Mr. Abbott's EBITDA statement, so there was no other information that in the 8-K that could have triggered its filing.
Side note: Mr. Abbott's belief turned out to be erroneous, as MeetMe had an EBITDA loss of ($1,417,400) for the 2012 fiscal year. MeetMe's press release announcing year-end results (available here) used an adjusted EBITDA measure to claim positive results, but Mr. Abbott's statement as reported in the 8-K said nothing about an adjusted EBITDA measure - only EBITDA.
The date of amendment of Mr. Abbott's 10b5-1 plan presents a more compelling case for the presence of material nonpublic information at the time of the plan amendment, in my view. The amendment was adopted on June 13, 2013. 12 days later, MeetMe issued a press release that reported:
"...it is now expecting second quarter revenue of approximately $9.0 million, up approximately 15% on a sequential basis. The company previously indicated that it expected revenues to be flat on a sequential basis. Mobile revenue is expected to be approximately $2.5 million, a new quarterly record, compared to $1.9 million in the first quarter, up approximately 30% sequentially and 90% year over year."
The key question is whether Mr. Abbott, as Chairman of the Board, had visibility into the expected second-quarter revenue increases 12 days before this announcement. If he did, it is clear that he possessed material nonpublic information at the time of the plan's amendment. Again, I can confidently make this statement because MeetMe filed a Form 8-K on June 25 that referenced the expected second-quarter revenue and which incorporated by reference the press release. The press release also was filed as an exhibit to the 8-K. MeetMe's own issuance of the press release and the filing of the 8-K reveal that MEET considered this information to be material.
Did Abbott Receive His $900,000 in Severance? Who knows?
I also wish to draw attention to one other disclosure question related to Mr. Abbott. In the 8-K filed on December 6, 2013, MeetMe noted that it entered into a letter agreement with Mr. Abbott that stipulated the date Mr. Abbott was to be paid "severance due under the Employment Agreement" had been changed to on or before December 31, 2013.
Mr. Abbott's employment agreement (available here) stated that Mr. Abbott could terminate his employment agreement for "good reason," which was defined to include, "The Company requires Employee to work in a non-supervisory or non-management position." If Mr. Abbott terminated his employment agreement for good reason, then Mr. Abbott was entitled to "two (2) times the amount of Employee's Base Salary and two times his target bonus amount under the Management Bonus Program as in effect immediately prior to his date of termination."
Using the 2013 proxy statement as a guide, Mr. Abbott would be eligible to receive $500,000 in a lump-sum payment for salary and $400,000 as a lump-sum payment for his target bonus, or a total of $900,000 in severance if he terminated his employment agreement for good reason.
If you review the executive and director compensation tables in Amendment No. 1 to the 2013 10-K (filed on April 4, 2014, available here), you will see that the 2013 Summary Compensation Table shows salary payments to Mr. Abbott of $62,500 in 2013 and director cash payments of $24,667.
In the MeetMe proxy statement filed on July 11, 2014, MeetMe added the following disclosure to the description of Mr. Abbott's employment agreement:
"As a result of Mr. Abbott's termination of employment, he is entitled to the severance payments described below as a result of a termination without 'cause' or a termination for 'good reason,' subject to a six-month payment delay, as required under Section 409A of the Internal Revenue Code."
Thus, as the former CEO of MeetMe (and a current director) at the time of such payment in 2014 (after the six-month delay required by Section 409A), Mr. Abbott presumably was paid $900,000 by MeetMe.
I was unable to locate any disclosure of a severance payment by MeetMe in 2013 or 2014, although as a former executive officer and a current director, a payment to Mr. Abbott of such an amount would have been required disclosure - at a minimum - under Related Party Transactions in the 2014 proxy statement. The absence of disclosure in the Executive Compensation section of the proxy statement (as a former CEO and former NEO) and in the Related Party Transaction section of the proxy statement is telling.
Abbott's Consulting Fees Substantially Exceed His MeetMe Salary
MeetMe did disclose that Mr. Abbott was separately paid $346,666 in 2014 for serving as a financial advisor to Altos Hornos de Mexico, S.A. de C.V. (AHMSA), the parent company of Mexicans & Americans Trading Together, Inc. (MATT). The 2014 proxy statement shows that MATT beneficially owned 9.2% of MeetMe's voting stock as of June 19, 2015. The related party transaction disclosure in the 2013 proxy statement indicates MATT paid $30,000 per month, or $360,000, to Mr. Abbott in 2012 and 2013. Thus, Mr. Abbott was paid more by a principal shareholder of MeetMe in 2013 and 2012 than he was paid by MeetMe for serving as its CEO for part of 2013 and 2012. And Mr. Abbott was paid far more by MATT in 2014 than he received in director compensation from MeetMe. This is a particularly curious state of affairs in 2012 and the first quarter of 2013 when you consider Mr. Abbott was obligated to devote substantially all of his business time and effort to MeetMe under the terms of his employment agreement.
As Mr. Abbott is no longer an officer or director of MeetMe, this issue may fade into obscurity. However, the fact Mr. Abbott received such enormous payments from MATT caused me to ask: what financial advisory services could Mr. Abbott have performed that were worth such amounts - over $1 million total from 2012 through 2014? I have no doubt Mr. Abbott is a bright guy, but to say the consulting fees involved seem large is like saying Warren Buffett seems to be a good businessman.
Selective Disclosure of Skout Financial Information Leaves Much to the Imagination
The June 27 announcement of Skout's pending acquisition described Skout as having generated 2015 revenue of $23.8 million. As Greg Kitt noted, Skout generated $2.1 million in trailing 12 months' EBITDA from March 31, 2016. Investor enthusiasm for this acquisition - together with announced Q2 results - has driven MeetMe's stock price substantially higher, with August 1 trades reaching a level 60% above the stock's closing price on the date of the Skout announcement.
Before investors get too carried away, I suggest caution in interpreting the very limited amount of Skout financial information issued by MeetMe. The audited financial statements of Skout, which MeetMe will be required to file with the S-4 that will register the shares being issued to Skout's stockholders (and in the 8-K reporting the acquisition's closing or within the 71-day grace period for the filing of target company financial statements), will surely provide a much fuller picture of Skout, including insights into financial, user, and other trends that are currently undisclosed. As Tyler Griffin pointed out in his Seeking Alpha post, the Skout acquisition offers few realizable synergies, and MeetMe may be overpaying for the acquisition.
I wonder if some investors have already reached a similar conclusion about the Skout acquisition as MeetMe's short interest increased from approximately 1 million shares at June 1, 2016 to over 3 million shares at July 15. While the shorts may be nursing their wounds after the recent run-up in MeetMe's stock price, it does appear that some investors have concluded that the Skout acquisition is not going to provide the impetus to financial success that others believe has arrived.
Skout investors are getting liquid at a valuation that is just over 2X their invested capital
According to a venturebeat.com story dated April 3, 2012 (available here), Skout raised $22 million from Andreessen Horowitz in 2012, after having previously raised $4.6 million in angel funding. As MEET stated in the Skout acquisition announcement of June 27, 2016, the Skout acquisition has an implied "enterprise value of $54.6 million based on MeetMe's closing stock price on June 24, 2016."
Therefore - not taking into account the recent increase in MeetMe's stock price - Andreessen Horowitz and the other Skout investors are collectively receiving just above a 2x return on the total invested capital. While there are undoubtedly many reasons for choosing to exit an investment with a return far below "typical" venture investments, the exit choice does make me wonder about Skout's value as perceived by its current stockholders - and what that may imply about MeetMe's "buy" decision.
Before investors jump on the MeetMe bandwagon, investors should factor into their analyses the following:
- The recent significant decline in Meet Me's M-Score;
- unexplained officer and director turnover;
- failure of the controller or chief accounting officer to sign the 2012 and 2013 10-Ks;
- the incorporation by reference of the deficient 2012 and 2013 10-Ks into MeetMe registration statements;
- insider sales by the CEO in 2016 under his second 10b5-1 plan that exceeded the disclosed number of shares to be sold and which were made while the Skout acquisition was being negotiated;
- insider sales by the former CEO/former chairman under a plan which was adopted at a time that former executive may have been privy to material non-public information;
- the former CEO/former chairman's receipt of over $1 million in consulting fees from a MeetMe principal shareholder from 2012 through 2014; and
- the current absence of detailed financial information and operational metrics for Skout.
MeetMe has plenty of things going its way, but a balanced analysis will consider these factors in making an investment decision.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have attached the detailed calculations of the M-Scores. Bob