Wednesday, November 12, 2014

VGGL Bartered Revenue Bonanza with insufficient cash.

So the star of the trading day had to be VGGL closing up 117% after announcing its quarterly report with the following headline:
"Viggle Reports 49% Year-Over-Year Revenue Growth and 112% Increase in Registered Users." 
  I thought it might make an EOD push and took a long trade.  After  it became apparent that would not happened I banged it out for a .06 gain. Wo hoo!   VGGL then proceeded to fade into the close so I took a short position at the close.

Obviously a sizable move on the daily. When you see something like this you have to ask what caused this and take a cynical view. 

So I thought I would start digging through the SEC filings.  Heck, if VGGL is legit I'd go all in.  Based on my research I've concluded that this company is all smoke and mirrors.   

So here's the dirt:
  • Revenue increase was driven by "Bartered Revenue"
  • The Company recognized barter revenue and barter expense in the amount of $3,010 and $1,385 for the three months ended September 30, 2014 and September 30, 2013, respectively. (all amounts in thousands) 
(source 11/12/14 10-Q pg. 10). In other words their bartered revenue increased 117%.

What is bartered revenue? The FASB explained the practices: 
"It has become increasingly popular for Internet companies to enter into transactions in which they exchange rights to place advertisements on each others' web sites. In some of these transactions, no cash is exchanged between the parties. In other transactions, similar amounts of cash are exchanged between the two parties. Some entities record an equal amount of revenue (for the web space they own and "sell") and expense (for the web space they "purchase" from the other entity). There is no overall effect on net income or cash flows, although the timing of the revenue and expense may differ. "
So to be clear: VGGL never received a penny of the 3 Million they claimed in barter revenue.  Notably, numerous companies have been implicated by the SEC for hatching scams to inflate revenue from web subsidiaries.  The former head of Homestore .com went to prison for his role in such a scheme. 

I, for one, certainly see a big difference between actually getting paid for your ads verses getting to place your ads on someone else's site an claiming revenues when no cash flow is effected.I also find it somewhat suspicious that the bartered revenue increased so much not only from year over year but from quarter over quarter.  I also find it suspicious in how they recognize revenue.
"The Company recognizes revenue when: (1) persuasive evidence exists of an arrangement with the customer reflecting the terms and conditions under which products or services will be provided; "
 The "persuasive evidence" standard has been badly manipulated by some high profile companies such as ENRON.Maybe I'm old school in the sense that I go by the adage "if it ain't in the till, it ain't revenue. "

In any event the non-bartered revenue growth comes out to a 17% gain, which may sound good until you realize that the losses increased by 32%.

  • Revenues from related parties
Mr. Sillerman is the majority owner of VGGL.  He is also the majority owner of SFX  a company affiliated with Mr. Sillerman. 
" SFX paid us $5,000,000 to license our audio recognition software and related loyalty platform for a term of ten years."  
In fairness, VGGL didn't break the SFX payment down but $5 mill over 40 quarters would amount to 125K a quarter.
  • Losses increased

For all the claims of increased revenue, where's the beef.  The assets are down from last quarter, the cash is down from last quarter, but the losses are up "Viggle reported an adjusted EBITDA loss of $7.8 million as compared to an adjusted EBITDA loss of $5.9 million a year earlier."  

In other words, the losses increased by 32%! 
  • VGGL is being Diluted 
In the latest 10Q  there were 16,107,807 shares outstanding, as of  May 9, 2014 there were 13,784,711. In other words, this stock has already been rapidly diluted  a 17% increase  between the last 10Qs.
  • More dilution will follow"
I got to hand it to VGGL they actually disclose t it does not have enough cash to continue its current business plan. " In order to meet our capital requirements for the next 12 months, we anticipate that we will need approximately $3,500,000 in new capital (in excess of the cash currently held by us and the $10,000,000 discussed above). (pg. 31)

For that reason:
"Management intends to raise additional funds through equity and/or debt offerings until sustainable revenues are developed."
And of course more skeletons in the 10q closet:
  • Auditor Gives a Going Concern Notice
""Our independent registered public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern. (pg. 35.)
  • SEC investigation
"The SEC opened a formal order of investigation relating to a matter regarding certain dealings in our securities by an unaffiliated third party. In addition, we have also received an informal request from the SEC for the voluntary production of documents and information concerning certain aspects of our business and technology. Although we have provided documents in response to the SEC's request, there is no assurance that the SEC will not take any action against us."
This quarterly report was terrible.  Growing losses, diminishing assets, a stated need for dilution.  Nonetheless, VGGL's share price rose on phantom revenue. I don't see this pop lasting.

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