iMERGENT, Inc. (IIG)

sandvig (98.25) Submitted: 9/07/07 6:03 PM : Start Price: $17.84 IIG Score: 18.87

Latet anguis in herba - A snake lies in the grass.





Their financials look pretty good, but, my, they have a lot of lawsuits by states that are related to deceptive business practices!


When I see outward signs that rascals are at work, it invites closer inspection. Their annual report has some interesting and unusual notations that make one wonder how much integrity stands behind the financials that look good on the surface.





For instance:


"In view of our revenue recognition policies as required by U.S. generally accepted accounting principles (US GAAP) and the rapidly evolving nature of our business and the markets we serve, we believe that period-to-period comparisons of our operating results, including operating expenses as a percentage of revenues and cash flows, are not necessarily meaningful and should not be relied upon as an indication of future performance."





"Our fiscal year ends on June 30. Revenues for the fiscal year ended June 30, 2007 ("fiscal 2007") decreased to $151,617,000 from $185,089,000 for the fiscal year ended June 30, 2006 ("fiscal 2006"), a decrease of 18%. Product and other revenue decreased to $125,552,000 in fiscal 2007 from $171,763,000 in fiscal 2006, a decrease of 27%."





"In accordance with US GAAP, until the change in our business model in late December 2005, the Company recognized product and other revenue ratably over a period of five years and not at the time contracts were written. Effective December 2005, the Company began recognizing product and other revenue after the expiration of the three-day cancellation period for contracts written for which cash payments were received. For products purchased by customers under extended payment term arrangements (EPTAs), the Company continues to defer and recognize revenue as cash payments are received from customers, typically over two years.


"Because of the changes in the Company's revenue recognition policies resulting from the change in business model noted above and due to the Company's growth, management believes that the Net Dollar Volume of Contracts Written is a relevant metric to understand the operations of the Company. Net Dollar Volume of Contracts Written represents the gross dollar amount of contracts executed during the period less estimates for bad debts, discounts incurred on sales of trade receivables (financial discounts), and estimates for customer returns. Net Dollar Volume of Contracts Written is not equivalent to revenue recognized in accordance with US GAAP. In contrast, revenue recognized in accordance with US GAAP represents cash contracts written net of estimated customer returns plus actual cash collections on financed contracts. Actual collections on financed contracts and the amount of customer returns may differ materially from original estimates. However, the Company has several years of experience with the financing arrangements and products and services offered to its customers. Consequently, management believes it has a reasonable basis for its estimates."





"Cost of revenue consists primarily of the cost to conduct Internet Training Workshops, credit card fees and the cost of products sold. Cost of revenue for fiscal 2007 increased to $46,997,000 from $31,141,000 in fiscal 2006, an increase of 51%. The increase in cost of revenue is primarily attributable to the increase in revenue and Net Dollar Volume of Contracts Written during the year."





As best I can tell, this loosely translates to, "We are trying to hide that sales are down and costs are up."

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