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MeetMe Investors Might Have A Question Or Two

Summary

Using Professor Beneish's Manipulator Score calculation, MeetMe's financial statements are signaling potential manipulation.

A wave of resignations in the C-Suite and by directors raise some interesting questions, as do recent stock sales by the CEO and former chairman.

Selective disclosure of Skout financial information leaves much to the imagination.

Skout's investors are getting liquid at a valuation that is just over two times their invested capital, which raises questions about the attractiveness of the acquisition.

Introduction

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.

Name Position Date
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

Click to enlarge

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...


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