InfuSystem (INFU 0.00%↑) reported its 4Q23 earnings and hosted a conference call last week. I updated our subscribers on my thoughts earlier this week here. In short, I am highly bullish on the company. In that article, I noted I’ve been hearing the reason for weakness in the stock is likely due to people making a connection that does not exist (the departure of a Board member and a delay in filing their audited FY23 results) and allowing their mind to run with it in crazy directions. Well, yesterday, I was directed to an investor message board where people were discussing just this scenario, which they actually called a “conspiracy theory,” yet nevertheless gave it credence!
The conspiracy theory goes like this: INFU is “cooking the books,” conducting some type of accounting fraud/scandal, and the Board member was threatening to blow the whistle, but was instead paid to be quiet and go away. Less sinister versions simply state that the Director joined the Board, realized the company is trash, and started selling his shares before leaving the Board, and is being paid to keep quiet about it.
Since some investors are actually giving these scenarios credence, I decided to write a public “rebuttal,” so to speak, that is open to everyone, and not just our paid subscribers. Below, I will discuss the delayed audited results situation and then copy and paste exactly what I told our subscribers about the Director’s departure, which is almost certainly (I’d estimate 99.9999999999999999999999999999%) entirely unrelated to the audit situation.
Delayed Filing of Audited Results
OK, first of all, let’s just take a step back and look at the big picture. In 2023, INFU hired Deloitte as their auditor. Did you hear that? Let me repeat it: in 2023, INFU hired Deloitte as their auditor. Now, put yourself in the shoes of a management team of a company that has decided to cook the books. Who do you go out and hire as your auditor? The premier audit firm in the world, right?!!!!!! Right?!!!!! Oh, wait, that might not be a good idea. Yeah, on second thought, you probably would not want to switch auditors, hiring the premier firm in the world as a small cap company, if you are cooking the books. Maybe you would instead find a fly-by-night type company that you could actually influence to let you get away with your fraud. In other words, the exact opposite of what INFU did.
Second, speaking of trying to influence your auditor, isn’t it clear that Deloitte is not allowing INFU to do whatever they want with their accounting? After all, that’s the reason for the delay in reporting the audited financial results. Deloitte is requiring INFU to make two changes. Those changes, as clearly deliniated in the NT 10-K filing, are:
re-classifying certain expenses included in general and administrative costs that should have been included in cost of sales; and
applying Accounting Standards Update No. 2016-02, Leases (Topic 842), referred to as ASC 842.
In other words, nothing sinister at all. As it relates to the first issue, all the change does is impact the gross margin. There would be no change to operating income, EBITDA, net income, cash flow, etc. With respect to the second issue, it is a minor change that will impact the timing of certain revenue, but will have no impact on the total revenue as a whole, over a long period of time (i.e. will also not impact total cash flow). These are minor issues.
As stated in the NT 10-K, the reason for the delay is simple: “The Company changed its independent registered public accounting firm in 2023. Additional time is required to coordinate with the predecessor independent registered public accounting firm in order for them to audit the reclassification adjustment and restated footnote disclosures associated with ASC 842, and to reissue their opinions and consents for the years ended December 31, 2022 and 2021.” Simply put, the above-stated changes were made at a late enough time in the audit process that the former auditor did not have sufficient time to review the changes to re-certify the prior two years’ financial statements.
So, how long should we have to wait for this to be resolved? According to the NT 10-K: “The Company intends to file the Annual Report as soon as practicable, and expects to do so on or before the fifteenth calendar day following the prescribed due date of the Annual Report.” I believe this means the company expects to file the audited 10-K results by April 15. Regardless, you can safely bet they will file the results and they will not be materially different than the previously-filed results as it relates to the most important metrics.
I wonder if the conspiracy theorists think Deloitte is sitting by quietly while the company publicly files these documents with the SEC, all while cooking the books? In what world does that conspiracy theory make sense? Certainly not in the real world! In the real world, the scenario is quite simple. INFU hired the premier audit firm in the world, the audit firm believes they should make some relatively minor changes to their financial reporting, the company did, and is now waiting for the previous auditor to sign off on the re-stated 2021 and 2022 results. Nothing sinister at all.
But, wait, what about this Director leaving. I will copy and paste what I wrote to our subscribers earlier this week below.
Board Member Departing
On March 8, INFU filed an 8-K announcing the resignation of Board Member R. Rimmy Malhotra. If you review the 8-K (linked above) you will notice extensive stipulations related to this resignation. Specifically, you will note that neither INFU nor Mr. Malhotra nor his fund (Nicoya Capital LLC) may disparage or demean any other party. What is going on with this situation?
Well, if you continue to read the agreement, you see that unless receiving written permission from the INFU Board, Mr. Malhotra and/or Nicoya may not:
acquire shares of INFU
try to merge INFU with another entity
participate in any proxies
form or join a “group”
vote against any of the Board’s recommendations in a shareholder vote
If not already obvious from the above, note that Mr. Malhotra joined the INFU Board in September 2022. Why is that significant? In the nine months prior to him joining the Board, INFU shares plunged from $17.00/share to a low below $7.00/share. Obviously, at that time, shareholder discontent was high.
Putting these two pieces of information together, it seems that Mr. Malhotra probably had ideas for how INFU should operate that were at odds with INFU’s Board of Directors. Evidently, Mr. Malhotra’s ideas did not gain traction and he is moving on. Relatively anti-climactic in the grand scheme of things.
Conclusion
INFU is currently firing on all cylinders from a fundamental business perspective. They happened to have the unfortunate timing of a Board member leaving and a delayed audit filing, causing self-proclaimed conspiracy theories to gain traction. Yet, when a person steps back to look at these situations, we find much more reasonable explanations exist. A company cooking the books does not decide to go out and hire Deloitte as their auditor. And when you read the actual filings, you find out the real issue: the previous auditor needs a bit more time to confirm the re-stated 2021 and 2022 results based on the change in accounting methods. Finally, as it relates to the Board member leaving, it seems there was a mere difference of opinion in terms of how INFU should proceed with its business operations. These things happen. There is nothing sinister. For these reasons, the selling off of the stock based on conspiracy theories presents bulls with a fantastic buying opportunity.
Author’s Disclosure: I have a beneficial long position in the shares of INFU either through stock ownership, options, or other derivatives. I wrote this post myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. I am not a licensed securities dealer, broker or US investment adviser or investment bank.
Breakout Investors’ Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Breakout Investors as a whole. Breakout Investors is not a licensed securities dealer, broker or US investment adviser or investment bank.