Monday, March 30, 2015

Overstock.com Hatchet Man Judd Bagley's Downward Spiral: Junkie, Confessed Criminal, Admitted Adulterer

Updated 4/16/2015 to include mugshot of Judd Bagley in police custody for forgery and police arrest record obtained by investigative journalist Gary Weiss under the Utah Freedom of Information Act

In the years that I’ve written extensively about Overstock.com (NASDAQ: OSTK), I have always been amazed about its bizarre CEO Patrick Byrne and the gang of misfits he has surrounded himself with. By far, the worst was a real loser named Judd Bagley. He dredged up that character from the bowels of the Internet, hiring him as a kind of all-purpose stalker and cybercriminal, harassing and intimidating certain investigative reporters and critics of Overstock.

As a criminal myself, in my many years managing the Crazy Eddie fraud, I learned to be careful about employing people with mental problems or substance abuse issues. Byrne himself, of course, was completely unhinged, with his paranoid rants and sometimes anti-Semitic and misogynist comments, making him a laughingstock. In January 2013, Byrne was arrested for having a handgun concealed in his luggage as he tried to board a commercial flight at Salt Lake City airport, and he told police he sleeps with a gun. He hired paid goons like Bagley (currently employed as the Director of Communications at Overstock.com) to stalk his real and imagined adversaries and to write lengthy conspiracy theories on the Internet.
Judd Bagley Mugshot

Over the years, as Byrne lied to investors, used illegal accounting tactics to overstate profits, defrauded consumers, and viciously attacked his critics, he used Bagley as a kind mafia hitman to assassinate the reputations of critics and journalists who questioned in actions, a role that Bagley clearly relished.

Though Byrne managed to charm a tiny number of idiots in the media, mostly members of the Utah press corps, it was plain to me from the start that Bagley clearly had “issues.” His obsessions and the vicious hatred that he exhibited in his online postings, combined with his protestations of purity and phony “piously religious family man” image, raised alarm bells. But only recently have I been able to learn what an absolute horror show, hypocrite and creep this Byrne employee was, and is.

It turns out that Judd Bagley is an admitted criminal and adulterer according to publicly filed court documents I’ve obtained [State of Utah vs. Judson Montgomery Bagley and Plaintiff Husband vs. Judson Montgomery Bagley]. (Note: Bagley, Byrne and Overstock.com are enmeshed in a libel suit brought by one of the targets of his “Deep Capture” website, but I emphasize that I was initially tipped off about Bagley's crime by an Internet sleuth, not the people suing him. During my research, I discovered another court case involving his adulterous affair. I obtained the court documents from both cases on my own.)

Meanwhile, Overstock.com’s former President and current Board Chairman, Jonathan Johnson is planning on running for Governor in Utah, while Judd Bagley remains on the payroll as its chief spokesman to the media and investors.

How Judd Bagley Stalked Critics

A bit of background first.

In 2005, Patrick Byrne made obscene and misogynistic comments to a female reporter suggesting that she gave “blowjobs” to Goldman Sachs traders after she published an article that he disliked. Two years later, investigative journalist Roddy Boyd from the New York Post reported that Patrick Byrne used Judd Bagley to secretly stalk and conduct a smear campaign against critics on the web. Bagley used anonymous aliases on stock chat boards to attack critics of Byrne. He hacked into the accounts of stock chat board posters and implanted spyware in emails to improperly gain personal information on critics. Bagley retaliated by attempting to blackmail the tech savvy blogger who initially exposed his activities. Then in 2009, Patrick Byrne used Judd Bagley to pretext journalists and critics (including me) to gather information about their family members (including minor children) and friends by setting up a phony profile on Facebook under the name Larry Bergman. That resulted in a spate of bad publicity and got Bagley kicked off Facebook.
Patrick Byrne Mugshot

In February 2009, I exposed certain violations of accounting rules by Overstock.com that allowed it to fabricate a Q4 2008 profit rather than properly report a loss in that quarter and overstate its reported income in later quarters. Patrick Byrne retaliated by personally attacking me on a stock market chat board, during various earnings calls, and in the press in an effort to discredit me. During that time, Judd Bagley injected himself into divorce proceedings by contacting my former spouse who ignored him. Bagley used illegal pretexting tactics to "friend" my children and relatives on Facebook using his phony account. Bagley’s illegal actions was a clear retaliation for my pointing out the company's accounting violations. My work was vindicated when at my request the Securities and Exchange Commission investigated Overstock.com and forced it to restate its financial reports to correct its illegal accounting practices.

Judd Bagley: Admitted Forger, Drug Addict and Adulterer

Judd Bagley should have been thrown in jail a long time ago for violating a host of federal laws. But our captured regulators have generally ignored Overstock’s serial law violations. Eventually, though, the drug-addicted misfit wound up behind bars.

On April 1, 2013, Judd Bagley was charged with eight felony counts of “Obtaining a Prescription Under False Pretenses, a Third Degree Felony, in violation of Utah Code Ann § 58-37-8(3)(a)(ii)….” According to Court Documents, Bagley altered the same prescription nine times by forging the dates and altering the names of substances he was looking to obtain illegally:

B. Kirkham, Lehi Police Department, having probable cause to believe a crime was committed, submitted evidence in support of the filing of this Information: On May 4, August 30, October 29, and December 11, 2012, the defendant presented a script for controlled substances (Lortab and Adderall) at the Macey's Pharmacy in Lehi. The script had originally been written in December, 2010, to be used one time. The defendant had altered the dates and/or the substance in order to receive the substances fraudulently. He did the same thing with the same original script, filling prescriptions for Lortab and Adderall on June 4 and August 30, 2012 and January 2 and January 31, 2013 at the WalMart pharmacy in American Fork. He presented the script again in February, 2013, but the pharmacy refused to fill it. Defendant admitted his conduct when interviewed by police. [Emphasis added.]

According to the arrest record, that lowlife Judd Bagley brought along his minor daughter with him to the WalMart pharmacy where he attempted to obtain medications with the forged prescription (page 13 of 17).

Police "suspect" Judd Bagley brings minor daughter to obtain drugs with forged prescription

On April 4, 2013, Judd Bagley was ordered to report to Utah County Jail for arrest and to have his mugshot and fingerprints taken by the police. On June 4, 2013, Bagley pleaded guilty to three Class A criminal misdemeanors. He was ordered to wear a GPS tracking device in lieu of spending time in jail before his sentencing.


On July 1, 2013, Bagley was sentenced to a one year jail sentence for each criminal misdemeanor, to be served concurrently. He was fined $7,500 ($2,500 for each misdemeanor). The Judge suspended his jail sentence and $6,641 of fines. He was required to complete 120 hours of community service and placed on probation for one year.

While all this was happening, Bagley’s downward spiral continued. He is married and has four young children. Apparently his criminal conduct took a toll on his marriage, because Bagley decided that as long as he was destroying his own family, he might as well destroy an innocent family as well. What follows reminds me a great deal of the serial infidelity of my cousin Eddie Antar, who cheated on his wife and spread misery wherever he went.

On December 13, 2013, Judd Bagley was sued by the husband of a woman he had seduced. It was not the sad excess of a man in midlife crisis, but the vicious act of an out-of-control drug addict, a tawdry affair that smacks of sexual harassment--in addition to exposing Bagley as an absolute hypocrite. The man accused Bagley of intentional infliction of emotional distress, negligent infliction of emotional distress, and alienation of affections. Not mentioned in the suit, obviously, is the toll this open adultery with a married woman wrought on Bagley's long-suffering wife Kristen and their young children.

According to the lawsuit, Bagley took advantage of his position as a sponsor at the Karl G. Maeser Preparatory Academy in Lindon, Utah by conducting an extramarital affair with the plaintiff's wife. In the course of ruining this man's marriage, the woman “admitted to having sex” with Judd Bagley “at local hotels, his home in Lehi, and [the woman's] home....” It's not known how the officials of the Karl G. Maeser Preparatory Academy feel about Bagley's predatory activity, but we can only guess.

On January 2, 2014, Bagley initially sought to cover up the affair by denying it in his response to the lawsuit filed in court. Bagley further attempted to cover up the affair by refusing certain discovery requests for documents and information, and denying wrongdoing in his answer.

That turned out to be a lie.

On July 18, 2014, the husband filed an amended complaint and on that same day, faced with a mountain of evidence proving his guilt, Bagley finally admitted to having a “consensual relationship” with the woman starting in “April or May 2012.”

Judd Bagley’s lawyers sought to dismiss the lawsuit by blaming the victim and throwing mud at the man he had victimized. Somehow, to Bagley's addled junkie's logic, there was nothing wrong with Bagley cheating on his wife and engaging in an affair with a parent at the Karl G. Maeser Preparatory Academy because, he claimed, the woman was in a troubled marriage:

This case airs the "dirty laundry" of an unfortunate personal and family matter. But the judicial system is not the proper venue for retribution after spouses have been unfaithful, particularly when Plaintiffs marriage was already troubled.

In other words, the plaintiff and his wife had marital problems, so it was okay for Bagley to waltz in and break up that marriage.

Bagley's lawyer went on to claim that:

Bagley’s participation in a consensual relationship with [the woman], while unwise and regrettable, does not rise to the “outrageous and intolerable” standard required by Utah law for a claim of intentional infliction of emotional distress.

Bagley fought the suit for months with similar rationalizations, evasions and lies. In one written interrogatory, the husband asks Bagley to “identify how many times you have had intimate contact, including but not limited to kissing and sexual intercourse with [his wife]." Bagley responded “Defendant does not know the answer to this question” and refused to provide any responsive information to the question.

Maybe he lost count. I believe that Bagley was probably having multiple affairs at the time that he was cheating on his wife, being an addicted individual with nothing resembling a conscience.

Bagley’s lawyers concluded that:

Bagley does not assert that he behaved admirably in participating in a relationship with [the plaintiff's wife]. However, his actions do not rise to the level of the causes of action alleged in the Complaint, and Plaintiff cannot meet his burden to show each of the requisite elements. Bagley respectfully requests that the Court grant his motion for summary judgment on all causes of actions and dismiss the case.

On September 3, 2014, the lawsuit was dismissed by a mutual agreement between the parties. It is not clear from the court file if Bagley had to pay money to get it withdrawn. Nor can it be quantified how much pain this disgusting junkie inflicted on everybody involved, something that no amount of money can make up for.

I’m no angel myself. I’ve committed crimes and all sorts of sins. But I’ve faced up to them. Bagley has not. A document filed with the court in May 2013 indicates that Bagley has undergone treatment in a Twelve Step program, in the course of shaking off his drug addiction, a very serious misery that I have no doubt whatsoever contributed to his vicious criminal conduct at Overstock, which Byrne exploited for his own ends.

Obviously the treatment didn't take. The Twelve Steps call for a person to have a spiritual reawakening and turn his or her life around. Yet at the time that letter was written and for months afterwards, Bagley was conducting a brazen affair, preying on another man's wife.

Step Eight of the Twelve Steps reads as follows: “Made a list of all persons we had harmed, and became willing to make amends to them all.” Bagley would have a very long list of people to make amends for his years of lies, most of which were much worse than the forgeries he conducted to fuel his addiction. I don’t expect him to even attempt to live up to the Eighth step, because he is an unrepentant criminal as well as a dope addict.

Written by, Sam Antar

Worthy Reading: Closing the File on a Criminal and Junkie Named Judd Bagley by Gary Weiss

Disclosure:

I am a convicted felon and a former CPA. As the CFO of Crazy Eddie, I helped mastermind one of the largest securities frauds uncovered during the 1980's. Today, I advise law enforcement agencies and professionals about white-collar crime and train them to catch the crooks. I perform forensic accounting services for law firms and other clients.

I have no investment position in Overstock.com, long or short.

Thursday, February 05, 2015

Crook vs. Crook: Why Former Congressman Michael Grimm is a Dumb Crook

In my first segment of a series of Op-ed articles about white-collar crime on CNBC, I examine the case of former Republican Congressman Michael Grimm who recently pleaded guilty to income tax evasion and awaits sentencing on June 8, 2015.

New York City’s high sales tax rate provides a powerful incentive for businesses to underreport cash sales.

According to the indictment, Michael Grimm skimmed cash sales, reaping an off-the-top 8.875% reward from stealing the sales taxes. Next, Grimm paid some of his employees in cash (off-the-books) thereby evading paying payroll taxes, unemployment insurance, and disability insurance. The net profits Grimm reaped from skimming cash was income tax evasion.

However, as a former FBI special agent, you would expect him to learn from the mistakes of the criminals he busted, but he didn't.

Read my Op-ed here: http://www.cnbc.com/id/102401283.



Written by, Sam E. Antar

Monday, September 08, 2014

Nu Skin Inventory Red Flags Remain Even After $50 Million Impairment Charge

On July 22, 2014, I warned investors that Utah-based multi-level marketing company Nu Skin Enterprises' (NYSE: NUS) surging inventory levels might lead it "to recognize a material impairment charge against inventory in a future period." On August 4, 2014, in a follow-up blog post co-authored with Zac Prensky, we warned investors about a massive inventory pile up in Mainland China. On August 6, 2014, Nu Skin reported its second quarter 2014 financial results and recorded "a $50 million write-down of Mainland China inventory." However, even after the $50 million inventory impairment charge, the pile of remaining unimpaired inventory is equal to enough merchandise to fulfill 335 days of sales versus only 146 days of sales in the comparable second quarter of the previous year. Therefore, there is a high risk that Nu Skin may have to reduce gross margins to clear out excessive inventories and there remains a high risk that it may have to report another material inventory impairment charge.

Background

Days-Sales-in-Inventory (DSI) measures the number of days it takes for a company to turn its inventory into sales. DSI is computed as follows: (Ending inventory/Cost of goods sold during the period) X number of days in the period. If the DSI number grows over time it indicates that a company's inventory turnover is decreasing because it is taking longer periods of time for a company to turn its inventory into sales. A continuously growing DSI can indicate one or more of the following: inventory mismanagement, potential inventory impairment, OR an overstatement of inventories to inflate profits

Second quarter financial results

In the second quarter of 2014, Nu Skin reported $650.0 million of revenues compared to $671.3 million in the second quarter of 2013. Its revenues were $50 million below the $700 million of guidance it gave investors on May 6, 2014. During the second quarter earnings call, CFO Ritch N. Wood said:

So while we reported gross margin for the quarter 76% without this $50 million inventory charge, gross margin would have been a solid 83.7% that's compared to 83.4% in the prior year.

Ritch Wood was quick to offer up pro forma numbers purporting that Nu Skin's gross profit margins would have been higher excluding the $50 million inventory impairment charge. However, he did not offer the flipside of those same pro forma numbers showing that gross inventory levels continued to grow larger excluding the same impairment charge. Without the impairment charge, inventories would have increased to a record $439.7 million in second quarter of 2014 compared to $410.7 million in the previous first quarter. More significantly, days-sales-in-inventory (DSI) would have grown 158% higher to a record 377 days in the second quarter of 2014 versus 146 days in the comparable second quarter of 2013.


Even if we take into account the $50 million inventory impairment, at the end of the second quarter of 2014 Nu Skin carried enough unimpaired inventories to fulfill 335 days of sales versus only 146 days in the comparable second quarter of 2013. Its days-sales-in-inventory was 129% higher in 2014 compared to 2013.

Note: Days-sales-in-inventory (DSI) excluding the effect of the inventory impairment is calculated as follows: [Ending inventory/ (cost of goods sold - impairment charge)] X 91 days. Cost of goods sold - impairment charge = cost of goods sold for unimpaired inventory. Ending inventory reported by Nu Skin is the same as the carrying value of unimpaired inventory.

Risk of reduced gross margins and another material inventory impairment charge

After inventory is impaired, it still physically exists until it is disposed of by the company. It is merely carried on a company's books at its market value. Initially, a company records its inventory at cost. When the value of inventory declines below cost, the company makes the following entries on its books: (1) increase cost of goods sold and (2) increase inventory reserve account. The inventory reserve account is a "contra-asset account" and it reduces the gross value of inventory reported on a company's balance sheet. The inventory value reported on a company's balance sheet is the net of its gross inventory (at cost) less its inventory reserve account (impairment).

In the second quarter 2014, 10-Q report page 14, Nu Skin disclosed "adjustments" to its inventory "carrying value" but did not make it clear whether the impaired inventory was still on hand for future sale (albeit to recover costs) or was actually discarded (trashed as unsaleable):

14. ADJUSTMENT TO INVENTORY
During the second quarter of 2014, the Company made a determination to adjust its inventory carrying value. Heightened media and regulatory scrutiny in Mainland China in the first part of 2014, and the voluntary actions the Company took in response to such scrutiny, had a negative impact on the size of the Company's limited-time offer in June, which significantly reduced its expectations for plans to sell TR90 in a limited-time offer later in 2014 or the beginning of 2015. This resulted in a $50 million write-down of estimated surplus inventory in Mainland China. Total adjustments to the Company's inventory carrying value as of June 30, 2014 and December 31, 2013 were $58.0 million and $5.9 million, respectively. [Emphasis added.]

If Nu Skin still intends to sell its impaired inventory to recover costs, the age of its other unimpaired inventory will invariably grow longer. Even if we assume that Nu Skin trashed $50 million of impaired inventory as unsaleable, the days-sales-in-inventory on its remaining unimpaired inventories will likely continue to grow since it is carrying an excessive level of merchandise while it is projecting significant declines in second half revenues.

Nu Skin projected third quarter 2014 revenues in the range of $620 million to $640 million compared to $908.3 million revenues in same quarter of 2013. It projected fourth quarter 2014 revenues in the range of $650 million to $675 million compared to $1.056 billion in the same quarter of 2013. Its revenue guidance amounts to a decline in second half 2014 revenues of 33% to 35%. At the beginning of the second half of 2014, Nu Skin carried $389.7 million of inventories compared to $178.2 million at the beginning of the second half of 2013. It carried 118.7% more inventories going into the second half 2014. Therefore, it appears that Nu Skin is excessively overstocked at a time when its revenues are expected to significantly decline. That's a significant red flag.

Written by:

Sam E. Antar

Disclosure

I am a convicted felon and a former CPA. As the CFO of Crazy Eddie, I helped mastermind one of the largest securities frauds uncovered during the 1980's. Today, I advise federal and state law enforcement agencies about white-collar crime and train them to identify and catch the crooks. Often, I refer cases to them as an independent whistleblower. I teach about white-collar crime for government entities, businesses, professional organizations, and colleges and universities. I perform forensic accounting services for law firms and other clients.

I do not own any Nu Skin securities long or short.

Monday, August 04, 2014

Why Nu Skin Must Come Clean on Troubling Inventory Red Flags

Co-authored by Sam E. Antar and Zachary Prensky

This coming Wednesday morning, Utah based multi-level marketing company Nu Skin Enterprises (NYSE: NUS) is scheduled to report its second quarter earnings. In its Q1 2014 10-Q report issued in May, major questions were left unanswered as inventories ballooned to $410 million. This pile of inventory is equal to enough merchandise to fulfill 346 days of sales – compared to only 149 days of sales in the comparable first quarter of the previous fiscal year. It's an increase of 132% over the prior year – an enormous red flag that shareholders would have expected management to explain in significant detail.

Rising inventory levels don't square with management's explanation

In its Q1 2014 10-Q report (page 17), Nu Skin claimed that, "we built a large amount of inventory during the first quarter for planned product launches in 2014...." However, Nu Skin’s excuse does not square with its own reported numbers. In reality, the inventory buildup had been going on for some time.

Since 2011, there is a clear and growing trend of inventory pileup – even as management consistently beats its most optimistic revenue guidance. See the chart below:


In the second half of 2013, Nu Skin introduced its ageLOC TR90 weight management system through limited-time offerings in each of its regions. Those sales were carefully choreographed with local management to maximize short term purchases of ageLOC TR90 under the rubric of a limited-time offer (LTO). On the surface, the new product introductions appeared to be highly successful. Revenues during the second half of 2013 rose 78.7% to $1.96 billion compared to $1.099 billion in the second half of 2012 fueled most by growth in Mainland China. In the 2013 10-K report (page 55), management had this to say about ageLOC TR90’s contribution to revenues:

In the second half of 2013, the successful limited-time offers of ageLOC TR90 generated approximately $550 million in revenue with over half of this volume coming from the Greater China region.

However, despite a huge growth in revenues and beating its most optimistic revenue guidance during that period, the amount of time it took Nu Skin to sell its inventory increased 30.2% to 190 days as of 12/31/13 compared to 146 days on 6/30/13, at the start of its launch of ageLOC TR90. This trend took a major ramp in the first quarter of 2014, where for the first time in the company’s history its warehouses are holding enough merchandise to cover practically the next 12 months of sales (346 days). Despite management’s claim that inventory ballooned because of planned product launches, Wall Street analysts seem unimpressed as their most recent consensus estimates call for year-over-year revenue declines during the remainder of 2014.

Inventory purchase obligations compound problem

Companies the size of Nu Skin can’t exactly turn off the manufacturing lines for six months while they whittle down inventory to normalized levels. According to its most recent 10-K report (page 2), Nu Skin utilizes a number of 3rd party contract manufacturers, mainly located in the US (except for China, where the company does its own manufacturing).

Nu Skin must work closely with its raw material suppliers and US contract manufacturers to plan ahead for inventory production as factories of this size cannot be turned on or off on a dime. As disclosed in the 2013 10-K (page 65), at year-end Nu Skin had $155.9 million of minimum outstanding purchase obligations as compared to 2013’s company-wide cost of goods sold of $505.8 million. Curiously, this figure like many important inventory-related metrics is deliberately not disclosed on a quarterly basis.

What has gone largely unnoticed is that in December 2012 the amount of purchase obligations was $32.1 million as compared to 2012's company-wide cost of goods sold of $353.2 million (See 2012 10-K report, page 59). This is a five-fold jump between 2012 and 2013 – yet overall cost of goods sold grew only 43% year-over-year. There is only one geographic location whose revenue grew at more than 100%+ year-over-year and could be responsible for this massive growth in future obligations – China.


What is the composition of Nu Skin's inventory and where is it located?

Nowhere in the 2014 Q1 10-Q report or in the accompanying management call with shareholders on May 6th did the company disclose (a) where the bulk of its inventory is located, and (b) what products comprise the majority of its inventory. These two questions are perhaps the single most important metrics that management needs to disclose on Wednesday in order to determine whether or not Nu Skin is heading for a potentially crippling write-down of inventory. As we noted above, the massive buildup in inventory cannot solely be attributed to planned product launches during the remainder of 2014.

Why is the makeup of the inventory so crucial? This is because a truthful answer to the question would shed light on the biggest question mark hanging over management’s performance to date: Is the massive buildup of inventory in any way related to global missteps with ageLOC TR90 rollouts?

Last year’s global launch of ageLOC TR90 was met with mixed results. For example, during the last two quarters of 2013, 35.6 % Greater China revenue came from limited-time offer (LTO) sales of TR90 compared to only 17.26% for Japan. Are the excess inventories TR90 supplies in China or are they being stored in Japan or some other location with tepid demand?

See the chart below:


Note: In Q4 2013, Nu Skin reduced its revenues going back at least three years to correct an accounting error in classifying certain rebates (2013 10-K report, page 50). The error caused relatively minor changes in previously reported revenues for the first three quarters of 2013. While the company revised its quarterly revenues on a consolidated basis (page 68), it did not revise its quarterly revenues by region. To calculate revenues by region for the last six months of 2013, we subtracted six month revenues from full year revenues for each region. There may be slight discrepancies in revenues numbers for each region during that period. Nu Skin did not report LTO revenues for the individual Americas and EMEA regions. The combined LTO revenues for both regions were computed by subtracting LTO revenues disclosed for other regions from total LTO revenues.

In the Q1 2014 10-Q report (page 13), management hinted at problems with its limited-time offer ageLOC TR90 product launch:

We believe the significant 2013 sales and the three-month supply kit configuration decreased consumer demand in subsequent regional limited-time offers of this product during the first quarter. In addition, TR90 was developed to decrease fat without sacrificing lean muscle. The result is a healthier body composition but not necessarily maximum weight loss. Our research shows that some consumers of TR90 were dissatisfied with the extent of their weight loss. [Emphasis added.]

Management is on record as stating that the customers of ageLOC TR90 were sold on 90 day supplies of product:

TR90 so far has only been sold in LTOs in a three month supply. We believe that consumers will benefit from being able to try the product first before making a three-month commitment. In addition, we have also realized that with weight management probably more than with any other category, it is tough to take a product off the market post LTO. Consumers in weight management just don't enjoy a start again/stop again reality. [Emphasis added.]

Did first time customers use the product for 90 days and then decline to reorder? Is the Chinese subsidiary or some other subsidiary sitting on piles of TR90 refills that are languishing unsold?

With the large cut in active salespeople operating in China ( “Sales Leaders”, Nu Skin’s term for individuals engaged in hawking goods for resale to others, dropped 49% in the quarter due to various regulatory concerns) if global inventory is heavily weighted towards that region, then the oversupply isn’t going to get whittled down anytime soon.

Clearly the 346 day supply of global inventory is sitting somewhere, made up of something. If a large proportion of it is TR90 goods located in geographies where the reorder levels are poor, it is inevitable that Nu Skin shareholders are staring at an imminent inventory write-down. Management doesn’t provide enough quarterly disclosure to support its claims that their “optimism for China remains intact” (transcript, May 6th, 2014 earnings call). If management truly wishes for its shareholders to share such optimism it should start by giving a detailed breakdown on inventory both inside and outside China.

What management must do

It’s very simple: if Nu Skin has hit the wall in getting customers hooked on buying overpriced weight loss pills direct from your neighbor, then the first place you would see the flashing reds lights warning of trouble ahead would be in the inventory buildup. We have shown how it is extremely likely – given the growth in future purchasing obligations – that the inventory buildup is most likely affecting China the most. Providing shareholders with a detailed breakdown of where the inventory is located and what it’s comprised of is the only way these nagging issues can be laid to rest.

Written by,

Sam E. Antar and Zachary Prensky

Disclosure - Sam E. Antar

Sam E. Antar is a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, Mr. Antar helped mastermind one of the largest securities frauds uncovered during the 1980s. Today, he advises federal and state law enforcement agencies about white-collar crime and trains them to identify and catch white-collar criminals. Mr. Antar refers cases to them as an independent whistleblower. He teaches about white-collar crime for government entities, businesses, professional organizations, and colleges and universities. In addition, he performs forensic accounting services for law firms and other clients. Sam E. Antar does not own any Nu Skin securities long or short and has no financial relationship with Zachary Prensky.

Disclosure - Zachary Prensky

At the time of the publication of this report, Zachary Prensky and/or affiliates hold short positions in Nu Skin common stock. More of Mr. Prensky's research can be found at the website of his firm, Little Bear Investments LLC.

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