One of the few analysts who covered the company, Kelvin Cheung of Clarus Securities in Toronto, wrote positively of Swisher’s prospects in 2011. His company also served as adviser to CoolBrands on the merger and as lead underwriter on Swisher’s stock offering. When Cheung initiated coverage, Clarus put an $8 target on the stock, which was then trading at about $5.50. A few months later, Clarus boosted its target price for the stock to $10.50.
December, 2011, brought the news that market-data firm Dealogic counted Swisher as the most acquisitive public company in North America for the year: 43 purchases. The deals for which dollar figures were reported added up to $220 million.
To help pay for the binge, Swisher sold $60-million worth of stock to institutional investors through a private placement, according to securities filings. Despite that dilution, investors continued piling in.
The spring of 2012 began in business-as-usual mode for Swisher, as it announced yet another set of acquisitions. But within weeks, the biggest mess facing the company was its own. In a move that stunned the markets and sent shareholders fleeing, Swisher’s board of directors issued a press release on March 28, warning that the company’s financial statements for the second and third quarters of 2011 “should no longer be relied upon.”
It was the first public sign that the roll-up machine wasn’t working. Revenue grew—rapid-fire acquisitions will do that for you—but Swisher never seemed to make any money. Revenue jumped from $21.4 million in the first quarter of 2011 to $67 million in the third quarter, which was more than 300% higher than the year before. Yet the whole time, the company posted multimillion-dollar losses each quarter.
Red ink wasn’t the only problem. Swisher was choking on its modus oper-andi. The frantic rate of dealmaking had made the books difficult to decipher for even the most sophisticated investors. Swisher’s accountants were apparently struggling too—several of the company’s acquisitions were allegedly being booked incorrectly. Those concerns had been raised by an unnamed former employee, according to court documents.
An internal audit was launched. By May, Swisher’s chief financial officer, Michael Kipp, and two senior accountants had been unceremoniously shown the door. The stock price slumped to $1.79, a new low.
The company’s board, which in--cluded Huizenga, Berrard and Serruya, announced a review into whether the quarterly financials had understated losses. The audit homed in on two things—how certain costs and intangibles from Swisher’s myriad acquisitions were counted; and a practice of optimistically toting up customer accounts that were actually unlikely to be paid. In short, Swisher’s numbers made the picture look far better than it really was.
“We want our shareholders to know that providing confidence and transparency in our financial statements is of paramount importance,” Berrard said in March, 2012. “We are doing everything possible to ensure that this is a one-time-only event.”
But the headaches were only beginning. Swisher later disclosed that the Securities and Exchange Commission and Department of Justice had inquired about the alleged accounting problems. Meanwhile, shareholders launched a class-action suit alleging that Swisher had fudged its results to goose its stock.
The suit, which is being led by James Caird, Harry Noyes and Eugene Stranch, who collectively lost close to $1.8 million on the stock, claims that Swisher shares were “artificially inflated by issuing materially false and misleading statements,” which clouded the company’s “business, profitability, performance and prospects.”
Unable to produce quarterly numbers during the audit, Swisher drew the ire of regulators when it became a delinquent filer with the TSX and Nasdaq.
On Aug. 20, with the shares at $1.62, Berrard stepped down as CEO. He remains the company’s largest shareholder, with a 14.2% stake, ahead of Huizenga at 13.8% and Serruya with 2.4%, according to the most recent regulatory filings from late 2011. (Huizenga has kept all of his original shares; Serruya has sold a little under half of his.) Swisher has since signed Berrard to a consulting agreement potentially worth more than $1 million; his brief, in part, is to help Swisher defend itself against the lawsuit.