As corporate accounting practices come under intense scrutiny nationwide, Neoforma's volatile stock value took it on the chin last week when company officials disclosed that financial results may have to be restated as far back as two years.
The announcement tarnished otherwise impressive second-quarter financial results for the San Jose, Calif.-based e-commerce company. Neoforma's stock sank 37% to $6.75 on the news. Officials struggled to explain to an already suspicious investment community that unlike other highly publicized accounting fiascoes of late, a financial restatement would not adversely affect cash flow or net income.
Under one scenario, it could even position the money-losing company to achieve bottom line profitability sooner than expected. And although a restatement might significantly erase Neoforma's revenue for the past two years, officials said the end result would not have any effect on profitability before interest, taxes, depreciation and amortization, an accounting milestone that Neoforma heralded in the first quarter of this year.
"I think this is a reflection of uncertainty in an accounting treatment and is not related to the performance of the company," said Curt Nonomaque, executive vice president, chief financial officer and treasurer of VHA and a Neoforma board member. "If you look at performance, it's looking terrific. This business is working, but you have two accounting issues that people don't understand."
If the accounting is ultimately changed, VHA, which is both a major investor in and user of Neoforma's electronic marketplace, only stands to see its bottom line and net income climb, as will Neoforma's, Nonomaque said. In addition to $19 million in outsourcing fees in 2001 and a $19 million loan, the hospital cooperative has invested $20 million in Neoforma. VHA owns a 25% stake in Neoforma, but that could swell to 46% by 2005 if VHA takes full advantage of all of its options.
At issue are two accounting principles under review by Neoforma's new auditors, Deloitte & Touche. The confusion relates to shares issued to its strategic partners in July 2000 under the previous outside auditors, Arthur Andersen, which Neoforma dismissed on May 31. Neoforma is the e-commerce partner of group purchasing giant Novation, the joint GPO of VHA and University HealthSystem Consortium. Specifically, the accounting principles concern the timing of the capitalization of the stock issued to VHA that was announced in May 2000 and the amortization of the equity issued to both VHA and UHC, which became effective in the first quarter of this year.
Neoforma officials said based on its complex relationship with Novation and the GPO's owners, they believe it would be "prudent" to consult with the Securities and Exchange Commission, which has been encouraging companies to consult with it "on complex and evolving matters of this type." The questions were forwarded to the SEC on July 22, the same day Neoforma released its preliminary second-quarter results, officials said during a hastily rescheduled conference call the same afternoon.
"Neoforma management has always taken full responsibility for our accounting, and we are working hard to make sure that we apply the most appropriate accounting treatment in our financial statements," officials said in a written statement.
The ambiguity seemed more of an issue for shareholders than for hospitals connected to Neoforma's electronic marketplace.
"I think that business is in pretty good shape. They have a good relationship with the Global Healthcare Exchange, which is a good anchor, and each quarter they are making their numbers in terms of the number of hospitals they have signed up," said Eric Brown, research director at Forrester Research, Cambridge, Mass. "If (the accounting issues) start to distract the company, then it's a problem."
Officials said they hoped to resolve the issues as soon as possible but could give no timeline. The SEC does not comment on issues arising out of financial statements, a SEC spokesman said.
"This is clearly a case of a very complex set of rules in accounting. Reasonable people can disagree on this," Nonomaque said. "I think it's a positive example of how a company should react when it gets advice that is conflicting from a prior auditor and an existing auditor."
Nonomaque said there are no concerns that the SEC might take punitive measures, especially considering that Neoforma voluntarily sought out the regulatory agency's advice.
Meanwhile, Neoforma preliminarily reported a net loss of $20.8 million, or $1.25 a share. Net revenue was $17.6 million, a 21% climb over the first quarter. As of June 30, the gross volume of transactions processed in the second quarter was $422.8 million, a 23% climb from the previous quarter.