GAAP-uccino Version 1.

Part I of III February 1, 2012

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Table of Contents
• • • • • • Introduction Summary The CFO Should Resign Threats to the Razor/Blade Myth Parallels to Sino-Forest Price Target




• Green Mountain Coffee Roasters’ (GMCR) stock was and remains one of the best performing stocks trading on the NASDAQ.
GMCR Daily Stock Price- 2006-Present
$120.00 $115.00 $110.00 $105.00 $100.00 $95.00 $90.00 $85.00 $80.00 $75.00 $70.00 $65.00 $60.00 $55.00 $50.00 $45.00 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 1/3/2006 1/3/2007 1/3/2008 1/3/2009 1/3/2010 1/3/2011 1/3/2012


• Compare GAAP earnings (i.e. paper profits) vs economic earnings vs the stock; you see conflicting stories. This got the critics’ attention.
$300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 -$50,000 -$100,000 -$150,000 -$200,000 -$250,000 -$300,000 -$350,000 -$400,000 -$450,000 -$500,000 -$550,000 -$600,000 -$650,000 -$700,000 -$750,000 -$800,000 -$850,000 -$900,000 -$950,000 -$1,000,000 -$1,050,000 -$1,100,000 -$1,150,000 -$1,200,000 -$1,250,000 -$1,300,000

Accounting, paper earnings increased…







Free Cash Flow - All Inclusive Free Cash flow ex Acquisitions GAAP Earnings Free Cash Flow - Proxy for Economic Earnings

Even as economic/cash earnings decreased at an accelerating rate

Sources: GMCR 10Ks, Thomson Reuters


• GMCR critics include an all-star lineup of accounting/fraud experts (with many more):
     David Einhorn – Allied Capital, Lehman Brothers, Office Depot Howard Schilit/CFRA – Author of “Financial Shenanigans” Sam Antar – Crazy Eddie,, Edward Ketch/Anthony Catanach – Accounting experts, Professors. The Warrior – One of the greatest financial/accounting fraud experts. Uncovered various frauds during the dot-com and subprime bubbles


• These experts’ (crime fighters) many concerns sound as if they come straight out of a Harvard Business School Case Study:
 Accounting/Fraud Issues: Overstating Revenue, Understating Expenses, Capitalizing Expenses, Channel Stuffing, etc. all to meet Wall Street Estimates  Improper Conduct/Violation of Laws: Violations of Regulation FD, Insider Trading, Securities Fraud, Peculiar relationship with quasi-captive distributor, etc.  Fundamental Problems: Zero cash flow since Keurig Acquisition, 100% dependent on external capital, Abysmal earnings quality, reliance on acquisitions to meet/beat expectations, Reduced/changing transparency of operating metrics, Patent expiration, etc.

Sources: GAAP-ucino by Greenlight Capital, Sam Antar's blog, Grumpy Old Accountant's blog, & sources citing Howard Schilit


• Yet there is even more to the story…
 GMCR Executives have repeatedly lied and mislead; In particular, CFO Frances Rathke has misrepresented her CPA Credentials for at least 8 years. This appears to be a violation of Vermont law. Rathke even tried to cover this up recently. The CFO needs to go.  A  A  A  A  A  A  A
Source: 9

• The Razor/Razor blade Myth Is Under Threat
 The rising popularity of Reusable K-Cups (such as Ekobrew & Solofill), replaces the need for k-cups.  Ekobrew and Solofill offer customers a ‘win-win’ – they can drink higher quality coffee, for a fraction of the price.  One Ekobrew/Solofill can save a user between $137 - $343 per year, and on average, $250 per year. This can easily cost GMCR $100s of millions in revenue, and render the business even more unprofitable.  At best (for GMCR), the Ekobrew and Solofill complicate the ‘razor / razor blade model’ and growth trajectory.      A A A A a
Sources: LST estimates 10

• Initial Price Target is $15.00/share…then single digits
 GMCR stock may look reasonably priced, if you trust the numbers AND believe its high growth continues indefinitely.  However, GAAP Net income does not reflect economic income. I estimate GMCR’s true net income is closer to ~$60-$120 million.  Once earnings decline, stock has no support until single digits. Note that Research In Motion (RIMM) stock peaked years before revenue and earnings did.  The economic, accounting, and behavioral similarities between Sino-Forest and GMCR are disturbing.  The two biggest reasons the market has yet to punish GMCR as severely as it did Sino-Forest, are GMCR is an American business, and its products are visible. Unfortunately, these reasons provide a false wall of security. Investors/traders equate the popularity of the product with “there is no fraud.”
Sources: LST estimates, GMCR 10Ks & 10Qs, Muddy Waters Research 11

• Eerie Similarities to Sino-Forest

The CFO Should Resign


The CFO Should Resign
• GMCR Management made some bold claims last quarter to address Einhorn and the crimefighters’ concerns:
 “Ultimately, our best response is continuing to run our business with the utmost of integrity”  “Those who know this Company and the individuals that come together to make our success possible, know how much we value integrity and respect”  “Though disappointing, we take the recent allegations of misconduct seriously. Our audit committee has reviewed the allegations and we are confident there is no misconduct. There is no wrongdoing”

• Contrary to the above statements, there is in fact, wrong-doing. Chief Financial Officer (CFO) Frances Rathke has been FALSELY claiming to be a Certified Public Accountant (CPA) since first joining the company in 2003; She’s been lying for at least 8 years. It would appear this violates Vermont law. Rathke should resign immediately, especially given the many more serious allegations.
Sources: GMCR Q4 2011 Earnings Call 13

The CFO Should Resign
• GMCR Chief Financial Officer (CFO) Frances Rathke Claims to be a Certified Public Accountant (CPA) in 6 out of 9 SEC 10K filings. Each 10K states:
 “Frances G. Rathke has served as Chief Financial Officer of the Company since October 2003, and as Interim Chief Financial Officer of our Company since April 2003. Prior to that, Ms. Rathke worked as a financial consultant with various food manufacturers and food retailers from September 2000 to April 2003. One of these consulting assignments included the position of Interim Chief Financial Officer for Wild Oats Markets, Inc., a supermarket chain, from July 2001 to December 2001. Prior to this, Ms. Rathke served as Chief Financial Officer for Ben & Jerry’s Homemade, Inc., an ice cream manufacturer, from April 1989 to August 2000. From September 1982 to March 1989, Ms. Rathke practiced public accounting and auditing with Coopers & Lybrand LLC, and is a certified public accountant.”

Sources: GMCR 10K 2003 - 2011


The CFO Should Resign
• In addition to falsely claiming to be a Certified Public Accountant, Rathke in the 10Ks certifies pursuant to SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002:  “I, Frances G. Rathke, Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Green Mountain Coffee Roasters, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report “  Did Rathke “review” ANY of the 10Ks? Based on her knowledge, it’s hard to believe she was not fully aware that these were untrue statements.  If Rathke has been inflating her credentials for the last 9 years, is it a stretch to say that GMCR is overstating its revenues and earnings as well?

Sources: GMCR 10Ks


The CFO Should Resign
• GMCR’s website also falsely claimed Rathke is a CPA, as recently as Friday, December 2nd, 2011 (as shown below):

Sources: GMCR website as of 12/2/2011 4 pm EST


The CFO Should Resign
• On the evening of Friday, December 2nd, 2011, Sam Antar tweeted (time-stamped in the image):



The CFO Should Resign
• Sam Antar continued:



The CFO Should Resign
• A simple license check confirms Rathke is not a CPA… it expired in 1993 • As if to remove all doubt, GMCR’s website modified Rathke’s bio within 2-3 hours of Sam Antar’s late, Friday night tweets.

Sources: GMCR website,


The CFO Should Resign
• The Vermont Statutes Online, Title 26: Professions and Occupations, Chapter 1: Accountants, under § 14. Prohibitions (b) states:
 “No individual person may use the title "certified public accountant," "CPA," "registered public accountant," "RPA," or "auditor" or any other title tending to indicate that he is a public accountant, unless he is licensed as a public accountant under this chapter or is an individual with practice privileges set forth under section 74c of this title.”  Section 74c ‘substantial equivalency’ doesn’t seem to excuse Rathke.  Were it not for Sam Antar, GMCR and Rathke would’ve continued this charade.  What’s equally, if not more disturbing, is that GMCR has attempted to coverup this lie, in hopes that no one knows or cares.  Unfortunately, as the next two pages show, Rathke is not the first C-Level executive to lie. Nearly all CEOs who lied in the past resigned; Rathke should as well, or at the very least, be forced to forfeit compensation.

• CFO Fran Rathke has been using the title “certified public accountant” and “CPA” for at least the last 8-9 years.

Sources: The Vermont Statutes Online


The CFO Should Resign
• Ronald Zarrella, Bausch & Lomb CEO  Zarrella falsely claimed an MBA from New York University's Stern School of Business. He attended the program from 1972-76, but never earned his MBA. His claim was never checked by his prior employers.  He was forced to forfeit $1.1 million from a bonus that could've potentially reached $1.65 million. Zarrella remained employed with Bausch & Lomb, who said he brought too much value to the company and its shareholders to fire him completely. • Kenneth Lonchar, chief financial officer of Veritas software  Lonchar fabricated his education, saying he earned an accounting degree from Arizona State University and was a Stanford MBA graduate -- in reality, all he had was an undergraduate degree from Idaho State University.  Lonchar resigned and Veritas stock investors responded -- the company's stock price fell about 16 percent.

Sources: "Infamous Resume Lies" by Rachel Zupek -


The CFO Should Resign
• Jeff Papows, chief executive officer of Lotus Corporation  In 1999, The Wall Street Journal discovered Papows exaggerated his military record (he was a lieutenant not a captain), feigned his education (he doesn't have a Ph.D. from Pepperdine University) and claimed he was an orphan (his parents are alive and well).  Papows resigned after his exaggerations were exposed at the same time as a sexual discrimination allegation from a former Lotus employee against him. • Dave Edmondson, chief executive of RadioShack  Edmondson falsified his résumé by claiming to have a degree in psychology from Pacific Coast Baptist College in California (though the school doesn't offer a psychology program), along with a degree in theology from the same unaccredited college.  Like the others, Edmondson admitted his false claims and resigned.

Sources: "Infamous Resume Lies" by Rachel Zupek -


The CFO Should Resign
• GMCR ‘Code of Ethics’ The Code of Ethics in brief asks each employee to:
 “Maintain accurate records and report any unethical behavior  “Comply with all laws, rules, and regulatory requirements”  “Avoid conflicts of interest and refrain from any appearance of impropriety”  Maintained false records of CPA credential  Most likely did not comply with laws and rules related to proper use of CPA designation  Increased the appearance of impropriety by trying to sweep this false claim under the rug
Sources: GMCR website 23

• CFO Fran Rathke and the Company has chronically violated the above:

Threats to the Razor / Razor Blade Myth


Threats to the Razor/Blade Myth
• The Rising Popularity of Reusable K-Cups Raises Doubts about the Razor/Razor blade Model:
 GMCR claims “Sell the brewer at or near cost & Sell the Kcup at a high margin, just like a ‘razor, razor blade’ model.”  Reusable k-cups, such as Ekobrew & Solofill, reduces the need for k-cups. Their popularity may keep the Keurig platform relevant, but render the business unprofitable.  The problem for GMCR is that Ekobrew & Solofill offer consumers a compelling alternative to k-cups, as they can enjoy fresher, higher quality, BPA-free coffee, for a fraction of the cost of a k-cup.  Consumers will (rightfully) wonder: why pay high prices for (at best) mediocre coffee, when they can pay low prices for premium coffee by using Ekobrew or Solofill?
Sources: Various GMCR presentations and LST estimates 25

Threats to the Razor/Blade Myth
• As the table below shows, reusable k-cups offer consumers a superior value proposition, overall, over k-cups; the only marginal benefits k-cups offer are: no clean-up required and prep-time is slightly faster. CRITERIA K-CUP Reusable K-Cup • A • AEffective Cost NO YES • A Convenient Fast and YES YES • A ‘Green’ i.e. Good for the Environment NO YES • A Coffee NO YES • A Quality, Freshness Control Quick YES YES • A Clean-up • A BPA Plastic (Carcinogen) Contains YES NO • : any beans and grinds Choose NO YES
Sources: and other reviews. 26

Threats to the Razor/Blade Myth
• GMCR has its own reusable k-cup…and the marketplace speaketh
 Reviews for the Keurig-branded product are noticeably weaker compared against Ekobrew or Solofill  “A must-have, but very poorly made…These things last us about 2-3 months max. They are so poorly made that they seem designed to break after a certain time period. I have gone through three so far” a review written on April 21, 2007. 302 of 324 customers found this review helpful. It is considered ‘the most helpful critical review’
AMAZON.COM REVIEWs as 1/31/2012 Ekobrew 574 109 55 75 101 914 4.07 Keurig Solofill My K-cup 411 344 163 169 88 116 60 107 113 233 835 969 3.84 3.29

5 4 3 2 1 TOTAL Average Review



Threats to the Razor/Blade Myth
• Ekobrew is the newest product & appears the most promising
 Ekobrew launched ~2 quarters ago, yet it is sold at Costco, and already ranked #3 best seller in ‘Grocery & Gourmet Foods’ at  Nearly all anecdotal accounts suggest Ekobrew has accomplished what the others have failed: deliver a strong cup of coffee. All indicators suggest they are selling like hot cakes.  Compatible with nearly all 26 Keurig, Cuisinart, Breville, and Mr. Coffee brewers (B30 Mini, B130, B150, B155, B3000 currently incompatible).

Sources: Costco, Amazon, & industry insiders


Threats to the Razor/Blade Myth
• The Reusable K-cups Can Easily Save Consumers Hundreds of Millions of $ a year:
 Buying an Ekobrew or Solofill and a 1-3 pound bag of premium drip coffee already leaves you with a positive ROI vs. buying equivalent # of servings of k-cups  While this is great news for consumers, who get more for less, this is bad news for GMCR  I estimate one reusable k-cup user saves between $137 $343 a year, and on average $250, depending on how often the Ekobrew/Solofill is used.  If there are 1,000,000-2,000,000 reusable k-cup users, that’s around $150-$600 million in savings for consumers, and $150-$600 million in lost k-cup revenue for GMCR
Sources: LST estimates 29

Threats to the Razor/Blade Myth
• The table below summarizes how much money reusable k-cup filter users can save collectively, depending on: (1) how many users there are and (2) How frequently they use them • The below analysis assumes a k-cup costs $0.66 and that a household consumes 1,040 coffee servings per year
Cost Savings from Reusable Filter Adoption (in thousands of $) Reusable Filters Users (in thousands) 750 1,000 1,250 1,500 1,750 2,000 $ 102,960 $ 137,280 $ 171,600 $ 205,920 $ 240,240 $ 274,560 $ 128,700 $ 171,600 $ 214,500 $ 257,400 $ 300,300 $ 343,200 $ 154,440 $ 205,920 $ 257,400 $ 308,880 $ 360,360 $ 411,840 $ 180,180 $ 240,240 $ 300,300 $ 360,360 $ 420,420 $ 480,480 $ 205,920 $ 274,560 $ 343,200 $ 411,840 $ 480,480 $ 549,120 $ 231,660 $ 308,880 $ 386,100 $ 463,320 $ 540,540 $ 617,760 $ 257,400 $ 343,200 $ 429,000 $ 514,800 $ 600,600 $ 686,400


20% 25% % of coffee 30% served using 35% reuseable filters 40% 45% 50%

$ $ $ $ $ $ $

250 34,320 42,900 51,480 60,060 68,640 77,220 85,800

500 $ 68,640 $ 85,800 $ 102,960 $ 120,120 $ 137,280 $ 154,440 $ 171,600

$ $ $ $ $ $ $

2,250 308,880 386,100 463,320 540,540 617,760 694,980 772,200

$ $ $ $ $ $ $

2,500 343,200 429,000 514,800 600,600 686,400 772,200 858,000

Sources: LST estimates


Threats to the Razor/Blade Myth
• Popularity of the reusable k-cup filters may directly save consumers hundreds of millions of $ and cost GMCR the same amount annually. That’s at least 10%-20% of 2011 revenue. • Reusable k-cup popularity may lead consumers to question the keurig brewer’s value proposition. Their popularity pressures GMCR profitability in the short term, viability in the longer term. • What were to happen if a competing single-serve coffee brewer that directly uses coffee grinds instead of k-cups, were to gain traction among customers? It seems that the marketplace beckons for a solution that delivers higher quality coffee for a lower price.
Sources: LST estimates 31

Parallels to Sino-Forest


Parallels to Sino-Forest
• Both GMCR and Sino-Forest have made claims denying wrong-doing:
 “I would like to say that there are no inaccuracies in our corporate reports, filings or audited financial statements.” Allen Chan, Former CEO, Chairman, and Founder of Sino-Forest June 14, 2011 Earnings Call.  “We can categorically say Sino-Forest is not the ‘near total fraud’ and ‘Ponzi scheme’ as alleged by Muddy Waters. I am pleased that the independent committee has been able to refute the substance of the allegations made in the Muddy Waters report," said Judson Martin, vice-chair & CEO, November 15, 2011.  “Embattled Sino-Forest Corp. is warning that its historic financial statements and audit reports should not be relied upon.” – January 12, 2012, The Globe and Mail.  “We are confident there is no misconduct, there is no wrongdoing.” Larry Blanford, CEO of GMCR Q4 Earnings  "The audit committee, with the assistance of counsel and a forensic accounting firm, completed its investigation of accounting practices at the company in December 2010,“ Suzanne Dulong GMCR spokeswoman told Reuters on December 20, 2011…even as there are new allegations of misconduct in 2011, NOT 2010.
Sources: Sino-Forest earnings, press releases, The Global & Mail, GMCR earnings, & reuters


Parallels to Sino-Forest
•CATEGORY M Block & Sons • •Shady ‘Intermediaries’ Rapid, smooth growth Smooth revenue + earnings growth • • No Free cash flow Free Cash Flow •Glaring FCF vs. Earnings Discrepancy • Sweeping denials •Dependence on External Capital aa fulfillment partner, • administrator • Questionable Capex Spending
Prominent Short Seller Exposed Fraud Numerous ‘minor’ errors in filings Growth via Aggressive Acquisitions GMCR Sino-Forest Artificial YES Intermediaries YES YES YES Rapid, smooth growth No No No Free cash Flow YES YES Sweeping denials YES YES Last paragraph YES of YES mitch the snitch YES YES YES YES YES YES

Sources: LST estimates, Muddy Waters Research, Greenlight Capital, Sam Antar, The Grumpy Old Accountants Blog, Sino-Forest filings, GMCR filings


Parallels to Sino-Forest (cont’d)
•CATEGORY M Block & Sons • •Revenue + Earnings Overstatements Rapid, smooth growth Ties between execs & auditor • • No Free cash flow Questionable Audit Committee • •Deep Ties with Chairman/Founder Sweeping denials •Sweeping Denial of Fraud Allegations • aa fulfillment partner, administrator • Conflicted Wall Street Enablers
Profitability as Reported is Doubtful Voluntary ‘Independent’ Investigation Stock prices appreciated 10x-20x GMCR Sino-Forest Artificial YES Intermediaries YES YES YES Rapid, smooth growth YES YES No Free cash Flow YES YES Sweeping denials YES YES Last paragraph YES of YES mitch the snitch YES YES YES YES YES YES

Sources: LST estimates, Muddy Waters Research, Greenlight Capital, Sam Antar, The Grumpy Old Accountants Blog, Sino-Forest filings, GMCR filings


Price Target


Price Target
• GMCR’s CFO Cannot Be Trusted, its numbers cannot be trusted
 GMCR CFO has lied about her credentials before, during, and after serious allegations of financial/accounting shenanigans were made and left unresolved; the CFO, who acts as the chief steward of financial reporting, cannot be trusted.  If the CFO cannot be trusted, especially given the nature of allegations, GMCR’s numbers cannot be trusted.  If GMCR’s numbers – revenue, earnings, etc. – cannot be trusted, valuation metrics derived off them, such as PE, PEG, etc. ratios, are meaningless.  Let’s assume that GMCR’s financial shenanigans is limited to overstating revenue, understating expenses, and/or capitalizing expenses. That is, let’s assume there is no cash balance related fraud.

• Working off Statement of Cash Flows, assuming cash balances are valid

 I speculate that a decent proxy for true earnings, looking past the shenanigans, is going to be cash from operating activities less depreciation (where depreciation is a proxy for maintenance/recurring capex)  2009’s CFFO less depreciation is roughly $15 million. In 2010 and 2011 this calculation leads to negative numbers. For the sake of being generous, I will ignore this and speculate that true earnings in 2011 was roughly 4x that of 2009 (revenue increased 3.4x, so I’m granting some operating leverage). I arrive at $60 million as an estimate for true earnings for fiscal year 2011.
Sources: GMCR 10Ks & 10Qs, and LST estimates 37

Price Target
• $15.00 per share, as initial target price
 If $60 million is a better estimate for 2011 earnings (albeit with downside risk to the estimate), and grant that earnings may double for full year 2012 to $120 million, I arrive at a $15.00 per share target based on 20x full year forward earnings.  $15.00 may seem so far away – even wrong – unless you factor in the many downside catalysts, two of which I focused on in this report. The fact remains: the fundamental support is not there.  The problem with GMCR is that if the company could not generate cash flow during these boom years, it is doubtful they can do so when growth slows or even starts going negative.

• Long-term Downside risk to single digits; true ‘ticking time bomb’

 For companies in such straits, the only real price support seems to be tangible book value (see retailers, ‘value’ tech, and financials).  GMCR’s book value/share less goodwill is $7.38; tangible book value / share is $4.05

Sources: GMCR 10Ks & 10Qs, and LST estimates


To Be Continued in Part II

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