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Wednesday, November 27, 2013

Yoga Intelligence : Bad Karma for the Taxpayer

Yoga Intelligence : A Downward Dog Pose for the Taxpayer

Yoga Corporation, also known as Yoga Intelligence Corporation, Yoga Intelligence Limited, Yoga Limited, Estomatic Solutions Limited, and Mokomat Limited (more on the name fun later), is a company providing "intelligent control for all buildings."

"Oh Yoga, you complete me!"

The company has ambitious plans. In a presentation given by their managing director (Priit Vimberg) in 2010, he spoke of their plans to have an IPO by 2015, while raising 4 separate rounds of venture capital funding prior to that (see slide 19).

Mr. Vimberg is indeed a dreamer. In 2008, he told the Äripäev newspaper that his company had a valuation of 1 billion Estonian Kroons (64 million euros), and needed to raise 150 million kroons (9.5 million euros) from investors. They had it all planned out too: of the 150 million, 100 million would be spent to enter new markets, 40 million on product development, and the remaining 10 million on "other expenses" (Hookers and blow? Fast cars? We can only speculate.).

"We're worth one BILLION kroons!"
Now, before we tear them apart like a vengeful Hindu god (hey, they named it Yoga, not us!), let's have a look at the idea.

Building Intelligence for All


Bear with us here, as their product is a bit difficult to understand, which is why they have numerous pages on their website dedicated to explaining what it is.

So the general idea with an "intelligent building" (also known as building automation) is that the building has feelings. It can tell you when it's too cold or hot, turn on the lights for you, and try not to use too many resources (power). It's like a good wife, but without the nagging and with much worse cooking skills. Some of the more intelligent buildings can even ask you if they look fat in this dress.

"Care to join me, or would you rather just discuss building automation?"

The building develops feelings reminiscent of a middle-aged women's book club after 2 bottles of wine, through the use of sensors. Just like your thermostat at home or in your car, various sensors report about room temperature, who is in it (through motion sensors), and so on.

The idea is this: why bother to heat, cool or light a room if no one is in it? That's a waste!

You must be thinking that Yoga then makes the sensors and hooks it all together, for a happy building that needs no antidepressants. Nope, they don't make sensors. They don't make lights. They don't make thermostats. They only make the software that controls all of it.

That's not so bad in itself (though we wonder why they needed a further 40 million kroons for product development). Let's have a look at their two markets, consumer (residential) and commercial buildings.

Let's start off with the easy one - residential.

First, there's price. According to this article, the price for an average apartment would be 1,500 - 4,000 euros to make the apartment into a "smart home". We're not sure if that's just for the software, or also all the sensors and installation, but let's assume it's fully inclusive. Remember, savings are marginal, so if your energy bill is 100 euros a month and they save you 10%, you're saving 10 euros a month or 120 euros per year. Even the yearly number is hard to predict, since heating and cooling needs vary drastically depending on the time of year. Who is going to spend 4,000 euros for such modest savings? Not many.. and here's another reason why:

Think of the last time you were out with friends, and talked about your house. Was it about energy savings? Probably not. It's just not an interesting topic. Do your friends (or you) care that you saved 10 euros a month? What's the motivation to go through all the hassle and effort to get this product, have it installed, and set it up?

Then, there are the alternatives for people who want to save money. Programmable thermostats have been around for years, and cost 20-100 euros. With those, you just program what day and time you want it to be a certain temperature, and it takes care of the rest. So it can basically turn off while you're at work, then have things all ready and cozy when you return in the evening. Simple solution, good savings, and low cost. Some vendors even make wifi-enabled thermostats so you can adjust it on the go. Who needs Yoga?

Now let's move on to business. Envision a large building, with the accompanying large costs to keep it heated, cooled and lit.  Yoga would be great for this, right? Well... maybe not. Large buildings are usually staffed by a maintenance person (building engineer) at least while it's occupied. This is often for insurance reasons -- someone needs to be on hand to fix anything that breaks, and in a large building, maintenance needs arise pretty much every day.

But surely the Yoga system can solve problems, right? It can adjust the temperatures automatically. Sure, it can, but so can the building engineer. What makes it even easier is that buildings lead a fairly boring life. They open at a certain time every day, and close at the same time. Usage is very predictable, so it's easy to plan ahead and warm the building up for Monday morning, turn off the system on Friday evenings, and so on. Easy tasks for a building engineer.

Of course, we could be wrong. Maybe every building and home needs this great technology, and we're just idiots. Ultimately, the measure of that would be the results, right? Now let's have a look at those.

 Taxpayer : Take Your Downward Dog Position!

Poor taxpayer. They thought it was just a yoga position.

Time for our history lesson of the day. Yoga Intelligence Corporation (business registration 10681001) started out back on July 2000. Yes, more than 13 years ago.

They got millions of kroons in investment from private investors, including a prominent investor from the UK. They also took on numerous company names during this time, including Yoga Intelligence Limited, Estomatic Solutions Limited, and Mokomat Limited, before finally settling on Yoga Intelligence Corporation.

The many faces of Yoga.

If the story were to stop here, we'd have nothing to complain about. Private investors invested into a startup company, and they changed names a lot (is this what they call a "pivot"?). Typical stuff.

Now let's move forward 8 years from their founding in 2000. Yoga Intelligence Corporation declares bankruptcy in 2008. They weren't meeting sales targets, ran out of money, and the current investors decided it wasn't worth putting any more money into this company.

Still OK in our book. The professional investors analyzed the company and the market, and decided it was not worth further investment. Totally normal.

Then things start to get messed up.

First, the bankrupt company shuts down with a tax debt of 99,809 euros. (The bankruptcy is so old this information is not readily available -- we verified it directly with someone at the tax authority.)

Then, the original founders of Yoga create a new company (Yoga Limited, registration number 11486721), transfer over all the intellectual property from the bankrupt company (without compensating the original investors, is our understanding), and.. get money from Enterprise Estonia (EAS)! How much money? Yoga received 442,624 euros of taxpayer money from EAS:

So let's review: a company is doing so poorly that professional investors decide it's not worth it to dump more money into. Instead, the founders run off with a tax debt and the intellectual property, create a new company, and get money from EAS. So, EAS is dumping money into a company that professional investors deemed to be a dud. Brilliant!

Was it just a matter of timing? Perhaps Yoga was just a technology too advanced for its time back in 2008 when they went bankrupt, and now they're flourishing. We don't think so. A review of their recent (2012) financial report shows a company that has racked up losses for each of the last 3 years (as far back as we have data), is heavily in debt to its investors, and has few sales to show for it.

This company is a dud, and EAS should never have dumped money into it.

Total loss to taxpayer: 544,433 euros.

Lessons Learned

There are lessons to be learned here. First, if a company has gone bankrupt, they shouldn't be allowed to just create a new one to run away from tax debt. On top of that, they certainly shouldn't be allowed to receive EAS money if they're not paying their tax bills.

Is Google blocked in EAS offices? A quick search would have revealed numerous articles about the first company's bankruptcy (they even had a similar name - Yoga!). A quick search of the commercial register would also reveal the questionable situation.

Our suggestion for EAS: before handing out money, type the company name and its founders' names into Google first.

Tuesday, November 12, 2013

Complus Consulting : One Big Minus for the Taxpayer

Complus Consulting : One Big Minus for the Taxpayer

Remember the old saying,  "If it's too good to be true, it probably is."?

With all the talk lately of a grand project to build a 600 million euro datacenter in Estonia (more on
that later), we thought it would be a good time to visit one of the grand projects proposed in the past.

Skeptical about large projects in Estonia. And the moon landing.

700 Jobs and Prosperity for All

Complus Consulting is an Estonian IT firm that handles data processing and back-office IT support.  Think of them like server monkeys, doing basic tasks like swapping out broken hard drives in computer servers, checking that a nightly report ran OK, and so on.

They write novels (and this blog) in their spare time.

Complus attracted great attention back in 2010 when they announced plans to create 700 jobs.  700 jobs! That’s huge for Estonia! To put this in perspective, Swedbank, one of Estonia’s largest companies, has 2,454 employees, and they have offices all over the country and an enormous operation.

Who would work in these jobs? This is where it gets interesting, especially to politicians. Complus’s plan was to take low-skilled workers (without IT skills) and train them to change hard drives and so on.

Now if you’re a politician, this is great news. A lot of the unemployment in Estonia, especially back in 2010, was comprised of low-skilled workers. The 17 year olds who dropped out of high school in 2006 to go work in lucrative construction jobs found themselves unemployed when the building boom went bust. Lacking a proper education or any skills other than swinging a hammer, their prospects were bleak.

(For those who were not aware of the situation in the Estonian economy back then, the market for construction workers was so red hot that it was not uncommon for a construction worker to earn a salary 2-3 times higher than a lawyer. We saw many of these construction workers wasting most of their hard-earned salaries at clubs like BonBon and Parlament when the weekend arrived, but we think that’s because the course on money management was given in 12th grade and they had already dropped out by then.)

We heard their BMW has new tires.

So as can be expected, the politicians rapidly appeared touting the great plans by Complus to help make a dent in unemployment.  It also appeared they were ready to help with funding:

"Timo Vaartman, adviser to the minister of social affairs, said that the company was keen to use the subsidies offered by the government to the companies that create jobs for the unemployed. "The state would subsidize the creation of these jobs," said Vaartman."

Here's a video report from ERR News about these plans, complete with the CEO of ComPlus (yes, he's French), and then-Social Minister (now Justice Minister) Hanno Pevkur praising ComPlus and the good benefits this will bring to the Estonian working man.

Now you’re probably expecting us to jump on this and be critical of the use of taxpayer money. Actually, if the money is used to train people with new marketable skills, we think that’s a good use of taxpayer money. Education provides great benefits in the long term, and improves society overall.

According to information we received from the social ministry, no taxpayer money was ever paid out for this anyway, at least from their department.

What happened? Complus went bankrupt. According to official records, Bienvenue OÜ was liquidated earlier this year (they renamed it to Bienvenue from Complus):

The bailiff even had to step in and auction off some of their old computer equipment in an attempt to recover some money.
"Help! I'm trapped in the empty ComPlus offices and I'm lonely!"

One Big Tax Scam?

Why was the bailiff auctioning off their equipment? Maybe because they owe the taxpayer over 1.3 million euros in unpaid taxes! To be more precise, Complus has a tax debt of 1,379,061 euros!

Taxpayer's money, in the hands of ComPlus

One does not build that much tax debt overnight. In fact, Complus was in the top 10 of largest tax debtors in Estonia (see Bienvenue).

What raises our eyebrows is the type of tax debt they have. Let’s have a closer look:

  • Erijuhtude tulumaks 806 570,70 (Special Income Tax)
  • Intress 408,61 (Interest)
  • Kinnipeetud tulumaks 120 557,65 (Withheld Income Tax)
  • Kogumispensionimakse  3 561,57 (Pension Tax)
  • Käibemaks 194 412,85 (VAT – Value Added Tax)
  • Sotsiaalmaks 227 375,00 (Social Tax)
  • Töötuskindlustusmakse  26 175,05 (Unemployment Tax)

Let’s leave aside Social Tax, Unemployment Tax, and Pension Tax, as those are the taxes the employer pays for their employees. Same with withheld income tax – it’s the income tax employers withhold when they pay their employees. Those tax debts are nothing to be proud of, but they’re also not suspicious. We’ll also leave off the Interest item because it’s small.

Now let’s look at VAT. This occurs when you sell a product or service, and collect VAT from the customer, on behalf of the government.

And now the big one: Special Income Tax. This comprises over half the company’s tax debt. There are a few types of taxes that can end up in this category, including fringe benefit tax, tax on interest payments on overdue taxes, taxes on expenses not related to the business and… dividend tax.

Here’s our theory, and note it’s just a theory since we don’t have all the information:

Complus set up this whole charade as a way to skip out on taxes. The company had operations outside Estonia, so they move those profits to Estonia, take the dividends, and never pay taxes. Brilliant! Too bad the taxpayer got screwed in the process. This company basically stole money from the taxpayer's pocket, with virtually no consequences.

Why do we think this was suspicious from the start? Well all the announcements about 700 jobs came out in the spring of 2010, but according to the tax data, the company has had a tax debt since 2009.  (It makes you wonder if any of the politicians bothered to research the company at all; tax debt is public information.)

They also haven’t filed an annual report since 2009. If the company was really serious about creating 700 jobs, wouldn’t they pay their taxes every month, and file annual reports?

Of course, we could be wrong on this. Maybe in the last 4 years, they were so busy creating 700 jobs that they forgot to pay their taxes every month, forgot to file an annual report, and forgot to stop from going bankrupt.

It’s possible, but unlikely.


More Grand Projects

So this is why we get worried for the taxpayer when grand projects like this are announced.
We’re still waiting for the billion kroon (64 million euro) Risti Club luxury golf course housing development to open, with housing for 780 families. It’s located at least an hour away from any major employment center in Estonia, but apparently location isn’t important in real estate. Our concern is that EAS has given significant taxpayer funding in the past to golf courses around Estonia, some of which have already gone into bankruptcy, so we’re skeptical Estonia needs another golf course, unless ice golfing becomes an Olympic sport. (More on taxpayer funding of golf courses in a future post.)

Estonia's next Skype?

And then there’s the 600 million euro datacenter that we referenced earlier, from Data Valley.  It would use so much power that it’s equivalent to half of Estonia’s entire power consumption in the winter, and would require building 3 more power stations. All we can hope is that no taxpayer money is wasted on this adventure.


Lessons Learned

Complus was too good to be true. Numerous news sites and ministries reported their great plans to create 700 jobs, but apparently no one bothered to look into the company even the slightest bit. Just a basic search of the commercial registry would have revealed their months of unpaid taxes dating back to 2009.

The situation has only slightly improved when it comes to Data Valley and their datacenter plans. ArcticStartup did some digging into the details behind this, but there are still a lot of questions.

Maybe it’s time for the Estonian media to look into these grand projects further, instead of just rewriting press releases?