Archive for February, 2018

Short Sellers Knock 40% Off MARK Stock In Two Days With Bogus Claims

  • Wildly inaccurate and misleading article published by short sellers 
  • Released mid-day during the most volatile market session in years
  • Multiple instances of misleading negative headlines but no evidence
  • Author appears to accuse CEO of trying to steal Kankan from shareholders
  • MARK stock now trading at barely over 1/2 the price per share that savvy APAC region acquiror CP Group paid for $10m Remark Shares 2 months ago 

We reviewed the article published Tuesday by a short seller and found it to be full of wildly misleading claims and erroneous statements. We find it difficult to believe that these factual inaccuracies and errors were all based on poor due diligence or misunderstanding of the financial statements. It appears that the author of this report is doing exactly what she is accusing Remark management of doing – making misleading statements to lead investors/traders to false assumptions about the value of this company. We highlight some of what appears to be blatant attempts to deceive below.

The article starts with three sentences, which we discuss in 1,2 and 3 below, followed by a discussion of a few other ridiculous claims –

The article starts with three sentences –“.. No “there” there: Wherever we look, we cannot find a real business behind Remark Holdings. The company changes its business description so quickly that even management struggles to explain. That does not stop them from pushing out press releases that make wild claims for fantastic new technologies to come.”

1) No “there” there: Wherever we look, we cannot find a real business behind Remark Holdings.
It doesn’t take a very deep dive into the filings to see that Remark is a holding company that owns many assets and/or operating businesses including but not limited to Vegas.com, Sharecare, its domain businesses (Banks.com, IRS.com, Bikini.com), Fanstang and Kankan. A quick review –

a) Vegas.com – generating approximately $65m-$75m in revenue per Remark’s most recently filed investor update. But the author wrote “At the time of acquisition, Vegas.com reported total bookings of USD 250 mln but no revenue. It still has not reported revenue”. It appears the author’s comments are trying to lead investors to believe that Vegas.com has not reported any revenue since being acquired, which is clearly untrue and verifiable by reading the company’s financials as filed with the SEC or reviewing the company’s investor deck.

b) 5% Sharecare stake – Sharecare is a very real business and we believe that the author is pointing to a bogus $10.2 million annual revenue figure that is likely short by $300 million or more to try to obscure the value of Remark’s Sharecare stake. We believe that the Seeking Alpha article on Sharecare’s value is still on point and that Remark’s 5% stake will prove to be worth over $100 million if Sharecare is acquired and possibly much more if Sharecare goes public.

c) Kankan – The author appears to intentionally try to muddy the water around Remark’s use of the VIE structure that foreign companies often use when setting up operations in China. It is complicated and we believe it is likely that few US investors are familiar with the hoops foreign companies have to jump through to offer services in China. But any suggestion that Kankan and thus Remark Holdings shareholders will not receive the revenue and other economic benefits of Kankan’s AI technologies and products is simply false and any effort to hint at such is misleading regardless whether it is intentional of just ill-informed.

The CP Group is quite familiar with how the VIE structure works as their effective employment of it to own and operate subsidiaries in many verticals has led to $100’s of billions of dollars in revenue for their owners on an annual basis. It should be noted that the CP Group made its $10 million investment in Remark after reviewing the company’s Kankan operations over several months and its chairman specifically mentioned Kankan when commenting on the $10 million investment the company made at $12 per share.

2) The author wrote  “The company changes its business description so quickly that even management struggles to explain.”
We see that the company changed the description in their press releases several times over the last year. It appears this was done as the company developed new products / services it could offer to further monetize its Kankan AI subsidiary’s technology and data. This should not be a surprise, as the company has historically generated the majority of its revenue from its legacy businesses (like Vegas.com) and Kankan has gone from generating zero in revenue in 2016 to an expected $8 million in 2017 and an expected $30 million+ in 2018. We think the description should change to incorporate such significant new offerings, particularly when a holding company develops a subsidiary that is growing as rapidly as Kankan.  Regardless, we have spoken with management on multiple occasions, watched them present at conventions and participated on conference calls and management has always done a very good job of explaining what Remark does.   This is another instance of the author making claims that she does not seem to have any way of backing up with examples or any proof of a time when management struggled to explain what they do.

3) The author wrote – “That does not stop them from pushing out press releases that make wild claims for fantastic new technologies to come.”
> We have not found any instances of press releases from Remark making wild claims for fantastic new technologies other than what they own and are now using. The author did not provide any examples or evidence related to this claim.

4) The author wrote – “MARK claims to have developed language-recognition software, web filtration, Big Data analysis of virtually all China’s consumer records, and 3D face recognition, all on a historical total of USD 2.8 mln in R&D costs. “
>We could not find any evidence of MARK management making such claims and wonder why the author did not provide links to filings or press releases where MARK claims to have Big Data analysis of virtually all of China’s consumer records or where MARK claims to have spent $2.8m TOTAL for the development of Kankan.  Again, the author is referencing things she says management has claimed, which should allow for links to press releases, filings, conference call transcripts, etc. but provides none.  Our review of these things has not turned up any evidence to support these claims from the short seller.

5) The author did not substantiate with a link to a filing or press release where Remark management “claims to be a major player in credit checks” 
>We are aware of a press releases that announce deals with several major banks but management has stated publicly that these deals represent less than a fraction of one percent of consumer lending in the Chinese market. We believe that readers of the short seller’s report are likely to believe that Remark management actually “claims to be a major player in credit checks” when in fact they do not. Again, we believe this kind of thing should be easy to prove with links to press releases, filings or conference call transcripts if it were true, but it appears that it is not true so again there is nothing to support this claim from the short seller.

6) The author wrote – Vaulting the firewall: “MARK management says that it offers international advertisers the opportunity to avoid China’s firewall controls on content.”
>The author states this, then provides as evidence only a quote from Remark’s CEO that says nothing remotely like that. We could not find where MARK management has claimed to “offer international advertisers the opportunity to avoid China’s firewall controls on content”. We note that the author did not provide a link or any other evidence of MARK management making such a claim and we could find none.

7) The author claimed “The real driver behind share appreciation seems to be that management is looking to cash in on options.” Somehow in her deep due diligence process the author failed to discover that the CEO of Remark owns (if all his options are included) close to 30% of the company’s stock and he has not sold any of them.

8) Patents – in our experience it is often difficult to find patents under a company name, as it is usually more fruitful to search by the name of the original developer. Also, the patent approval process often takes years. Given the uncertainty of getting pending patent applications actually granted and the time-frame involved, we find it difficult to ascribe value to them at this point in time and seriously doubt that any Remark investors bought stock based on some perceived value of its patents. We did not ascribe any  value to Remark’s existing patents or the pending patents in our due diligence reports because we believe the value of work-in-progress patents is too difficult to ascertain. The author seems to imply here that Remark is not actually working towards getting patents granted or that investors are ascribing too much value to the Remark’s intellectual property. We think the author is wrong on both counts.

9) Under “Nothing Owned” the author goes beyond the previous attempts to make it appear that MARK shareholders will not get the benefit of Kankan ownership.  She boldly claims that our CEO Tao Shing is trying to “seize without disclosure what legal control of KanKan Remark shareholders may have” – it appears that she is accusing our CEO of trying to steal Kankan from shareholders.  Not only would such a claim be beyond ludicrous generally, but it would also highlight another gaping hole in the author’s due diligence as it appears she is unaware that the CEO is by a very large margin the largest shareholder with ownership of just under 30% of outstanding shares.   So the key takeaway from this report is that the author has discovered that our CEO is trying to steal Kankan from himself? 

Another “smoking gun” the author seems to think she has uncovered relates to the entity (Bonet) setup in China that all Kankan revenue flows through. The author wrote “We obtained financial records for Bonet for the years 2015 and 2016. Bonet should be collecting all Remark’s China revenue. But the company records show that it had no revenue in either year.” We hope the author did not go to too much trouble to obtain those records because the SEC filings and conference call statements from management made it crystal clear that Kankan did not start to earn revenue until 2017. While this part of the article was kind of difficult to follow, to summarize it all here we believe that the author was trying to make it appear that Remark Holdings investors will not receive the benefit of Kankan’s operations.

10) The author stated that the company has $35.5m in debts and her review of the financials suggested that there was no way to repay it. Surprisingly, it seems the author was not aware of the cash Remark has in the bank or the recent $10m cash infusion from CP Group. Our review of the company’s last 10Q plus the publicly announced deals that have happened since the end of that quarter lead us believe Remark will report it ended Q4 with almost enough cash to pay off the debt in its entirety, though we believe they will likely pay down only a portion of it and use their much improved financial condition to get a better long term debt arrangement.

11) The author tried to throw shade at Remark’s unique arrangement with Aspire Capital that allowed the company to “put” shares to Aspire based on market prices when it needed liquidity. The author presented it in such a way as to lead investors to believe that the company is still selling stock to Aspire for less than $4.50 per share. While this did occur back when the stock was trading for less than $4.50 per share, that is not happening now. The author may not have intended to give that impression though, it could have just been another instance where she did not understand the filings.

12) In the section titled “Snake oil, Vegas, and bikinis” the author lists several Remark acquisitions from the past five years (Bikini.com, Banks.com, Hotelmobi, etc.) and uses the distressed financials of each of those companies before they were acquired and seems to be trying to suggest that buying such companies somehow allowed “…executives to make money form the financial engineering of the deal itself, while shareholders lose” but did not give one single item of evidence to support such a claim.

In summary, we believe the report published yesterday is a seriously flawed piece that should be viewed for what it is – an attempt by a short seller to bring a company’s stock down. The timing was perfect for the scheme given the broader market weakness and it worked to drive the stock down to levels that essentially value the company’s fastest growing and arguably most valuable asset (Kankan) at zero. We note that comparable valuation metrics used for similarly situated companies operating in China would value Remark’s Kankan holding to be worth much more than the company’s entire $178 million market cap. We note further that the company’s other assets (Vegas.com, Sharecare stake, domain businesses, etc.) combined are likely worth  more per share than the current $6.50 range where the stock has been trading. Investors and traders have today what we think will be a very short lived opportunity – the chance to buy shares of Remark Holdings at a price that is less than half the intrinsic value of the company and close to half of what one of the largest and most sophisticated acquriors in the APAC region paid ($12 per share) for $10 million worth of Remark shares less than two months ago. The only material happenings with Remark since CP Group completed its due diligence and paid $12 per share are:

  1. New contract with Bank of China for Fintech product
  2. New contracts with  CITIC Bank (which was formerly known as China International Trust Investment Corporation), Industrial Bank, Guangdong Development Bank and China Minsheng Bank for Fintech product
  3. New contract with China Mobile’s Internet of Things subsidiary  as its AI-solution partner for facial recognition and verification technology
  4. New contract with Beijing Hualian Group, one of China’s largest retailers, as its data and AI solution partner
  5. New contract with Shanghai Open University to provide an AI-based automatic video indexing and editing product—KanKan Media Box—as its online class video-management platform.
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February 8, 2018 at 10:00 am Leave a comment


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