REKR – Government documents do not support investor expectations

Portfolio manager summary

  • REKR is a provider of automatic license plate recognition (ALPR) technology whose stock fell precipitously over a lack of legislative progress on the company’s Texas ALPR program
  • This appears to be the tip of the iceberg – today, we highlight government documentation which shows that REKR’s revenue opportunities are likely a fraction of what investors expect
  • Oklahoma government budgets imply that REKR’s much vaunted UVED program is a sub $2MM revenue opportunity – almost 96% less than the >$40MM in revenue intimated by Rekor’s CEO 
  • The predecessor provider of this technology to Oklahoma ended its relationship with the state saying the program was “not economically feasible” at a per enrollment fee nearly double what REKR receives
  • Government filings showing “Rekor’s largest state and local clients” and our searches of other contracts imply annual revenues of just $1.8MM, a far cry from sellside expectations that contemplate $26MM in revenue in 2021 and $53MM in 2022
  • We unveiled evidence that REKR is unlikely to win other states – ALPR bills have failed in several states, including NY and FL, which REKR has touted as potential business opportunities
  • In Texas, Rekor appears to have missed its window as the ALPR bill is unlikely to make it to the legislative floor before the May 31 session adjournment.  As Texas legislature meets every other year, it won’t see the light of day until at least 2023
  • We believe REKR’s largest contributor to 2020 revenue will fall 95% in 2021 due to its non-recurring nature
  • Governance concerns combined with management turnover and backgrounds should create an additional level of concerns for investors 
  • Our work suggests that REKR will be unable to reach sellside revenue estimates, and we assign a $3.71 price target to the stock, down ~68% from current levels

REKR’s revenue problem

Rekor (REKR) is a provider of automatic license plate recognition (ALPR) technology which can be applied to toll roads, parking enforcement, and speed limit and red light monitoring, among other things.  On May 10th, REKR saw its shares drop almost 30% which was attributed to “speculation that a Texas bill for uninsured vehicle enforcement [using REKR technology] was likely dead”. It is our view that this is just the tip of the iceberg when it comes to REKR.  Today, we show investors the following:

  • That the Oklahoma uninsured vehicle program’s revenue opportunity appears to ~96% less than what REKR’s CEO has suggested to investors
  • Annual revenue from REKR’s “largest” state and local customers is miniscule relative to future topline expectations
  • Evidence that would suggest that adoption of similar legislation in other states is unlikely due to privacy concerns – and yes, we think the Texas bill is dead for at least another two years
  • That REKR’s largest revenue driver in 2020 will likely be down 95% in 2021
  • Management and auditor concerns

As a result of the above and the implications to REKR’s revenue base, we assign a $3.71 price target to REKR stock, down ~68% from current levels.

CEO Berman seems to have set monster revenue expectations for Oklahoma’s UVED Program

In November of 2020, REKR announced that the state of Oklahoma would use REKR’s Rekor One “to provide vehicle information associated with uninsured motorists as part of the state’s Uninsured Vehicle Enforcement Diversion Program (“UVED Program”)”.  The UVED Program uses REKR’s ALPR technology to identify uninsured vehicles, at which point the motorist receives a notice to enter the UVED Program by “acquiring insurance and paying a $174 enrollment fee, thereby avoiding the possibility of criminal charges, associated penalties, and a permanent mark on his or her driving record.”  

REKR’s share in this is a $43.50 processing fee per UVED enrollment and a 25% commission from insurance companies for each sign up, bringing the total revenue per enrollment “closer to $100 per successful” enrollment, according to REKR’s CEO, Robert Berman:

Source: Press release, NobleCon virtual presentation 

Berman himself outlined the revenue opportunity from the UVED program in an January 2021 virtual presentation at NobleCon (starting around minute 34) – he appears to suggest there are 500,000 uninsured motorists in Oklahoma, with a target to have just 10% of those remain uninsured, implying 450,000 enrollments at close to $100 a pop, for a total three-year revenue opportunity of $45MM, or $15MM annually over the three year life of the contract.

Oklahoma government documents imply revenues ~96% below Berman’s target

  • At year end 2020, the Oklahoma Executive Budget shows 20,678 total enrolled citizens in the program, with an expectation of just under 16,000 more enrollments through 2023:

Source: Oklahoma Executive Budget 2022

  • Berman’s 450k enrollments out of 500k uninsured drivers implies an enrollment rate of 90% – the actual enrollment rate for the first six months of 2020 was just 36% 

Source: Amendment of Solicitation

What this results in is a dramatically lower revenue opportunity that what Berman intimated during the investor presentation:

It is our view that the Oklahoma revenue opportunity is just 1/28th (1.6MM/45MM) of or 96% lower than what Berman intimated during the investor presentation.  

REKR’s first quarter 2021 earnings corroborate our view

REKR reported $245,000 in Oklahoma revenue for itself, and $1,000,000 in revenue for the state of Oklahoma – “over 25,000” notices of non-compliance were issued, but REKR doesn’t disclose the number of enrollments, which drive REKR’s revenue.  Based on $174 per enrollment received by the state, this implies an enrollment rate of just 23%, even lower than the 36% rate we mentioned above.  For REKR, $245k in revenue divided by 5,747 enrollments implies a revenue per enrollment of $42.63, very close to the $43.50 stated in the contract win and well below the $100 per enrollment fee Berman referred to (this math corroborates our view that REKR’s opportunity is much smaller than advertised and comports with the government documentation above):

Source: REKR 1Q21 earnings

We asked REKR if they could share the number of OK enrollments they got in 1Q21, and what its targeted OK enrollments are – REKR’s EVP Charlie Degliomini responded by asking about our employment and stated that “Much of what you are asking for beyond what is in the Q is material non public information.”

Oklahoma UVED: “not economically feasible” even at higher prices

Given these unit economics and trends, it should then come as no surprise that the prior UVED program vendor parted ways with the state, calling it “not economically feasible”.  

In its 2017 annual report, Swedish company Sensys Gatso size its Oklahoma UVED contract win at 17 million Swedish Krona, or $2MM annuallySensys would be paid $80 per enrollment, according to the contract.

Even at a per enrollment fee of near double REKR’s, Sensys, in August 2020, announcing it was “mutually parting ways” with the Oklahoma UVED Program, citing a lack of payment compliance by drivers, making the program “not economically feasible”:

Source: Sensys Gatso release

The sellside has REKR doing $26MM in revenue in 2021 and $53MM in 2022 – the economics of this contract plus the historical precedent suggests this is not remotely possible.

In our next section, we show government documents that suggest that REKR’s largest state and local clients are unlikely to be major sources of revenue.

Public data implies a large gap between actual revenue generation and expectations

In an October 2020 contract with the town of Collierville, TN, REKR provided a “list [that] includes Rekor’s largest state and local clients”: 

Source: Town of Collierville, p60

This list includes the DoD, Sands Point (NY) Real-time Crime Center, Westchester County (NY) Real-time Crime Center, Mt. Juliet (TN) Citywide LPR System, City of Lauderhill, FL, City of New Rochelle, NY, and the City of Yonkers, NY.  This got us down the rabbit hole of finding the economics for these contracts and others – what we found were implied annual revenues that make it hard to understand how REKR will hit street estimates.  Our view is that if these are the largest state and local clients for REKR, and their revenues are well below $1MM annually, then it is hard to understand how REKR will grow in line with Street expectations. 

In the table below, we found contracts for five of the six entities mentioned in the Collierville RFP, as well as three more entities, which total just $1.8MM in annual revenue – and that’s without adjusting for the $1.5MM already likely recognized for the Lauderhill contract (more on this later).  Adjusting for this, this set of “Rekor’s largest state and local clients” produces approximately $1.5MM in annual revenue.

Sources: DoD, Mt. Juliet, Lauderhill, New Rochelle, Yonkers, San Diego, Washington County, Daughin County

The contract size issue we raise also extends to the North Dakota win Berman mentioned in the 1Q21 earnings:

Source: 1Q21 earnings call

Through public records, we were able to get a look at the contract, and total value of just $75,000 over two years:

Source: North Dakota Parks and Recreation

If “Rekor’s largest state and local clients” produce just $1.8MM in annual revenue, and a recent contract just $37,500 in annual revenue, how is REKR supposed to hit sellside revenue estimates of $26MM in revenue in 2021 and $53MM in 2022??

We asked REKR if they could share detail on their largest client – REKR’s EVP Charlie Degliomini responded by asking about our employment and stated that “Much of what you are asking for beyond what is in the Q is material non public information.”

In our next sections, we show historical evidence that suggests that ALPR bills have little chance of success, and yes – we believe that the Texas bill is dead.

Privacy concerns about UVED programs

In the same investor presentation we mentioned above, CEO Berman cited other states as potential UVED revenue opportunities for REKR.  In a 2021 acquisition proposal to Iteris, Berman restated the “large revenue opportunity” of the Oklahoma UVED contract, and told Iteris’s CEO that he expected to “win similar mandates from the States of Texas, New York, and Florida”:

Source: Letter to Iteris

Our view is that UVED programs are unlikely to spread past Oklahoma, which is the only state in the US with an ALPR-powered uninsured motorist program. 

This view is rooted in serious privacy concerns associated with reading and scanning license plates:

Recent failures suggest that other states are unlikely to adopt similar programs to Oklahoma

This view seems to have percolated more broadly, as bills to enact ALPR-powered programs appear to have failed across several key states:

  • Florida bill SB1230 died in committee on 4/30/21

“Died in Transportation”

Source: Florida Senate

  • It appears that New York Senate Bill 6053, which was to establish the “automatic uninsured vehicle enforcement program” never left committee during the 2020 legislative session, and it doesn’t look like there is one for the 2021-2022 session

Source: NY State Senate

Source: Billtrack

  • In 2016, Rhode Island Senate Bill 2231 didn’t make it out of committee, as the “Committee recommended measure be held for further study”

Source: Legiscan

The Texas bill: looking deader than a run-over armadillo

Which brings us to Texas, where the ALPR bill (HB 1119) absence from the Daily House Calendar likely caused the stock to fall 40% over two trading days.  

Our research shows that the bill was left pending in committee as of 4/15/21:

Source: Texas Legislature Online

An identical bill was filed in the Senate, and it was just recently referred to a Committee on 4/1:

Source: Texas Legislature Online

In other words, the Texas bill has a long way to go before being signed into law:

Source: Texas Legislature Online

Which is a problem – the Texas legislative sessions ends on May 31, 2021, IN JUST FIVE DAYS, and doesn’t reconvene until 2023, making it extremely unlikely that REKR wins the Texas business anytime soon.  

On the 1Q21 earnings call, Berman told investors that “In Texas, we still don’t know what is happening, as there are few more weeks of sessions out”:

Source: 1Q21 earnings call

We firmly believe that Berman’s statement is at best unaware of the timeline we’ve presented, or at worst misleading to investors. In light of this, we asked REKR when they expected to know whether the Texas bill would go through – REKR’s EVP Charlie Degliomini responded by asking about our employment and stated that “Much of what you are asking for beyond what is in the Q is material non public information.”

And let’s assume a bill does make its way back in the 2023 session – similar proposed regulations have fared poorly in Texas:

Source: 1Q21 earnings call

In Paxton’s denial to Bowie County, he noted that counties only have powers granted by the Texas Constitution and Legislature, and no statute authorizes the use of “automated photographic or similar technology”:

Source: Paxton letter to Rochelle


The fact pattern for Texas and the other states makes it unlikely that REKR will gain much traction outside of Oklahoma.  

In our next sections, we illustrate our belief that REKR’s largest 2020 revenue contributor will be down 95% in 2021 and our concerns with management and REKR’s auditor.

We show that REKR’s largest revenue contributor in 2020 is unlikely to repeat

In 2Q20, REKR reported that its $1.2MM increase in sales year over year was due to “the implementation of a large software and hardware contract in Florida which generated up front revenues from building infrastructure.”

Similarly, in 3Q20, REKR reported that its $590k increase in sales year over year was due to “the implementation of a large software and hardware contract in Florida which generated up front revenues from building infrastructure.

Both filings note that in March 2020, REKR signed an “agreement with the City of Lauderhill [which is in Florida] for $1.79 million and contract to provide services for a five-year term.”  This amount is corroborated by a bid result summary from the City of Lauderhill:

Source: City of Lauderhill

REKR provides a customer concentration analysis in the 2Q20 10-Q, the 3Q20 10-Q, and the 2020 10-K that shows that a “Company A” was responsible for approximately $1.5MM in revenue through the year:

Source: 2Q20 10-Q, 3Q20 10-Q, 2020 10-K

Based on the timing of the Lauderhill contract (March 2020) the two mentions of a “hardware contract in Florida” in the two 10-Qs, and the size of the revenues, we think that Company A is the City of Lauderhill.  Assuming that, we believe that REKR recognized $1.48MM of the five-year contract value of $1.79MM, or ~83% of the contract, in 2020.

This means that the remaining $313k, if recognized ratably over the next four years, will contribute just ~$78k annually – implying that the Lauderhill contract revenues will be down almost 95% in 2021 and REKR will have to dig up well over $1MM in revenues in 2021 to make up for the non-recurring nature of this contract.

Curiously, another “Company A” shows up in the 1Q21 results – this time accounting for 40%, or $1.69MM of the $4.22MM in total revenue.  This is another large concentrated source of revenue that could be non-recurring. We asked REKR for further detail on Company A, and what % of REKR’s total revenue base is recurring – REKR’s EVP Charlie Degliomini responded by asking about our employment and stated that “Much of what you are asking for beyond what is in the Q is material non public information.”

We highlight Lauderhill to show investors that a meaningful part of REKR’s revenues have been non-recurring, and as a result REKR’s revenue base is likely not as predictable as investors might think.

Governance issues as a further cause for concern

If a fragmented revenue base consisting of relatively small ticket clients is not enough of a concern to investors, we think that REKR’s management and auditors provide additional cause for concern.

In well researched piece by Western Edge, we learned about the following:

  • REKR allegedly purchased a business from a childhood friend of CEO Berman
  • An auditor resignation after being allegedly threatened with litigation by company executives
  • Significant management turnover

Adding to this, we have concerns about both REKR’s CFO and COO:

In 2019, REKR switched auditors to Friedman LLP, making it, until a few days ago, Friedman’s largest publicly traded client.  

The PCAOB appears to have found numerous deficiencies in Friedman’s audit work over the years:

  • A 2018 inspection found deficiencies “of such significance that it appeared to the inspection team that the Firm, at the time it issued its audit report, had not obtained sufficient appropriate audit evidence to support its opinion that the financial statements were presented fairly.”  These deficiencies were as follows:

Source: 2018 inspection report

Source: 2012 inspection report

We believe that in addition to what appear to be optimistic revenue expectations and statements, the issues revealed in the Western Edge report, combined with the history of REKR’s CFO and COO and the audit deficiencies should cause investors to cast a jaundiced eye not only on the REKR’s ability to grow revenues but also on the credibility of the REKR’s management team and their statements.

Valuation and conclusion

The Mariner Instant Replay:

  • Public filings suggest that REKR’s Oklahoma contract will, at best, be a sub $2MM revenue opportunity, approximately 96% below CEO Berman’s intimations
  • Contracts and press releases imply that REKR’s “largest” contracts are much smaller than investors think, and make reaching optimistic sellside estimates unlikely
  • A number of failed legislative efforts suggest that REKR is unlikely to gain traction in other states, and that the Texas bill will amount to nothing
  • It appears that REKR’s largest revenue contributor in 2020 will be down ~95% in 2021, and that REKR’s revenue base is not as recurring as investors may think
  • We think that REKR’s history as covered by Western Edge Research and the auditor issues revealed in this note should cause investors to question the company’s credibility

In light of all of this, it is our view that sellside estimates of $26MM in revenue in 2021 and $53MM in 2022 are way too high and perhaps pipe dreams at best.

We don’t believe that REKR will do more than $10MM in 2021 in the best case – this means that REKR currently trades at ~38x our $10MM estimate.  Assuming the highest multiple in a comp set comprised of similar businesses, we arrive at a price target of $3.71, down ~68% from current levels:

YMAB: different data for different audiences, disclosure issues, and stock sales – PT $16

Portfolio manager summary

  • Y-mAbs (YMAB) is a biotechnology company focused on cancer treatment – it has one FDA-approved drug on the market, Danyelza (naxitamab), which received FDA approval in November 2020 for the treatment of neuroblastoma
  • Our diligence reveals that YMAB’s top shareholder is also the same physician in charge of the neuroblastoma program at a major YMAB study site and patient treatment center – his over $100MM ownership in the company is the first time we’ve seen a conflict of interest of this magnitude between patient care/research integrity and financial interests
  • We believe YMAB is obfuscating Danyelza’s efficacy – while investor materials have shown objective response rates (ORR) of 68% to 79%, its FDA label shows an ORR of merely 45%; CLVS’s stock plunged 70% in 2015 when it disclosed lower than guided efficacy for an oncology drug
  • If this weren’t enough, we believe YMAB’s characterization of highly positive results in frontline trials is disingenuous and a result of selecting the healthiest patients for study – patients with no detectable evidence of cancer
  • YMAB received a rare FDA Refusal-to-File (RTF) letter for Omburtamab in October– in the three years ending 2018, just 1% of BLAs received an RTF. We believe this is a sign of execution and cultural issues; management has already missed its own expectations/targets for resubmitting Omburtamab’s BLA
  • Investors and/or the SEC might take issue with YMAB’s disclosures about its founder, Thomas Gad; filings disclose the single insolvency of a “personal holding company”, but our review of never before seen Danish corporate filings show at least five entities with no less than 40MM kroner in liabilities that went bankrupt/were dissolved 
  • While YMAB’s stock rallied from the mid-20s to low-50s from 2019 to early 2021, Gad has sold almost half of his direct holdings
  • We believe that the combination of Danyelza’s “real” efficacy and YMAB’s poor disclosure presents significant risk to investors, and that Danyelza will not be as successful as the company and sellside would like you to believe – we assign a $16 price target to the stock, down ~55% from current levels


YMAB is a biotechnology company focused on the development of antibody-based products for the treatment of cancer.  YMAB’s product portfolio was licensed from Memorial Sloan Kettering Cancer Center (MSKCC), and its only FDA approved product, Danyelza (naxitamab), is for the treatment of relapsed or refractory (R/R) high-risk pediatric neuroblastoma.  Neuroblastoma is a rare, almost exclusively pediatric cancer that develops in the nervous system.  Unfortunately, this disease  is “associated with poor long-term survival” and accounts for 15% of pediatric cancer deaths.

Obviously, treating pediatric cancers is an exceptionally noble mission, and we applaud YMAB and the team at MSKCC for their work.  What is not noble, however, is what appears to be a pattern of unusual and incomplete disclosure about drug efficacy and management history, execution issues, and stock sales.

As an example of the above, we cannot reconcile why YMAB would tell investors that Danyelza’s efficacy exceeds 75%, when its recent FDA approval shows an efficacy of just 45%.  Read on to learn why we assign a $16 price target to YMAB, down ~55% from current levels.

Part I: A disclosed and disturbing conflict of interest

Before going into the substance of our thesis, we’d like to bring up an issue which we believe is a significant public health and governance issue.  

A look at YMAB’s holders list shows that its top holder is Nai-Kong Cheung:

Who is Nai-Kong Cheung? Dr. Nai-Kong Cheung, who owns over ~$100MM in YMAB stock, is the head of the neuroblastoma program at Memorial Sloan Kettering (MSK) which is not only a study site for YMAB’s drugs, but also a treatment center for neuroblastoma patients.

Said another way – Dr. Cheung, through his massive stock ownership (likely well in excess of his MSK compensation), has a clear financial interest in trial outcomes and patient care at MSK.  YMAB licensed its drug portfolio from MSK and granted shares to Cheung for “his involvement in the development of technology licensed from MSK in consideration for his services with respect to such technology development.”

We believe that this, despite any policies and procedures, creates a massive conflict of interest that could favor YMAB over patient care (choosing a YMAB product for reasons outside of clinical superiority, for example) or in clinical trials (like presenting data in a favorable manner).  WE ARE NOT ACCUSING DR. CHEUNG OF ANYTHING UNTOWARD, BUT THE OPTICS HERE ARE TROUBLING.

Bear the latter in mind as we discuss certain data reporting issues in the next section.

This would not be the first time conflicts of interest have touched MSK – in 2018, ProPublica and the New York Times found that “…several top executives and board members [at MSK] had profited from relationships with drug companies, outside research ventures or corporate board memberships.

Source: NYT

These findings led MSK to conduct a review, which found:

Source: ProPublica

We believe that MSK’s previous cultural issues, Cheung’s significant ownership in YMAB, and his leadership position in the very department conducting patient care and research using YMAB drugs creates an alarming set of conditions.

The findings we share below, particularly around the efficacy discrepancies between how YMAB has presented its drug data compared to its FDA label, should be considered in light of the conflict of interest mentioned above.

Part II: Danyelza’s different data for different audiences

After the close on 11/25/20, YMAB announced that YMAB’s Danyelza (naxitamab) received its FDA approval for relapsed/refractory pediatric neuroblastoma.  The resulting FDA label highlighted what we believe to be significant inconsistencies in the efficacy data that YMAB has presented to both the market and the medical community.

Before we move on to laying out this data, let’s first recap some important terminology related to the efficacy of oncology treatments:

  • Objective response rate (ORR): according to the FDA, ORR is “the proportion of patients with tumor size reduction of a predefined amount and for a minimum time period”
  • Complete response (CR): according to the FDA, CR is defined as “as no detectable evidence of tumor”
  • Relapsed/refractory disease (R/R) – setting where the disease does not respond to or gets worse on therapy or after showing a response to prior therapy

These terms, along with progression-free survival (PFS), which is defined as the “time from randomization until objective tumor progression or death”, are critical in allowing physicians and other important stakeholders to compare treatment options.

Now, let’s walk through what we believe are significant inconsistencies in how YMAB presented Danyelza’s data. 

Shot: Data per Company Investor Deck

In YMAB’s December investor deck, YMAB shows that Danyelza, in Study 201, which was the dataset submitted to the FDA for its biologics license application (BLA), has an ORR of 79% and a CR of 71%:

Source: YMAB December Investor Deck

Shot: Data per SIOP Poster

In a poster presented at the International Society of Paediatric Oncology’s October 2020 Virtual Congress (SIOP), YMAB shows a lower ORR of 68% and a CR of 59%:

Source: SIOP 2020 poster screenshot

It is notable that YMAB has changed to presenting the SIOP data in its January 2021 and subsequent investor decks, without explanation:

Chaser: Data per FDA Label

And then there are the efficacy metrics found in the FDA label (approved November 2020) for Danyelza, which we believe is the most credible source and the one most likely to be relied on by physicians, showing a dramatically lower ORR of 45% and CR of 36%.

Source: FDA label

To put this in context, the FDA label ORR and CR are 34 percentage points and 35 percentage points, respectively, LOWER than what YMAB presented in its investor deck – and 23 percentage points for both metrics LOWER than what was presented at SIOP:

Source: Investor deck, SIOP 2020, FDA label

What gives? 

Why would YMAB show investors and the medical community efficacy metrics dramatically higher than those that ultimately blessed by the FDA?  Did YMAB analyze the data differently than the FDA would?  If so, why? 

It is our view that YMAB chose to interpret and present the data in a manner that was favorable to them, and, by extension, to the stock price.  

Physician commentary from a pediatric oncologist at a large neuroblastoma treatment center suggests the investor and SIOP data was limited to a single site:

“Single site versus multi-site. That [higher number] is that two decades of data that they have for patients who were treated at Sloan Kettering as a single institution. This goes back to how much cherry-picking occurred.”

YMAB’s own explanation is unsatisfactory:

“Well, we have 3 sets of data out from that study. We have the investigators’ response evaluation, which shows about 79% overall response. We have the independent tumor response evaluation, where we have 2 independent radiologists and 2 independent pathologists looking at bone marrows and scans from the patients and concluding that 68% of the patients is responding. And the same data set was sent to the FDA, and their decision was that they excluded a number of our responders for various kinds of reasons. And I could have spent the next 3 months discussing whether it was fair and reasonable and added additional information on data. I felt it was more important to get the treatment out to the patient than having that discussion that the FDA wanted to remove a number of our responders out of the first 24 patients.”

Source: Call on 12/16/20

The FDA is clearly using a different evaluation criteria than YMAB, and investors are expected to just believe that YMAB’s interpretations are better than the ultimate arbiter of drug safety and efficacy? This, in our view, is not a good look.

It’s like Clovis Oncology, in a bad way

More tangibly, YMAB is bringing to market a product whose label efficacy is dramatically lower than what YMAB initially communicated.  This is something investors should be concerned about – Clovis Oncology found itself in a similar situation, to the detriment of its shareholders.  After telling investors its rociletinib showed a 59% response rate in lung cancer, it provided a November 2015 update revising the number down 25 points to 34% response rate.  This sent Clovis’s stock down ~70% in one trading day. 

Danyelza’s FDA label efficacy is more than 30 points below what YMAB was telling investors. 

We have doubts about efficacy and success

Along with the company credibility issues that this implies, it means to us that Danyelza will struggle to compete against incumbent United Therapeutics’ Unituxin (dinutuximab) in the R/R setting.  In this paper, published in The Lancet, we learn that Unituxin has a median PFS (defined as how long a person lives without their disease worsening) of 2.1 years for R/R neuroblastoma:

Source: The Lancet

For Danyelza, YMAB uses an analogous metric known as Duration of Response (DoR), which is effectively PFS for patients that have responded to the treatment, a more favorable metric since it excludes patients that failed to respond.  Danyelza’s DoR is just 6.2 months:

Source: Danyelza FDA label

To put this in perspective, competitor Unituxin has a progression free survival, which includes non-responsive patients, of 2.1 years, while Danyelza’s DoR (which EXCLUDES non-responsive patients) is just 6.2 months.

The implication is that Unituxin’s DoR should be greater than 2.1 years, and that Unituxin has an over 4x better PFS or DoR than Danyelza.  

Physicians will ultimately decide how they want to use the drug, but we are bearish on its prospects outside of MSK.  

The same oncologist we quoted earlier said that “no one” outside of MSK has been able to make their own evaluations of Danyelza’s study data.  Further, due to the data issues we highlighted, comparability of Danyelza to other drugs was characterized as “nebulous”:

“No one had an opportunity to to make their own evaluations if you weren’t at Sloan Kettering. Even if you referred a patient there, it was still a little bit nebulous as to how does this data compare.”

If you test healthy patients, you get good results

YMAB has also been promoting Danyelza’s results in the frontline setting, where it would compete with Unituxin’s on-label use.  In YMAB’s materials, they show a 2-year event-free survival rate of 74.3%, comparing favorably to Unituxin’s 63%:

Source: Investor deck

For anyone that reads this, it’s absolutely amazing to see this kind of EFS without the use of the standard of care stem cell transplant.  And we think that’s exactly the reaction we think YMAB wants you to have.  

What they don’t tell you is buried in disclosures presented during SIOP – the patients in this study were in complete remission (i.e., they had no detectable evidence of cancer):

Source: SIOP

The boxed areas say “…improved outcomes of HR-NB patients in complete remission (CR) after induction therapy and autologous bone marrow transplant (ABMT)” and “Eligibility criteria included non-evidence of disease”.

So Danyelza was given to patients with no evidence of cancer after receiving chemo, and the results of that study were good? That should come as no surprise. 

In the case of Unituxin, the eligible patients in the study were not limited to those only in complete remission:

Source: NEJM

To put this simply – YMAB is comparing the results of a drug given to those with no detectable evidence of cancer to the results of a drug given to sicker people. This, in our view, is disingenuous.

We believe this is a problem in study design – by using the healthiest of cancer patients, how could the results NOT come out positively? How can these results be taken credibly?  

Why on earth would a physician choose to prescribe Danyelza? Not only did YMAB’s efficacy come in lower than it presented, but the survival benefits appear to be dramatically lower in R/R when compared to Unituxin. Not to mention the patient selection for Danyelza in frontline seems highly biased.

In our next section, we highlight YMAB’s execution issues for two of its drugs, Omburtamab and Nivatrotamab.

Part III: Execution issues

Omburtumab’s refusal to file as a cause for concern

YMAB first landed on our radar in October and the reason that it attracted our attention was something that rarely happens in the biotech world.  The company received an FDA Refusal-to-File (RTF) letter for the BLA for its pipeline drug Omburtamab.  

An RTF letter is a notice from the FDA that a submitted drug application is incomplete, and that the FDA is refusing to accept the application until the sponsor corrects the identified issues.  

RTFs are relatively rare – between 2010 and 2017, the FDA issued only 73 RTF letters – over that same period, 1,042 new drug applications and BLAs were filed, implying that just 7% of applications were deemed sufficiently incomplete as to warrant an RTF letter.  More specifically, in the three years ending 2018, less than 1% of submitted BLAs (most relevant to Omburtumab) received an RTF.  

The FDA takes the view that issues that are addressed by RTFs are known as “complex significant deficiencies”, note that these are the FDA’s words, not ours and they include:

  • Applications that are materially lacking to the extent they would not permit efficient review
  • Parts of an application that contain inadequate information
  • Reliance on a single trial when prior communication with FDA determined the need for more than one trial
  • Failure to submit assessment of studies related to the potential abuse of a drug
  • Content not submitted electronically where the FDA has specifically requested electronic format

In our view, these seem like basic blocking and tackling for any drug company, and the inability to comply with them is a cause for concern.  In the case of YMAB, detail around the RTF is scant, but sufficient enough, in our view, to call into question the company’s ability to execute.  In its RTF release, YMAB said that the “FDA determined that certain parts of the Chemistry, Manufacturing and Control (“CMC”) module and the Clinical module of the BLA require further detail”.

A subsequent conference call with investors was similarly vague, seeming to chalk up the CMC module issue to YMAB “anticipating that the FDA would have been okay” with what the company provided:

Source: Investor update call on 10/6/2020

On the clinical side, it appears that FDA is asking YMAB for tumor response data independently evaluated according to the RANO criteria, an industry standard set of criteria published in 2010 used to assess response to first line treatment:

Source: Investor update call on 10/6/2020

To us, this reads like YMAB simply chose not to provide independent data evaluated according to a widely accepted framework. 

The more galling part is that FDA “found out” that YMAB had the data needed to do this:

Source: Investor update call on 10/6/2020

Reading further, we learn from YMAB’s CEO that the study data was, in fact, not validated and that the FDA had allowed them to provide the RANO criteria evaluation as a post-marketing commitment:

Source: Investor update call on 10/6/2020

This, in our view, strains credulity. The FDA was going to accept an application where the data are not independently evaluated and then changed its mind? 

As if that weren’t enough, CEO Moeller mentions on this call that they would work to resubmit Omburtamab’s BLA “before the end of 2020”:

Source: Investor update call on 10/6/2020

But in 4Q20 results, that timeline got pushed to the end of the second or third quarter of 2021, suggesting the problems hinted at during the October 6 investor call are perhaps thornier than disclosed:

Source: Press release

We think the fact that YMAB did not provide data evaluated under RANO criteria as an indicator of company credibility and execution.  This is, in our view, entirely consistently with the Danyelza efficacy story we shared above.

In its 2018 Report on the State of Pharmaceutical Quality, in noting how it has processes to refuse poor-quality drug application submissions, FDA discusses drug product application quality, noting that “[a]nother important indicator of the overall State of Quality is the quality of drug product applications sent to the FDA, which may reflect a firm’s quality culture across its operations.” (our emphasis) 

The hat trick – issues with a third product

On December 16, 2020, YMAB released a pipeline update that included commentary on the aforementioned Danyelza and Omburtamab, as well as a third drug candidate, Nivatrotamab.

In the case of Nivatrotamab, we learn that no complete or partial responses were achieved in YMAB’s 10 patient study, but they are still preparing for a Phase 2 study:

Source: Press release

So in addition to Danyelza’s data issues and Omburtamab’s RTF, we have Nivatrotamab’s poor initial results.  This collection of events suggests significant execution and cultural issues, which, when combined with YMAB’s incomplete management disclosure and founder’s stock sales,  makes us very negative on the company. 

Part IV: YMAB’s disclosure issues appear to extend to its founder

Thomas Gad is YMAB’s “Founder, Chairman, President, and Head of Business Development and Strategy and Director.”  

In the proxy, there is a curious mention of a Y-mAbs Therapeutics ApS (“Old YMABS”), a Danish company explained as Gad’s “personal holding company involved in research and development activities in the pharmaceutical industry.”  The proxy goes on to tell us that the company was placed in liquidation proceedings in 2015. The company is now under compulsory dissolution proceedings.

Taking this at face value, it seems innocuous. But, as we have seen, YMAB appears to have an issue with full and complete disclosure, and this, unsurprisingly, extends to the company’s disclosures about its founder.

Our examination of Danish corporate records found not just Old YMABS’s bankruptcy, but four other Gad-affiliated companies that were dissolved/went bankrupt, and a sixth company which recently absorbed Old YMABS.

Here is an overview of Gad’s corporate activity:

Sources: Danish Corporate Filings for Thomas Gad, Gad Invest, Singad Holding, Singad Pharma, SG Generics, Old YMABS, G. Estates

What is most impressive to us is that it appears that there are two separate insolvency storylines here.

  • The first is the insolvency of Singad Pharma, whose activities consisted of importing and distributing pharmaceuticals (translated from the Danish corporate filings). As you can see below, of Singad Pharma, Singad Holding, and Gad Invest, Singad Pharma was the only entity with real revenue and profit.  But it wasn’t very profitable – for the period which we were able to obtain filings, its best operating margin was in 2008 at 3.75%, when sales peaked.  Between 2008 and 2011, Pharma’s sales fell 65% but liabilities grew 165%, and the equity value went deeply negative to -27MM kroner.  We believe that the insolvency of Gad Invest and Singad Holding were the result of Singad Pharma’s clear insolvency:

Sources: Danish Corporate Filings for Gad Invest, Singad Holding, Singad Pharma 

  • SG Generics appears to be another story.  Founded sometime in FY2008, around the same time when Gad Invest became a 100% owner of Singad Holding, SG Generic’s business was also the import and distribution of pharmaceutical products (translated from Danish corporate filings).  While we only have three annual filings for SG, it’s quite clear that the business never went anywhere – producing no revenue in the 2008 to 2011 period:

Source: Danish Corporate Filings for SG Generics

In August of 2013, a request for dissolution was sent to the probate court in Elsinore, and in May 2014 a bankruptcy decree was handed down:

Source: Danish Corporate Filings for SG Generics

Curiously, in December 2012, Gad formed another entity, EQ Medicine ApS, which was renamed Y-MABS Therapeutics ApS (what we called Old YMABS).  In Old YMABS’s 2013 filing, we learn that it acquired SG Generics in bankruptcy, and that SG’s condition wouldn’t affect Old YMABS’s business:

Source: Old YMABS’s 2013 filing and Google Translate

But clearly it did affect Old YMABS, because in 2016, a request for dissolution was filed, and a bankruptcy decree was handed down.  The decree was subsequently repealed and Old YMABS was dissolved by merger in June 2020 in yet another Gad entity, G. Estates, formed in 2019:

Source: Old YMABS’s 2013 filing

So in the SG Generics story, we have Gad forming two entities (Old YMABS and G. Estates), which subsequently absorbed two bankrupt entities (SG Generics and Old YMABS). 

The most galling fact here is that YMAB only discloses to its investors the bankruptcy of Old YMABS, which had just 81k kroner of assets and 9k kroner of liabilities at the end of 2014.  Investors are left completely in the dark about the chain of insolvency beginning with Singad Pharma, which had an 41MM kroner in liabilities.  These are undisclosed insolvencies and dissolutions never before seen by investors.

Why was this left out? 

It is our view that this is yet another significant data point in a pattern of poor and shifting disclosure designed to sweep unfavorable events and data under the rug.

Part V: Founder’s stock sales

Since April of 2019, Thomas Gad has amassed a breathtaking amount of stock sales, regularly selling every couple weeks as the stock went from the $20s to the low $50s.  In April 2019, we estimate that Gad directly held 1.19MM YMAB shares – as of March 3, 2021, Gad holds 596k shares, implying that he sold ~50% of his ownership since 2019. Inclusive of sales following option exercises, this amounts to 795k shares!

All the while, investors bid the stock from the mid $20s to the high $40s.

It seems rather concerning that while the sellside salivates over the company and management continue to promote YMAB that Gad himself is dramatically reducing his exposure to the company he founded:

Source: SEC

We estimate that this has resulted in net profits to Gad of approximately $27.3MM: $8.3MM in 2019, $17MM in 2020, and $2MM in 2021 year to date.

Why should investors continue to hold the stock if the founder and Chairman is lightening up his ownership?

Part VI: Conclusion and valuation

The Mariner Instant Replay shows that:

  • From a public health perspective, Dr. Cheung’s ownership of over $100MM YMAB stock is a conflict of interest that could be to the detriment of both patients and investors
  • YMAB’s Danyelza appears to have an efficacy and disclosure issue – while showing investors and physicians efficacy ranging from 68% to 79%, Danyelza’s actual label shows efficacy of just 45%
  • Further, YMAB appears to have tested Danyelza on patients with no observable cancer, making the high efficacy numbers in the front line setting almost meaningless
  • YMAB’s Omburtamab RTF is suggestive of poor execution and data issues
  • YMAB’s Nivatrotamab doesn’t appear to show any efficacy thus far
  • YMAB has failed to disclose that Thomas Gad’s bankruptcy history is not just limited to his “personal holding company”
  • Gad has unloaded stock at a breathtaking pace, having sold ~50% of his ownership since 2019

We believe that YMAB is obfuscating its Danyelza efficacy and its Omburtamab execution.  The sellside expects Danyelza to take almost 40% of the R/R neuroblastoma market in the long run.  We just don’t see it.

It is our view that Danyelza will never reach more than 20% patient penetration, and that, despite sellside estimates to the contrary, Omburtamab will not see revenue until 2024.  

Under these assumptions and 12.5% discount rate in a DCF, we arrive at a price target of $16, down ~55% from the most recent close.

EXRO: exaggerated partnerships, leadership concerns, and no revenue – PT $0.35

Portfolio manager summary

  • Exro (EXRO), a wind power equipment founded by a former mutual fund salesman, made a pivot in 2018 to EVs – a flurry of press releases followed this pivot, and the stock has rallied over 1200% over the last twelve months
  • Recently touted partnerships are pegged as key growth drivers
  • Our investigation found that EXRO’s partnerships have limited, if any, value
  • One of its oldest and most touted partnerships, with Potencia Industrial, has been marred by repeated delays and no revenue
  • One of EXRO’s other partnerships, a vendor “focused on the mass production of commuter electric boats”, is based out of a UPS store mailbox
  • EXRO’s other celebrated partnerships include a single storefront in Vancouver, a “leading” Finnish snowmobile manufacturer with <€600k in revenue, and an agricultural equipment company with no planned capex until 2022 – these unimpressive partnerships support our view that the hype around Exro is misplaced
  • This pattern of obfuscation and exaggeration appears to be reflective of tone at the top.  EXRO was taken public and led by a BC entrepreneur who we believe exaggerated his prior successes – in one case, we could not confirm his claims that he founded a successful healthcare business
  • This same BC entrepreneur was CEO of Unity Wireless, which ultimately collapsed 87% during his tenure – the entrepreneur was KIDNAPPED by an angry counterparty alleging that Unity was a “pump-and-dump”; in the kidnapper’s ensuing trial, the entrepreneur admitted in testimony that other Unity shareholders tried to get him to participate in a pump-and-dump scheme 
  • Our sources, which include auto OEMs and others, suggest that EXRO is far from getting a seat at the table with any auto manufacturers of consequence
  • Since 2016, EXRO has spent 4x more on opex than R&D – calling into question whether this is really a technology business
  • Despite a furious pace of press released “opportunities”, the CEO has blown out of almost 20% of her holdings in a short period as EXRO’s stock rallied
  • Our view is that EXRO is little more than an exaggeration designed to line the pockets of insiders, and we assign a $0.35 price target to the stock, down over 90% from current levels


Exro (EXRO) was founded in 2005 by former mutual fund salesman Jonathan Ritchey, who launched the company with a focus on generators in the wind power space.  Despite a long list of patents, EXRO was unable to generate meaningful revenues, and in 2017 went public through an RTO with Mark Godsy, a British Columbia-based stock promoter and “entrepreneur” at the helm.

It is our view that EXRO’s current claims and partnerships, like Mark Godsy’s background, appear to be overexaggerated, and that EXRO exists to enrich its management team. 

In this article, we discuss the following:

  • EXRO’s pivot to EVs after being unable to generate revenue in the wind space
  • Findings from our conversations with auto OEMs and experts that suggest that EXRO is unlikely to ever become an automotive supplier of consequence
  • Missed expectations around EXRO’s Potencia partnership
  • What appears to be clear overexaggeration for no less than four other EXRO partnerships including a company based out of a UPS box and another operating out of a single Vancouver storefront
  • An apparent underprioritization of R&D spend
  • A CEO in a hurry to sell stock
  • Irregularities in former CEO and current chairman Mark Godsy’s background and an apparent pump-and-dump of a company he led

EXRO, in our view, is very good at pouring out press releases, but our work suggests the substance of these releases to be lacking, and the company’s results thus far have amounted to near nothing.

The electric slide

EXRO’s 2017 listing document showed that for the two years ending January 2017, EXRO had just one quarter where it generated ANY revenue, suggesting it had not had much product success in wind turbines:

Source: Listing document

Given the lack of revenue development and, in our view, investor excitement about wind energy, it is therefore not terribly surprising that EXRO made a public pivot to the EV space in early 2018:

Source: Press release

With all the publicity the EV space was getting in 2018, what better area was there for EXRO to pivot to? What better way to get investor attention than to join the roster of small cap EV companies? All things considered, EXRO, with a product set targeted to electrical motor applications, could credibly make this pivot.

The ensuing flurry of press releases and investor optimism about electric vehicles led EXRO’s stock up over 1200% over the last year. 

After learning more about EXRO’s product offering and partnerships, we believe EXRO’s success in EVs will mirror its success in wind turbines – that is, it is most likely to fail miserably and ultimately generate no meaningful revenues. 

Below, we show why we think EXRO’s strategy is flawed, why we believe its announced partnerships are vaporware, and why we believe investors should be concerned about its Chairman/former CEO’s past.

What does EXRO DO?

Investors could be forgiven for not understanding what EXRO means when it says:

Source: EXRO website

We were certainly confused. A further look reveals that EXRO has its sights set on two main business areas:

  • Coil switching
  • Battery control systems

EXRO’s coil switching technology apparently allows for electric motors to switch coil configurations to optimize motor performance:

Source: EXRO

This sounds well and good – if EXRO’s target markets cared about it.  Our research into EV applications found the following:

  • None of the EV OEMs or sellside analysts we spoke to were familiar with coil switching 
  • EV manufacturers have tended to prefer internally developed IP

Our view is that EXRO’s technology for EV application is a longshot at best – one, because it does not appear that OEMs are focused on optimizing power in this manner and two, because EXRO does not possess a fraction of the qualifications needed to supply major producers.

On the battery management side, we learned that OEMs typically develop their battery management software in-house.  In addition to having to compete with in-house development, EXRO’s positioning is also substantially weaker because NONE of its patents have anything to do with batteries, artificial intelligence, machine learning, or any other buzzwords found in EXRO discussions:

Source: AIF

EXRO is unlikely to become an automotive supplier

Technology aside, with marketing like this, we think that EXRO wants investors to believe that it’s going to supply EV manufacturers with its products:

Source: EXRO website

While this is an admirable goal, we believe the likelihood of it actually happening is extremely low. Becoming a supplier to any auto manufacturer of scale requires a rock-solid balance sheet, years of testing, and a proven technology. We believe EXRO has none of these.

The simplest way to explain our view is around the idea of supplier qualification.  For a part or component to be automotive qualified, “…manufacturers have to meet specific industry standards throughout the manufacturing and testing process.  Three key standards are IATF 16949, AEC-Q100 and AEC-Q200:”

Source: Qorvo

IATF 16949 cannot be implemented on a stand-alone basis – it must be implemented as a supplement to ISO 9001, another standard.

EXRO’s own filings do not even mention ISO 9001 or IATF 16949 – leading us to conclude that EXRO does not meet those standards.  This, in fact, does make sense, since EXRO does not even have a manufacturing facility.

Further, “because cars last much longer than other electronic devices, manufacturers typically must ensure a supply of each automotive component will be available for 10 years.” As we show below, EXRO has been unable to meet stated prototype deadlines; it’s a stretch to think they could ensure the supply of anything for ten years.

In the next sections, we highlight several highly publicized, but eventually delayed or failed business announcements and series of partnerships with tiny companies we believe are unlikely to move the needle.

Failure to launch is a sign of things to come

In December 2017, EXRO announced that it was working with a Fortune 50 company on drones:

Source: Press release

No further detail about the partner was provided, and in February 2018, EXRO updated investors to tell them that things were “more difficult and time-intensive than originally planned”:

Source: Press release

Apparently, things seem to have been too difficult and time-intensive – EXRO never mentioned the Fortune 50 drone effort again, and doesn’t appear to have recognized any revenues from it:

Source: 2019 AIF

Below, we show you more of the same – execution issues and partnerships with companies that we believe are unlikely to result in any revenue.

Potencia partnership – moving the goalposts after each missed kick

One of EXRO’s most press-released current partnerships is with Potencia Industrial, a Mexican industrial goods company.  EXRO is allegedly providing Potencia with its coil driver technology for Potencia’s Pronto Power technology, which Potencia describes as a “concept design”:

Source: Potencia website

While this sounds straightforward, as with all things we like to look at, the Potencia relationship is much more complicated – investors have been treated to bullish announcements and promises of actual revenue only to be shown delays and no cash flow. We show all this below.

EXRO first announced its Potencia partnership in May 2018, announcing a collaboration in three areas: electric motors for car conversions, generators for wind turbines, and electric motors used in trams and trains:

Source: Press release

Just six months later, in November, EXRO’s focused narrowed on just the motor project, and management claimed they were just “contemplating” the two other areas.  The motor project entails “exploring the integration of Exro’s hardware and software into Potencia’s motor drives”:

Source: Press release

A month later, in December, EXRO said that a prototype of its “intelligent battery management system” (IEMS) would be delivered to Potencia by 2Q19:

Source: Press release

In the same release, EXRO also claims to have received a “pilot purchase order” from Potencia for the prototype:

Source: Press release

So now we have EXRO setting two major expectations for investors:

  • Prototype delivery by 2Q19
  • Potential revenues from a purchase order

RESULT: By 2Q19, no announcement of a prototype delivery or revenues has been made.

The next we hear about the Potencia partnership is nine months later, in September 2019, when EXRO announces it has received a production order for approximately $500k for Motor Drivers, one of five modular units in the IEMS, of which delivery is anticipated to commence in 1Q20:

Source: Press release

RESULT: By 1Q20, still no revenue, and no delivery announcement. The Company replied to us that the lack of revenue was due to EXRO moving to “Stage Two”, a different product. We find this unusual since Stage One produced no revenue:

But then in June 2020 – another order? Expected to be delivered to Potencia by “4Q19”?

Source: Press release

Come August 2020, and EXRO announces it delivered the Motor Driver in June, and that it’s being tested at Potencia with expected testing completion by end of October 2020:

Source: Press release

RESULT: By October 2020, no announcement of completed testing.

And then on February 3, 2021, EXRO tells us that “testing was delayed prior to Christmas”, and that they are “looking forward to sharing the performance results as soon as they are completed in third quarter 2021”:

Source: Press release

What we have here is a series of moving targets, and we are not optimistic that EXRO will succeed in meeting this most recent bogey.

We also reached out to Potencia to clarify this situation, and we were told by the person on the phone that EXRO had asked Potencia not to talk to anyone about the partnership, but that nothing had been finalized.

This, plus the constantly changing targets and lack of revenue (see below) suggest a problem with execution and management.

It’s critical to note that despite claiming to have received orders, EXRO has not booked ANY revenue in 2019 and YTD 2020:

Source: Financials

And from the 2019 AIF, no revenue since inception:

Source: 2019 AIF

We are now in February 2021, and investors have the following from EXRO:

  • A 2018 initial announcement claiming early 2019 deliveries where the eventual delivery date of the prototype was June 2020
  • Claims of purchase orders that have so far generated $0 in revenue in 2019 and 2020
  • Expectations that EXRO will share performance results in 3Q21

It seems to us that EXRO could be overstating Potencia’s potential – in its investor deck, EXRO claims that Potencia is one of the largest motor OEMs in Mexico:

Source: EXRO Investor Deck

EXRO’s claim here would imply that Potencia Industrial is a large OEM of automotive motors. Our diligence would suggest otherwise:

Sources: Astronic UPS, Hydro Generators, Wind Generators, MG Sets, Hummingbird, Motors & Generators, Permanent Magnet Generators

  • The ONLY automotive application we could find on Potencia’s website was Pronto Power, a kit that Potencia sells for converting internal combustion vehicles to EVs

Source: Pronto Power

  • It doesn’t look like Potencia even presents itself to customers as an EV or automotive player, as EXRO seems to suggest

Our view is that Potencia is most like a large industrial motor player, not a large automotive motor company.

Unfortunately, as we show below, it appears that overstating partnerships is a pattern for EXRO.

EXRO’s other partnerships – not much more than press releases, in our view

Aside from Potencia, we believe that EXRO is overstating the potential of at least four of its announced deals.

Motorino Electric – a single storefront partner

In September 2019, EXRO announced that it signed its first licensing agreement Motorino Electric, a company it characterized as a “a pioneer in the Canadian electric transportation industry starting over 17 years ago with its first product launch, and now having dozens of products across the electric bicycle, electric scooter and electric motorcycle categories.”  For this deal, EXRO would be integrating one of its technologies into Motorino’s CTi electric bicycle:

Source: EXRO Press Release

Now, investors might be forgiven, based on EXRO’s description, to think that Motorino is some giant company, making electric bikes and other electric vehicles.  The reality is quite different, in our view.  

Motorino operates out of a single storefront in at 336 W 2nd Ave in Vancouver:

Source: Google Maps

Further, EXRO, by its own admission, is integrating its technology into ONE of Motorino’s 26 different products, the Motorino CTi.  At just CAD $1,950 a unit, we think the revenue opportunity for EXRO here is likely minimal:

Source: Motorino

When our investigator called Motorino to inquire about the EXRO-fitted bike, he was told that the performance improvement of the EXRO-fitted product would be marginal, more expensive, and if he wanted an e-bike, he should just buy one now. Not a ringing endorsement of the EXRO technology.

Templar Marine – a boat manufacturer headquartered at a UPS store?

In November 2019, EXRO put out a characteristically optimistic press release announcing its partnership with an “…e-Boat Leader in Multi-Billion-Dollar e-Marine Sector”:

Source: EXRO Press Release

As you can see in the release, EXRO is partnering with one Templar Marine Group, Ltd., a Canadian company focused on producing electric boats.  EXRO claims that Templar will be integrating EXRO’s technology into its water taxis and implies that Templar is an e-boat leader in a giant, almost $8B market. 

Our findings would suggest that Templar is more like Motorino, a small business.

Templar’s own website gives the company address as #379, 9-3151 Lakeshore Road in Kelowna, British Columbia:

Source: Templar website

This address appears to be a box at a UPS store located at a strip mall in Kelowna:

Source: Google maps

Source: Google maps

UPS’s own website confirms that 9-3151 is, in fact, the address for the UPS Store in this strip mall:

No showroom – no place where a potential customer can see and touch Templar’s boats – just a UPS store mailbox.  Hardly a strategy we’d employ.

The other unusual finding about Templar is that it only has one employee on LinkedIn – one of the co-owners, Jennifer Fry:

Source: LinkedIn

Source: LinkedIn

A minimal LinkedIn presence and headquarters at a UPS store don’t scream “e-Boat leader” to us. It is our opinion that this is EXRO yet again overstating the size and revenue potential of a potential partner.

Aurora Powertrains – Proactive Investors overstates the potential

In February 2020, EXRO announced a strategic agreement with Aurora Powertrains, “…one of the world’s most innovative manufacturers of snowmobile powertrains”:

Source: EXRO Press Release

EXRO’s CEO, Sue Ozdemir, was quoted as saying, “We are very excited to now be entering the snowmobile industry, which sees more than one billion dollars of global sales annually.

Based on this characterization, plus a puff-piece released by Proactive Investors calling Aurora “Finland’s leading snowmobile manufacturer”, we wouldn’t fault investors for thinking this might be a significant deal.

Source: Proactive Investors

Unsurprisingly, this is not the case.  Finnish corporate filings for Aurora (which can be accessed using business ID 2825151-4) show that, for the twelve months ending April 30, 2020, Aurora did just EUR 530k in revenues and lost EUR 148k in net income:

We would hardly characterize a business that does a little over half a million euro in revenue as “the leading” anything – nor is Aurora, at the revenue level, grabbing much share of the $1B market that Ozdemir mentioned.

Not to mention Aurora had just EUR 46k of cash on its balance sheet in April 2020:

We have a hard time believing how a business with such a small revenue base and cash balance will be able to meaningfully contribute to EXRO’s top line.

Clean Seed Capital Group – not on the same page as EXRO

In April 2020, EXRO announced that it signed a collaboration and supply agreement with Clean Seed Capital to “integrate Exro’s technology into Clean Seed’s high-tech agricultural seeder and planter platforms, advancing the electrification of the world’s heavy-farm equipment.”  

Clean Seed, a TSX-listed company with ticker CSX, has only generated $5MM in revenue in the recent past, and has just CAD $2.3MM of cash on the balance sheet as of September 2020:

Source: Clean Seed MD&A

Source: Clean Seed Financials

In fact, in the three months ending September 2020, Clean Seed burned almost CAD $880k in cash, leaving it with just over 2.5 quarters of cash on its balance sheet at the current burn rate.  Given its size and burn rate, it should come as no surprise that Clean Seed’s own management noted, in the June 2020 MD&A, that it expected capital-intensive expenditures “…more likely would start in 2022” than fiscal 2021.

Additionally, in EXRO’s release, the company claimed that Clean Seed “will be building a working prototype that will be implemented in the field by 2021” and that Clean Seed would “issue a purchase order to integrate Exro’s electric-motor-enhancing technology into Clean Seed’s latest technology offerings and beyond:”

Source: EXRO Press Release

However, in Clean Seed’s release announcing the very same collaboration, there is no mention of a 2021 implementation nor any indication that Clean Seed will be purchasing ANYTHING from EXRO.

So, not only does Clean Seed have just $2.3MM on its balance sheet, it expects to deploy its capex in 2022 and has not mentioned anything about purchasing EXRO’s product, despite EXRO’s communications. 

In our view, this would suggest that EXRO may be overstating the near-term potential of the Clean Seed relationship to investors.

To recap, here we have four EXRO business announcements where the business partner’s size and scope don’t seem to match EXRO’s claims.  While we don’t question the legitimacy of these enterprises, we do question EXRO’s characterizations of them and the likelihood that they will result in meaningful revenue for EXRO.  

We believe that this is a concerning pattern that, combined with the CEO’s stock sales and management history, should keep investors away from EXRO’s stock.

A focus on payroll, not R&D

For a company that uses the word “technology” no less than 89 times in its Annual Information From, EXRO doesn’t appear to prioritize R&D.  

Since 2016, EXRO has spent at staggering 43% of its operating expenses on payroll and consulting but just 9% on research and development:

Source: Company filings

This perhaps explains the Potencia delays, and doesn’t speak to the company investing in what it claims is a unique technological proposition.

Getting out while the getting is good

As EXRO’s stock reached all-time highs in February, we’ve seen several executives exercise low priced options and sell what we view are meaningful amounts of stock (all amounts CAD):

  • Between 2/9 and 2/12, CFO John Meekison sold 50k shares for net proceeds of approximately $321k
  • Between 2/10 and 2/12, Strategic Advisor Eamonn Percy sold 100k shares for net proceeds of approximately $630k
  • On 2/17, Corporate Secretary Christina Boddy sold 13.3k shares for net proceeds of approximately $90k 

The most concerning of these sales are from EXRO’s CEO, however.  

Sue Ozdemir, who took over from Mark Godsy (more on Mark later!) as CEO in 2019, seems to be a rush to lower her personal exposure to EXRO stock, for whatever reason.  Since December 30, 2020, Sue has sold almost 18% of her ownership in EXRO stock, according to SEDI

According to the SEDI data, Sue was granted 2.75MM options to purchase EXRO stock – 2MM on 9/13/19 and another 750k on 10/13/20, all with a strike price of CAD $0.25.  It appears that she also acquired 37k shares “under a prospectus exemption” at CAD $0.27, giving her a total of 2.5 options and 37k shares.

Since 12/30, she’s exercised 500k options and sold off the corresponding stock for a total of CAD $2.1MM in proceeds – in a four-week span.  Sue began her substantial sales after EXRO’s stock moved up over 1100%, and since 1/18/21 has not sold anymore (perhaps her remaining options are still unvested?)

We believe that her recent stock sales and falling exposure to EXRO are significant red flags in light of all of EXRO’s announced partnerships.  

Her stock sales raise serious questions:

  • Does Sue believe that the recent EV-driven increase in the stock exceeds the eventual value creation from the litany of deals EXRO has announced?
  • Is Sue concerned about the very same issues we raise in this report about the technology and revenue opportunity?

Our view is that if the CEO of a company is selling stock after a big move up, investors should take that a signal to stay away.

The Company’s response to our question around stock sales was unsatisfying, essentially dodging the substance of our question:

The Mark Godsy playbook

EXRO’s partnerships would suggest that EXRO implies, but never outright states, massive revenue opportunities. For example, mentioning the $1B snowmobile market without mentioning that their partner in the snowmobile market did less than EUR 600k in revenues in FY20.  

It’s like saying we played on the 1988 Jazz without telling people it was a team for eight-year olds that happened to be called the Jazz.  

This pattern seems to extend to EXRO’s former CEO and current chairman, Mark Godsy.  Godsy, who took EXRO public through a reverse merger in 2017, was CEO through August 2019 and remains chairman of EXRO.

In several of Mark’s biographies (the EXRO prospectus, the McGill website, and a 2020 investor deck), he makes reference to his success as an entrepreneur as founder of two companies in particular, ID Biomedical and Angiotech Pharmaceuticals:

Source: EXRO prospectus

Source: McGill website

Source: June 2020 EXRO investor deck

With all due respect to Mark, we believe that he has overstated his contributions and successes at both businesses.

We believe that Mark had nothing to do with ID’s GSK acquisition

Mark’s biography, in our view, reads like he had a hand in or benefited from GSK’s acquisition of ID Biomedical.  Our work, below, suggests that Mark’s time at ID had nearly nothing to do with the eventual success of the business.

Indeed, according to Godsy’s bio in an Angiotech (more on this in a second) offering document, Mark Godsy was an officer of ID Biomedical from 1991 to 1995:

Source: Angiotech Offering Document

And in ID’s 1997 AIF, we see that Godsy is a Director at ID:

Source: ID Biomedical AIF

Sometime between this filing and the 1999 20-F, Mark Godsy left ID Biomedical’s board:

Source: ID Biomedical 20-F

The timeline here is critical – Mark Godsy was an officer of ID Biomedical from 1991 to 1995 and a Director of the company until sometime before mid-1999. 

Why do we believe Godsy had nothing to do with GSK? Well, at the time Mark Godsy was involved with ID Biomedical, it was primarily involved in genetic diagnostics and the development of subunit vaccines for tuberculosis and Group A strep:

Source: ID Biomedical AIF

When GSK acquired ID Biomedical in 2005 (almost ten years since Godsy left the management team and about six since he left the board), it was primarily for ID’s flu vaccine capabilities:

Source: FT

Source: CBC

ID Biomedical did not get into flu vaccines until 2001, when it bought Intellivax:


By the time ID made its entry into flu vaccines in 2001, Godsy had been out of leadership for almost six years and off the board for around two. There is little chance he had any role in the strategy that led to ID’s eventually acquisition by GSK.

We cannot verify Godsy’s Angiotech claims

To recap, in EXRO’s prospectus, Mark Godsy is described as a founder of Angiotech Pharmaceuticals; in his McGill biography, it says he founded Angiotech after founding ID Biomedical.  

Our research would suggest neither of these claims hold water – but let’s tackle the second one first.  ID Biomedical, by its own admission, was incorporated in 1991:

Source: ID Biomedical AIF

Angiotech, by its own admission, was incorporated in 1989:

Source: Angiotech Offering Document

So perhaps someone got the timing wrong? Either way, we cannot find evidence to even support that Godsy was ever a founder of Angiotech.

A 1996 private placement offering document explicitly names the three founders of the company as William Hunter, Larry Arsenault, and Lindsay Machan:

Source: Angiotech Offering Document

Mark Godsy, in fact, was a director of Angiotech at the time, but his biography in the offering document does not characterize him as being a founder (even though Dr. Arsenault, mentioned immediately after, is mentioned as a founder):

Source: Angiotech Offering Document

Angiotech’s Wikipedia page similarly only mentions Drs. Hunter, Arsenault, and Machan:

Our view is that Mark Godsy may have been an early investor in Angiotech, and thus thought it appropriate to consider himself a founder – the public record, including Angiotech’s own filings, suggests otherwise.

In our view, this exaggeration fits the same pattern as EXRO’s partnership and business claims.

An unfortunate incident alleging a pump and dump

The smoke around Mark Godsy doesn’t stop at his claims about the companies he claims to have founded:

Source: Globe & Mail

We wouldn’t bring this unfortunate incident up if it weren’t for the things that came out at Mr. Shaw’s trial. From a June 4, 2004, piece in the Vancouver Sun, we learn:

  • Shaw accused Godsy of orchestrating a “pump and dump” — artificially inflating the share value through false representations and then dumping his shares on the open market through offshore accounts.”

Now thankfully Godsy made it through this harrowing experience in one piece, but the pump-and-dump commentary is a cause for concern, in our view:

Source: Bloomberg

Source: SEC

While certainly not conclusive, we have:

  • A chart that looks like a pump-and-dump
  • Late disclosure on stock transactions
  • An admission by Godsy that he was invited to participate in a pump-and-dump, but declined

Based on that, it’s probably not a stretch to conclude that Unity could have been a pump-and-dump, and despite Godsy’s claims that he didn’t participate in it, he was the CEO and largest shareholder during part of the pump and the eventual dump.  

Did Godsy try to stop the pump-and-dump, since, by his own admission, it appears he was aware of it? 

We believe that Godsy has a history that should call into question the credibility of any venture he is involved in, and investors should act accordingly.


The Mariner Instant Replay shows:

  • EXRO’s stock is up over 1200% on optimism that it will be some kind of credible EV player
  • EXRO, in fact, is offering up a technology platform that is not a priority for EV manufacturers, and appears to be best suited to wind turbines; given the R&D spend – we are not even sure the technology WORKS
  • EXRO has failed to achieve milestones in its critical Potencia partnership
  • EXRO appears to have overstated the potential of its other partnerships
  • It looks like EXRO’s own CEO, Sue Ozdemir, sees the writing on the wall, has been rapidly reducing her exposure to EXRO, having sold almost 18% of her shares in a four-week period
  • EXRO’s former CEO and current chairman, Mark Godsy, appears to have exaggerated his involvement in prior ventures and admitted knowledge of a pump-and-dump of a company he led

Before we start talking about price targets, let’s take a quick break to go through the Mariner stock promote checklist:

  • A “hypeable” business, say, EVs
  • Dollars spent on G&A, but not a whole lot on the technology that’s supposedly game-changing
  • Investor hype up about an unproven technology that seems largely hypothetical
  • Promise the world

In our view, EXRO checks all these boxes. Our view is that EXRO is little more than a vehicle to enrich its management team rather than a company that will bring some kind of revolutionary technology to market.

The question is then, how do you value a company with a bunch of patents no one is using, with no revenue, and a raft of positive press with nothing to show for it?  Our best guess is cash value per share, or approximately 8 cents a share. 

Perhaps that is too draconian, so let’s simply say EXRO’s prospects are no better than they were before the stock started running, so around $0.35 per share, down over 90% from the most recent close.

Appendix – Company response to our questions

Author’s note

3/5/21 – we edited this piece to reflect commentary provided by Potencia Industrial regarding its facility size.  

Falling off the BEEM

Portfolio manager summary

  • Beam Global (BEEM), formerly Envision Solar, sells the EV ARC, a solar-powered EV charging station whose main customers have been government entities, accounting for the majority of revenues
  • We believe two recent business press releases that were part of driving the stock recent parabolic move overstate reality – one gives us DÉJÀ VU as we believe BEEM recycled a 2017 item for one of these announcements
  • Gov’t entities have reduced their Beam spend – for example, once mission critical to BEEM’s revenues, NYC has not placed a new BEEM order since 2018! We dug up budgetary filings that suggest this trend will continue
  • We believe and show that EV ARC’s impracticality and performance is the primary cause of falling orders – imagine our disbelief when we found out that EV ARC costs almost 100x more than some residential chargers but charges at a slower rate! 
  • Not only that, but the EV ARC may never be profitable, with gross margins ranging from -4% to +8% (solar company median is almost 20%), and unlikely to ever be profitable given its revenue outlook
  • If you can’t make it…just stop disclosing it…management stopped disclosing backlog (forward indicator of revenue) after it fell over 50% in the two years leading to 2Q20 – this affirms our view that topline growth is challenged 
  • But have no fear, the management team is unusually well compensated. Between 2010 and 2019, the CEO + CFO compensation accounted for about 1/3 of cumulative revenues
  • Both the current CEO and CFO were senior executives at companies that had to restate their financials 
  • BEEM trades (undeservedly, in our view) at a massive premium to successful, mature, solar companies with real revenues like Enphase, SolarEdge, and First Solar. Median EV/Sales for the peer group comes in at 3.9x, compared to 27x for BEEM
  • A disappointing margin profile and a bleak revenue outlook paints an impossible path to profitability – we assign BEEM a target of $12.49, down 82% from the last close.

This isn’t a BEEM of light

Beam Global (BEEM), formerly Envision Solar, primarily manufactures and sells solar-powered EV charging infrastructure.  BEEM’s primary product is the Electric Vehicle Autonomous Renewable Charger (EV ARC), which is effectively a carport with solar panels mounted on top.  The EV ARC line includes a frame, panels, and battery to which a purchaser can connect an EV charger of their choice:

Source: BEEM

BEEM is the product of a 2010 reverse merger into a shell company known as Casita Enterprises.  At the time, BEEM’s founder, Robert Noble, was CEO, and the company had a rather sordid set of allegations against it, which includes lying about installation contracts to attract investors:

Source: Casita 8-K

While a distant memory, we’ve long believed that zebras don’t change their stripes – the reverse merger history plus the 1460% stock price performance over the last year caught our eye.  We believe that BEEM’s rocket ship stock performance is the result of investor optimism about the renewables space magnified by price insensitive ETF purchases of BEEM stock, but that this excessive excitement for BEEM is largely unwarranted.  We also believe that management quality remains unchanged from the Noble days.

In this report, we explain our views on BEEM’s unprofitable products, its falling revenue outlook, disappearing forward-looking disclosure, excessive executive compensation, and troubling management histories.

These factors lead us to assign a $12.49 price target to BEEM’s stock, down ~82% from current levels.

“All the time our customers ask us, ‘How do you make money doing this?’ The answer is simple – volume.”

Very few companies we have analyzed have been so kind as to provide unit-level cost economics, but BEEM does.  Below, from its 2018 10-K, are two tables which outline the cost of goods for two versions of the EV ARC:

Source: 2018 10-K

What we see here is that GAAP gross profits for the “average” and “least profitable” EV ARCs are 4% and -8%, respectively – this is driven in part by what we would view as a large portion of variable costs with volume-based fixed cost allocations.

As an aside, our analysis suggests that some of BEEM’s largest orders have been for the “least profitable” EV ARC, based on back of the envelope math:

  • In September 2018, BEEM received a $3.3MM order for 50 EV ARCs from New York City, or an average price of $66k per unit
  • In September 2020, BEEM announced a $2MM order for 30 EV ARCs from Electrify America, or an average price of $66.7k per unit

Despite this profitability profile,  BEEM says, “We have assumed in the past, and continue to assume, that our sales will increase and will, as a result, reduce the impact of our per unit fixed cost contributions.”, implying that revenue growth will improve gross margins. This sentiment is repeated in the 2019 10-K: “As our business continues to grow, we expect to see an improvement on our gross profit through better utilization of our manufacturing facility.”  

Despite this unit level disclosure, BEEM has not yet come close to achieving the GAAP gross margins it claims for each of these units, suggesting that revenue levels or mix are worse than management hopes (in other words, likely below the assumptions used in the above charts):

Source: Company filings

Notably, management never updated the unit economics for the EV ARC in subsequent 10-Ks.  If unit profitability were improving, wouldn’t management want us to know that? (Note to reader: the company has put out 66 press releases in 2020, one would think if gross margins improved, we’d hear about it)

The company’s performance thus far, and our view of the future, suggest that further revenue growth needed to achieve positive gross margins is unlikely, but before we discuss that, let’s put some context around BEEM’s gross margins.

BEEM’s actual gross margins on a consolidated and unit basis as disclosed in the 2018 10-K put it firmly at the bottom of a peer group of solar component manufacturers:

Source: Bloomberg and company filings

On this basis alone, we believe that BEEM has a very deep hole to dig itself out of to come close to matching peer group profitability.  In the rest of this report, we show that BEEM has thus far failed to achieve any revenue scale and explain our view that BEEM is unlikely to do so.

When the trend is not your friend: Municipal contracts that made up over 50%+ of revenues are starting to fade 

In BEEM’s own words, “As our business continues to grow, we expect to see an improvement on our gross profit through better utilization of our manufacturing facility.” The problem here is that the business has stopped growing.  After putting up 336% growth in FY18, BEEM’s revenues have been trending down dramatically:

Source: Company filings

Our view is that this has largely been the result of falling or nonexistent deliveries at two critical customers – the City of New York and the State of California – over the last twelve months. The contracts, which do not have minimum purchase requirements, associated with these entities accounted for a meaningful portion of revenue in 2018 and 2019:

Source: Company filings

The New York City contract appears to be a cause for concern – after receiving a $3.3MM order from the city in September 2018, we believe that BEEM HAS NOT RECEIVED ANY NEW ORDERS SINCE THEN. After recognizing revenue for 34 units from this order in 2019, our examination of the filings for the first 9 months of 2020 suggest that BEEM has not recognized any further revenue from the city of New York:

“For the nine months ended September 30, 2020, revenues were $4,009,644, compared to $4,615,669 for the nine months ended September 30, 2019, a 13% decrease. Revenues in the nine months ended September 30, 2020 included a wide variety of customers, including several municipalities and state agencies in various states and in Canada, colleges, a large commercial business and two nonprofit organizations. We have also sold a variety of different products during this period, including our traditional EV ARC™, our new EV ARC™ 2020, a DC fast charging station for a California rest stop and the first two of three Solar Tree® solar-powered sustainable infrastructure products sold to charge large vehicles. This compares to revenues for the nine months ended September 30, 2019 where almost half of our revenue resulted from the delivery of units to one customer, the City of New York. We also sold two DC fast charging stations for California rest stops last year. Our shipments will continue to fluctuate each quarter due to the varying size of orders and timing of deliveries.”

Going deeper, BEEM’s own disclosures and those of New York City confirm our conclusion:

In the 2015 10-K, BEEM notes that it deployed one EV ARC to New York City in 3Q15

In the 2019 10-K, BEEM says as of March 2017 it had received an order of 36 EV ARCs from New York City, and in September 2018 received an order for 50 EV ARCs from NYC

The sum total of the above mentioned orders is 1 + 36 + 50 = 87 units, which matches to what New York City discloses as the number of EV ARCs deployed

Based on the fact that the number of EV ARCs deployed by the city match the number that BEEM discloses as being ordered from the city, we can conclude that no new orders have been delivered after the 2018 order.  Does this imply that the NYC was unhappy with BEEM’s product?

We considered that NY might be an outlier, so we investigated California.  For the California Department of General Services contract, we see a material deterioration through 2019:

Source: Company filings

On a total unit basis, BEEM delivered 90 units in 2018, but just 65 in 2019, down 28% year over year.  Even though the company has not provided clear unit delivery numbers YTD2020, revenues for the first nine months of 2020 are down 13%, making it safe to conclude that units are also down for the same period.

Declining Revenue in the Face of a Massively Growing Sector

To put this in context of the industry – while BEEM’s unit volumes have fallen from 2018 through 3Q20, U.S. total solar capacity has increased 34% (Dec 2018 to Aug 2020), meaning solar power capacity is growing, but BEEM is just not participating:

Source: US EIA

This deterioration in revenues from material contracts implies that BEEM would have to find new customers to fill these revenue holes – and they have, to some extent – but it’s come at the cost of BEEM’s profitability.  

In February of 2020, BEEM announced a $2MM order for 30 EV ARC charging stations from Electrify America, of which 8 were deployed in 3Q20.  This order equates to approximately $66k per unit…which happens to be the price point of BEEM’s “least profitable” product (as illustrated earlier).  So while BEEM did find a new customer, it was for a product with -8% gross margins.

Source: 2018 10-K

In our next section, we reveal why we believe that BEEM’s future revenue growth is likely to be limited.

Significant revenue growth is unlikely to materialize

There are two main indicators that suggest BEEM is unlikely to experience a dramatic increase in revenues.  

The first, and most significant, in our view, is the company’s backlog, which is typically a representation of orders to be delivered in the future.  Through 2Q20, BEEM’s backlog is down over 50% from the $5.7MM peak in 3Q18:

Source: Company filings

By analyzing the change in backlog and revenue booked in a quarter, we can estimate the dollar value of new orders, which are barely up year over year through 2Q20:

Source: Analysis of company filings (orders = EOP backlog – BOP backlog + revenue)

Unfortunately for investors, BEEM appears to have withdrawn this disclosure in 3Q20, which we would view as a negative indicator for the future. This is addition to eliminating quarterly unit delivery disclosures, leading us to believe that management does not want to provide critical transparency to investors.

If backlog was up, wouldn’t BEEM want you to know that? We can only assume that it was down yet again, and consequently BEEM decided to exclude it from its quarterly disclosure.

The second indicator for a less than rosy future is the state of BEEM’s customers. As we covered in our note on GreenPower Motor, COVID has had a negative impact on state tax revenue.  For example, in January, California was predicting a $5.6B budget surplus – by May, that surplus had turned into a $54B deficit.

Similarly, for the state of New York, state tax revenues are down 17.2% through September 2020 compared to the prior year.

What this results in is flat to smaller budgets, meaning BEEM finds itself trying to sell to customers who have less dollars to spend.

NYC budget dollars are downward trending

While New York City may be a moot point given it hasn’t ordered anything from BEEM since 2018, it’s still important to assess the city’s budget.  The city division that has a contract with BEEM is the Department of Citywide Administrative Services, per the contract exhibit found in BEEM’s filings:

Source: Company filings

The trend in funds allocated to fleet services (where we believe BEEM’s products are included given their use in charging vehicles) is negative, down from $58MM in 2018 to just $31MM for 2021, a drop of 46% and not a good indicator for incremental spend:

Source: NY Department of Citywide Administrative Services

Customer budgets in California are also shrinking

We found several instances where named BEEM customers in California are reducing budget allocations to the departments most likely to purchase BEEM products.

Source: San Diego County Budgets

Source: City of Long Beach

  • Tehama County, a March 2020 purchaser of EV ARC to provide free electric charging to citizens through its Carl Moyer Program, has seen budgets to the Moyer program fall 60% since 2018, inclusive of a significant increase to funds in 2020

Source: Tehama County Budget

Source: Air Pollution Control District

We believe that recent announcements are hot air and unlikely to translate into meaningful revenue

BEEM recently made two business announcements that would suggest potential revenue upside:

Here, we’ll show you why we believe there is much less to these announcements than suggested.

The first, with the US General Services Administration (GSA), simply allows federal agencies to purchase EV ARC through the GSA Advantage website.  Importantly, there is no volume commitment associated with this award. We would liken this to just getting your product added to a catalog where catalog recipients can choose to order your product.  

Notably, in this release, BEEM CEO Desmond Wheatley notes that five federally funded labs and the Navy already use EV ARC:

“Five Federally funded National Laboratories and the U.S. Navy already use EV ARC™ products. It will be much easier to get follow on orders from them and new orders from other Federal agencies as a result of this contract vehicle being in place.”

Those five federally funded labs are the US Department of Energy’s National Renewable Energy Laboratory (NREL), Lawrence Livermore National Laboratory, Sandia National Laboratories in Albuquerque, Sandia National Laboratories in Livermore, and Idaho National Laboratory and while they can certainly now use the GSA website to place orders, their 2021 budgets don’t suggest an increasing ability to pay.

Livermore and the Sandia labs have 2021 budgets 25.5% and 12.6% less than 2020, respectively, while NREL and Idaho are flat.

Source: Department of Energy funding by site

In fact, the DOE’s budget for “Energy Efficiency and Renewable Energy” is down 74% in 2021:

Source: Department of Energy Funding by Appropriation

Stepping even further back, the DOE’s overall budget for 2021 is 8.2% below 2020’s budget. Unless other federal agencies decide to make up for budget shrinkage by BEEM’s existing federal customers, we do not believe this announcement will translate into meaningful revenues.

We believe that the above shows a fairly clear trend that budgets of key municipal and government customers are tightening and less funds are available to purchase EV ARC products.

Is this déjà vu?

The San Diego announcement, in our view, bears a striking resemblance to a 2017 announcement that doesn’t appear to have gone anywhere. 

In this most recent announcement, BEEM says it is collaborating with the city of San Diego to offer “free sustainable charging to the public” through a “a public-private partnership with a corporate sponsor who will receive global naming rights to the network and highly visible corporate brand placement on the EV ARC™ units”:

Source: Press release

In 2017, in fact, BEEM made an announcement that it had engaged Outfront Media to procure a “naming rights sponsor for the EV ARC™ charging station network throughout San Diego”:

Source: Press release

Strangely, it does not appear that this amounted to anything – we were unable to find a subsequent release that Outfront and BEEM had found a naming rights sponsor.  We would assume, based on this and the fact that the “corporate sponsor” story is back in 2020 that the initial 2017 effort didn’t amount to anything.  

These two announcements are strikingly similar – both mention a to-be-determined corporate sponsor, suggesting an intent to do business with a corporate sponsor rather than anything actually set in stone.

Given that the 2017 announcement doesn’t seem to have amounted to anything, what’s to say that the 2020 announcement will? Is it simply possible that corporate sponsors don’t have interest in spending over $60k per device for marketing purposes?  

These indicators, plus BEEM’s considerable decline in backlog and decision to eliminate the backlog disclosure lead us to believe that revenue growth for the foreseeable is unlikely to reach the sell-side’s eyepopping revenue growth estimates of 259% in 2021 and 84% in 2022 (Bloomberg).

Is EV ARC an uncompetitive product?

We believe that it’s important to understand the why behind the apparent stalled-out growth and limited product demand and future we have outlined above. 

When we first started looking at the EV ARC, we were unable to find any real competitors in the solar powered EV-charging carport category.  This led us to two potential conclusions: either BEEM had bottled lightning and no one was able to compete with them, or the product category itself was, for some reason, unattractive.  Unsurprisingly, our conclusion is firmly in the latter camp. A quick look at the EV ARC’s capabilities provides insight into why – according to BEEM’s own fact sheet, EV ARC only provides up to 245 miles of daily range:

Source: BEEM

Our interpretation here is that a single EV ARC can provide a total of just 245 miles of range per day – so if two cars are using the charger over the course of the day, they split that 245 miles of range. This is a function of the solar panels’ ability to generate electricity, and compares unfavorably with traditional, on-grid stations both in range and price:

Sources: New Motion catalog, New Motion Business Line, New Motion Home Line, EV Solutions, EV Solutions Store, CarPlug, EVBox, ChargePoint Home, ChargePoint HomeFlex, ChargePoint Express 250, ChargePoint CPF50, Charging Shop, Beam Global

The rate of charge for the EV ARC is dramatically slower than the other commercial and residential chargers, which we would imagine doesn’t provide a great customer experience.  In fact, we reviewed user feedback from six EV ARC stations we were able to find on PlugShare, and while many users were able to use the stations, common complaints were related to stations not working or slow charging:

Camp Roberts Northbound Rest Area

Ginkgo Petrified Forest – Trees of Stone Trailhead

Camp Roberts Southbound Rest Area

Santa Monica Airport

Selma City Hall

Huron City Hall

The economics of an EV ARC don’t appear attractive to us, either – a survey of the EV ARCs in the Fresno area shows that they charge $0.43/kWh for a charge. Assume we are attempting to fully charge a 75 kWh TSLA Model S, the owner would pay 75 * $0.43 = $32, and the EV ARC would be tapped out. Based on this 43c/kWh pricing, the revenue for the EV ARC is capped at ~$30 a day, or $10,950 a year. Assuming zero operating costs (which is obviously unrealistic), that’s an almost 6-year payback period, best case, for an EV ARC.

Unsurprisingly, BEEM has received criticism for its product given this dynamic. As early as 2014, BEEM (then Envision), received criticism for being too expensive at $40k (it’s now over $60k!):

Source: WIRED

Aside from being expensive, it appears that off-grid commercial charging presents another costly problem – wasted capacity.  The changing dynamics of traffic flow in cities or employee presence in corporate lots make “sizing a suitable generation system – without massively overbuilding capacity – very difficult.”

According to this article, you can easily install enough solar-powered EV charging for your “busiest days”, but then your system is underutilized on other days:


Given this, if a customer really wants solar-power EV charging, they are either going to optimize capital returns by planning deployments based on lower utilization (vs “busiest days”) or push for pricing that makes wasted capacity less of an issue.

We think the latter is where solar power EV charging is headed – as an example, just a few days ago, we learned that the Minnesota Pollution Control Agency is planning on spending $170k on 22 Level 2 charging stations, but will reward developers who include solar panels or other renewable power sourced into their stations:

Source: US News

A municipality is offering $170k to purchase 22 charging stations, INCLUDING SOLAR PANELS, amounting to an average price of $7727 per station.  BEEM, at over $60k a station (and still barely/not profitable on a unit basis at these prices), is entirely unable to compete in such situations.  BEEM would only have to drop their pricing by ~87% in order to be competitive in this situation

Despite this difficult dynamic powering anemic future revenue growth, history tells us that management will be well compensated regardless.

Great work if you can get it

Since its 2010 reverse merger through 3Q20, BEEM has generated approximately $27MM in revenue. Of that, an eye-popping 99.7% has gone to operating expenses:

Source: Company filings

The prime beneficiaries of this operating spend have been BEEM’s current CEO, Desmond Wheatley, and CFO (formerly Chris Caulson and currently Katherine McDermott).  From FY10 to FY19, the period for which compensation data is available, operating expenses were 106% of revenue. Compensation paid to the CEO and CFO were approximately 30% of revenues during this period. 

CEO Wheatley’s comp alone accounted for almost 20% of revenues from 2010 to 2019:

Source: Company filings

While BEEM’s revenues have fluctuated dramatically over the last 10 years, Wheatley appears to have done just fine. 

In addition to what we believe is excessive executive compensation, we have other concerns about certain members of the executive team and board.

The C-suite and two restatements 

In something we typically don’t see in our work, both the CEO and CFO of BEEM were at companies that both had to restate their financials.  

From 2000 to 2007, BEEM’s longtime CEO, Desmond Wheatley, was in leadership at Wireless Facilities, Inc. (WFII), now Kratos Defense Solutions.  He was a VP from 2000-2002, and from 2002 to 2007 was the President of the Enterprise Network Services Segment (ENS):

Source: LinkedIn

On August 4, 2004, WFII announced it would have to restate its financial statements for the years 2001 to 2003, primarily as a result of a “recent analysis of contingent tax liabilities primarily in foreign jurisdictions”.  WFII estimated that the “preliminary estimate of the impact of the adjustments is between approximately 3 – 8% of net income or loss for any given year from 2000 to 2003 for an aggregate increase of expenses of $10 million to $12 million.”  In the three months preceding this announcement, company insiders were alleged to have sold over $60MM in stock.  When the company released its amended 10-K a month later, however, net income was reduced by a total of $33.6MM, and the drivers of the restatement were a broad range of issues:

Source: 10-K/A

The division Wheatley was president of, ENS, was also caught up in the restatement – its 2003 revenues were reduced from $43.2MM to $41.1MM, or down 4.9%.  While Wheatley was never mentioned in the ensuing lawsuit, his position in leadership of a segment that had to restate numbers is, in our view, a cause for concern.

CFO Katherine McDermott, who joined in July of 2019, was at Lantronix from 2000 to 2005 as VP of Finance when the company had to restate its financials.  Lantronix announced that it expected revenue reductions of less than 15% for fiscal 2001 and 2002.  Lantronix later disclosed it was the subject of an SEC probe, and, in 2006, the SEC sued Steven Cotton, Lantronix’s CFO during this period:

Source: SEC

In 2009, Cotton “consented to entry of a permanent injunction, disgorgement of $344,976.98 in ill-gotten gains plus pre-judgment interest of $62,629.03, payment of a $120,000 civil penalty, and imposition of a ten-year officer and director bar.”

Let us be clear, Kathy McDermott is not mentioned in the restatements or SEC complaint.  It is, however, troubling to us that Kathy was the VP of Finance at Lantronix, potentially working for CFO Steven Cotton.

In both cases, neither Wheatley nor McDermott were implicated in the suits that resulted from the restatements.  They were, however, indisputably in senior roles in their organizations when the above-mentioned events transpired.  We believe this should be a red flag for investors.

Unhappily EVer after

We believe BEEM presents significant risk to retail investors, and that the 1460% increase in the stock price over the last year on deteriorating fundamentals is entirely unjustified. 

The Mariner instant replay shows that:

  • BEEM sells a product whose profitability has thus far been minimal
  • BEEM’s revenues, after growing in FY18, have since slowed considerably, leading to stagnant margins
  • BEEM’s backlog has shrunk, and the company has stopped providing backlog disclosure
  • BEEM’s municipal customers are facing budget headwinds
  • EV Arc’s performance is far behind that of on-grid systems, despite a much higher price tag
  • Despite all this, BEEM’s executive compensation has soaked up ~30% of revenues since 2010
  • Both BEEM’s CEO and CFO had leadership roles in companies that had to restate their financials

In light of these factors, we do not believe that BEEM can achieve the lofty sell side estimates found on Bloomberg, which call for revenues of $20.2MM in 2021 and $37.1MM in 2022, up 270% and 72%, respectively, from the prior year periods.

Given current backlog and customer trends, we think revenues will be flat in 2021 (to TTM 3Q20) at best.  Assuming multiple compression from BEEM’s eye-popping 27.0x EV/Sales multiple (a 585% premium to the group median multiple) to 20x EV/Sales, we get to a price target of $12.49, down 82% from the last close:

IBIO – don’t buy the vaccine dream

Portfolio manager summary

  • IBIO is a Texas-based company whose stock was up ~500% year to date through 12/7 on investor optimism about its COVID-19 vaccine efforts
  • We believe that IBIO is vaccine vaporware, with a history of having inserted itself into the discourse of several diseases-du-jour over the last decade including H1N1, Ebola, and now COVID
  • IBIO has never actually commercialized any of its vaccine or therapeutics efforts, having eliminated pipeline disclosure in FY17
  • In fact, IBIO settled a shareholder suit alleging that it lied about its Ebola claims, and we believe IBIO’s COVID effort is just a replay of the 2014 Ebola episode
  • Despite this, the Roberts (Kay and Erwin), have reaped compensation in excess of 100% of IBIO’s revenues since 2008
  • We uncovered associations between Robert Kay and CELH’s Carl Desantis, himself a controversial businessman, and a Georgian businessman caught up in post-Soviet intrigue along with Hillary Clinton’s brother
  • Robert Erwin, on the other hand, was CEO and Chairman of LSBC, a plant-based biotech that went bankrupt in 2006
  • Between the company’s track record and management history, we believe this is a clear “fool me once, shame on you; fool me twice, shame on me” situation that investors shouldn’t get caught in. We believe that IBIO’s business is worth no more than the cash on its balance sheet adjusted for the next twelve months of cash burn, or just $0.43 per share, down 71% from the 12/7 close

All hat and no cattle

If you ever hear the saying “all hat and no cattle”, the message is simple: wearing a cowboy hat doesn’t make you a cowboy. All talk, no substance – rarely has a metaphor fit our view of a company the way it fits IBIO.

iBio is a Texas-based company that purports to develop vaccines and other therapies using its plant-based system known as FastPharming. As a fresh example of what investors are dealing with, on December 2nd, it announced a Statement of Work with Belgium-based ATB Therapeutics, which sent IBIO’s stock up ~10%, adding about $30MM to the company’s market cap.

What investors miss here is that ATB Therapeutics did just EUR 55,209 in gross profits in 2019 and had just EUR 2.2MM in assets on its balance sheet:

Source: ATB financials

Investors are overly optimistic about this announcement, especially given the size of the partner – we do not believe this will be a material revenue generator for IBIO moving forward. After researching IBIO, we view this as typical of the company’s modus operandi, and think it is yet another red flag in a series of many.

For context, it is our view that this announcement was solely used to bolster investor optimism about IBIO, which was up ~500% year to date through 12/7 on its purported COVID efforts, which we believe will amount to nothing.

In light of Moderna and Pfizer’s stunning recent announcements that their COVID vaccine candidates prevented over 90% of infections, we thought it would be important to give investors a look into purported COVID player IBIO’s business model, history, and management.

Before kicking off this report, here is a little perspective – a perspective that should give the reader an idea of the level of investment required to be competitive in the COVID vaccine race. Pfizer spent $2B to get its vaccine to this stage, and it had $1.5B in cash on its balance sheet at the end of September. Pfizer has approximately 88,200 employees.

In the last twelve months, Moderna has spent $729MM on R&D and had $1.5B in cash on its balance sheet at the end of September.

IBIO, on other hand, had $77MM in cash at the end of September and 51 employees at the end of June.

We believe IBIO lacks the track record, leadership, or resources to be successful. In our report below, we will outline IBIO’s repeated failure to bring vaccines and other therapeutics to market over its history as a public company. At one point, IBIO even made comments that implied its involvement in Ebola drug development! We also will present our concerns about key personnel and why we believe they cannot be trusted.

Based on all this information we believe IBIO shares to be worth no more than $0.43, its cash value per share (pro forma for today’s offering adjusted for cash burn), or 71% below current levels.

Understanding the bull case

IBIO’s meteoric 2020 performance is largely the result of the company’s purported efforts toward a COVID vaccine developed through its FastPharming System. Investor speculation in vaccine plays this year has been so frothy that at one point in July, IBIO’s stock was up 2483% from the beginning of the year. And while the stock has since come in, it is still up over 400% on the year as investors assign value to its technology and the possibility that IBIO may be able to successfully bring to market a COVID vaccine.This InvestorPlace article argues that while IBIO may be behind its peers in developing a COVID vaccine, its technology has real potential. Comments on Reddit outline a similar view on IBIO and its technology:

Source: Reddit

Source: Reddit

It is our belief that these investors are unfortunately unaware of IBIO’s history of unkept promises and the management history of the company. We outline those topics in this note.

IBIO’s Ebola (EboLIE?) Drug

COVID would not be the first time IBIO gave itself a part in the search for a solution to a concerning disease. In 2014, the world was horrified by a small, but concerning the spread of Ebola from Africa to other locations, including the US.

With no approved drugs on the market at the time, the FDA allowed two experimental drugs to be used in the US. One of these compounds was ZMapp, a cocktail developed by San Diego-based Mapp Pharmaceuticals and manufactured by Kentucky Bioprocessing using “genetically modified tobacco plants”. In August 2014, Mapp ran out of its supply of the drug, and the federal government sought help from other facilities, one of which was the Texas A&M Center for Innovation in Advanced Development and Manufacturing. (source: US District Court of Delaware, case 1:14-cv-01343, document 1).

The Texas A&M facility was affiliated with Caliber Biotherapeutics LLC. Caliber, in 2013, entered into a licensing agreement with IBIO to “use their combined capabilities to develop their own product portfolios, starting with a monoclonal antibody for an oncology indication.” 

A shareholder suit refers to an October 11, 2014 quote from founder and then CEO Robert Kay (who just stepped down from the CEO role in March 2020 but remains co-chairman of the board) from the Washington Post (this, despite IBIO only partnering with Caliber for oncology):

Source: US District Court of Delaware, case 1:14-cv-01343, document 1

Just five days later, IBIO explicitly inserted itself into the Ebola discussion with a press release that implied it had a role in responding to Ebola:

Source: Press release

These communications resulted in an approximately 530% increase in IBIO’s stock price from the beginning of October 2014 to the middle of that month. Shortly thereafter, two Seeking Alpha articles, one on October 20 and the other on October 23, concluded that IBIO never actually explicitly confirmed it was producing an Ebola drug and that the government-funded lab was not exploring any changes to Mapp’s compound. These reports sent the stock down approximately 55% through month-end. Shareholders later sued IBIO, claiming that “iBio repeatedly lied about the role it played in producing an experimental Ebola drug

This is a classic “Fool me once, shame on you; fool me twice, shame on me” situation. IBIO settled for $1.9MM, and, unsurprisingly, investors never saw IBIO come to market with an Ebola drug. We believe IBIO is pulling the same trick this time around, albeit more discreetly. We have the view that if a company settles a lawsuit that alleges it lied to its shareholders, that should be a large enough red flag to make it a bad investment.

However, for the investors that still think IBIO can pull off a COVID-19 vaccine, we believe the company’s repeated pattern of failing to commercialize its efforts speaks for itself.

IBIO: promises unfulfilled

IBIO’s roots are in a 2004 acquisition of a plant-based technology platform from Fraunhofer USA Center for Molecular Biotechnology (FhCMB), a non-profit translational research institution. IBIO’s model was to use the platform to create and advance its product candidates and license the platform to other parties. Indeed, in the 2008 10-K, we see that IBIO is “prioritizing the following product candidates for our in-house research and development portfolio”:

Source: 2008 10-K

In the 2009 filing, we learn that IBIO and FhCMB, in January 2009, agreed to “defer further preparation for clinical trials of a seasonal flu vaccine candidate and instead to focus on clinical trials of a pandemic flu vaccine candidate”, namely H1N1. (We are struck by IBIO’s ability to insert itself in the discourse for H1N1, Ebola, and now, COVID-19.)

In the same filing, we learn that FhCMB is an important source of funds for IBIO – in 2009, FhCMB received $8.7MM from the Bill & Melinda Gates Foundation to fund clinical trials of “the pandemic flu candidate based on [IBIO’s] platform.” Further, IBIO noted that “[t]he U.S. Department of Defense (“DoD”) has also provided $10.3 million in funding to FhCMB for preclinical and clinical studies for anthrax and plague vaccine projects, and this funding is similarly beneficial to us because we have retained the commercial rights to any technology improvements resulting from those projects”.

Needless to say, it sounds like FhCMB was probably an important source of capital and revenue. The company derived close to ~$1M in sales as a subcontractor to FhCMB. The company also put its focus on H1N1 stating that “Our near-term objective is to complete preclinical evaluation and transition select vaccine candidates into Phase I Human Trials”.

In the 2010 10-K, we learn that in addition to H1N1, IBIO was developing vaccine candidates targeting the H5N1 virus and therapeutics for Human Papilloma Virus (HPV), as well as owning the commercial rights to an oral anthrax vaccine. Once again, the company stated the importance of H1N1 saying “We currently are prioritizing H1N1 influenza vaccine candidates for our in-house research and development portfolio”. All of this was being done at IBIO’s “approximately 500 square feet of office space at our headquarters located in Newark, Delaware, which is leased on a month-to-month basis from FhCMB.”

In the 2011 10-K, we find out that IBIO started Phase I trials for both the H1N1 and H5N1 vaccines in late 2010, and the company had yet again expanded its efforts to develop vaccines for malaria and trypanosomiasis and therapeutic proteins for Fabry disease, hereditary angioedema, and treatment of disorders caused by a deficiency in alpha-1 antitrypsin. This seems like a gargantuan undertaking for a company with just seven employees at the time.

In the 2012 10-K, we learn that IBIO completed its H1N1 and H5N1 Phase 1 trial, and in the 2013 10-K, the company started disclosing all its research programs as seen below.

Source: 2013 10-K

But then, things seem to slow down considerably over the next few years. The chart below shows the status of these clinical programs over the next few years:

Source: 10-Ks

In the 2014 10-K, there is no progress AT ALL on the 2013 pipeline, and we just see the addition of one therapeutic protein known as IBIO-CFB03. In FY15, we see that just three products have moved forward – malaria, hookworm, and anthrax vaccines moved into Phase 1. We also learn that IBIO filed a legal complaint against its partner, Fraunhofer, for material contract breaches. In FY16, we see “feasibility demonstrated” (whatever that means) for several products.

Also in FY16, IBIO launched a new business, IBIO CMO (now IBIO CDMO), a contract manufacturing organization to 1) develop and manufacture third party products, 2) develop and product IBIO’s products for the treatment of fibrotic disease (what happened to the vaccines?!) and 3) commercial technology and transfer services. Was the litigation with Fraunhofer going so poorly that IBIO had to pivot its business?

Sure enough, in the 2017 10-K, the product candidate pipeline is GONE. There is no mention of the progress of the pipeline, and IBIO mentions the following risk:

Neither we nor our collaborators have completed any other clinical trials for any vaccine or therapeutic protein product candidate produced using iBio technology. As a result, we have not yet demonstrated our ability to successfully complete any Phase 2 or pivotal clinical trials, obtain regulatory approvals, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization.”

To recap – between 2008 and 2016, IBIO claimed to have a pipeline of promising vaccines and therapeutics, including implying a role in addressing Ebola, and quite literally NONE OF IT MATERIALIZED into a marketable product.

Of the $8.4MM in revenues booked between FY08 and FY17, $6.3MM came from providing, through Fraunhofer, technology services to a Brazilian company, with the remainder coming from nutraceutical sales in 2008 and 2009. This revenue stream went to zero in FY18. 

Since then, IBIO has done little else, in our view, generating revenues of just $2MM in FY19 and $1.6MM in FY20.

What IBIO has done, however, is spend almost 7x on G&A as it generated in revenues since 2008 – two of the main recipients of this largesse were the Roberts (Kay and Erwin), who have been in leadership positions at IBIO through the saga we outlined above. We believe the Roberts’ track record is a cause for concern and an indication that the company’s promises lack credibility.

Robert Barons? We believe that IBIO’s leadership is a cause for concern

Over the last 12 years of what we view as a bunch of talk with very little results, the company has had two constants – the Roberts – Robert Kay and Robert Erwin, two individuals whose aggregate cash and stock compensation between FY08 and FY20 comprised 101% of the $12.5MM in revenues that IBIO generated during the same period. We believe that this is grossly excessive given the track record we outlined above.

Robert Kay was IBIO’s CEO from its 2008 spin-off until earlier this year when he stepped into the role of Co-Chairman and member of the board. As CEO, he oversaw the series of failed commercializations we outlined above but made over $7.5MM in the process.

Kay’s background includes some colorful experiences and characters. Before becoming CEO of IBIO in 2008, when it was spun out of Integrated BioPharma (INBP), Robert Kay was on the board of INBP from 2003 until the 2008 spin-off. INBP appeared to be a family affair, with Gerald Kay (Robert’s brother) as CEO at the time (now Chairman). Today, according to Bloomberg, Riva Kay Sheppard and Christina Kay share the Co-CEO seats at INBP. During Robert Kay’s time on INBP’s board until the IBIO spin-off announcement, INBP’s stock fell from a peak of $12.85 to approximately $2.72, a 79% collapse.

But this is not as interesting as who the Kay brothers have surrounded themselves with – Carl Desantis. Carl, who still sits on the INBP board and was partners with the Kay brothers in a vehicle known as Trade Investment Services, LLC (TIS), was also the founder of Rexall Sundown, which was fined $12MM by the FTC about claims it made in the marketing of a dietary supplement, Cellasene. 

In 2000:

Source: Broward New Times

Carl is also the largest shareholder of CELH, which Grizzly Reports covered in an October 2020 research piece. CELH itself makes bold claims, saying it is the “first and only negative calorie drink the world.”

But that’s not all – enter Vasili Partarkalishvili – Vasili and the Kay brothers, along with Carl Desantis (through TIS mentioned above), were owners of a company called Paxis Pharma, which INBP bought in 2003.

Somehow, inexplicably, Hillary Clinton’s brother Tony Rodham is part of this story:

Source: TIME

We should note here that the Gene Prescott mentioned here was Robert Kay’s partner in a real estate business.

Back to Vasili – in the early 90s he opened Liberty Bank, which, in 1994, the US Comptroller of the Currency warned was not authorized to operate in the US. Vasili and his partners got sued by two men claiming that “Liberty, IBN and several other enterprises amounted to a Ponzi scheme in which they lost hundreds of thousands of dollars”:

Source: TIME

Those partners included Robert Kay:

Source: TIME

We believe it is safe to say, given Robert Kay’s background with dubious characters and the Ebola lawsuit which involved management making false claims, that anything he is involved with is deserving of additional scrutiny if not complete avoidance.

Now, onto the other Robert, Robert Erwin. Erwin has been IBIO’s president since 2008, earning over $4.9MM through FY20. Like Robert Kay, Erwin has a track record we wouldn’t want to see in a public company. According to Erwin’s bio on the IBIO website, he “led Large Scale Biology Corporation from its founding in 1988 through 2003, including a successful initial public offering in 2000, and continued as non-executive Chairman until 2006.

Like IBIO, Large Scale Biology Corporation (LSBC) was attempting to use plants as biological factories. What Erwin’s bio doesn’t tell you is that LSBC “never really managed to get its products off the ground” LSBC filed for Chapter 11 protection in 2006, and its 3Q05 10-Q shows it had an accumulated deficit of over $200MM.

Erwin has also found a way to enrich himself as the minority shareholder of Novici Biotech, which, since 2012, performs various scientific services for IBIO:

“In January 2012, the Company entered into an agreement with Novici Biotech, LLC (“Novici”) in which iBio’s President is a minority stockholder. Novici performs laboratory feasibility analyses of gene expression, protein purification and preparation of research samples. In addition, the Company and Novici collaborate on the development of new technologies and product candidates for exclusive worldwide commercial use by the Company.” (Source: IBIO 10-K)

In FY19 and FY20, IBIO’s expenses related to Novici were $954k and $97k, respectively, accounting for 47% and 6% of IBIO revenue during those periods. Not a bad gig if you can get it.

To recap, IBIO’s founder/former CEO/chairman, whose compensation exceeded 60% of IBIO’s revenues from FY08 to FY20:

  • Served on the board of what appears to be a family-run company while its stock price fell 79%
  • Partnered with Carl Desantis, who is alleged to have made unsubstantiated claims about the businesses HE ran
  • Alleged to have partnered with a Georgian “wheeler-dealer” to launch a bank that was not authorized to operate in the United States

IBIO’s president, whose compensation was approximately 40% of IBIO’s revenue from FY08 to FY20, was CEO and Chairman of a biotech that went bankrupt during his tenure and extracts value from IBIO through his position as a minority shareholder that provides services to IBIO.

Given these backgrounds and IBIO’s track record, we believe there is little value for investors in the stock.

We believe IBIO is likely to disappoint investors

The Mariner instant replay shows that:

  • IBIO’s ATB Therapeutics deal is with a company with just EUR 2MM in assets
  • We believe that IBIO will be unable to compete in the vaccine space given the massive amount of dollars and time required to be successful
  • IBIO’s track record shows that the company has attempted to insert itself in vaccine discussions related to other diseases-du-jour, but none of these efforts amounted to anything but stock price movement. In the fact, the company settled a lawsuit alleging it lied about its Ebola program to shareholders
  • Despite never commercializing a vaccine or therapeutic, Robert Kay and Robert Erwin, IBIO’s founder/former CEO (now Co-Chair of the board) and president, respectively, received compensation exceeding all of IBIO’s revenues from FY08 to FY20
  • We believe both Roberts present significant credibility and execution risk to the business

Our view is that the year to date move in IBIO is unrelated to business fundamentals and that the track record of IBIO’s platform and management suggests the business is in no better condition than it was in before its initial 633% move in February. IBIO has not shown investors any meaningful progress for its COVID-19 program, and we believe this program amounts to little more than vaccine vaporware.

Given this, we view IBIO as a stunning example of “all hat no cattle” and do not believe the business is worth more than the cash on the balance sheet.

After today’s offering, this amounts to 53c per share – which, adjusted for approximately $20MM of estimated cash burn over the next year, results in a price target of $0.43 per share or down approximately 71% from the 12/7 close.

GreenPower Motor – the wheels on the bus are slowing down

Portfolio manager summary

GreenPower Motor (TSX: GPV, NASDAQ: GP) is an EV bus company that we believe has significant misunderstood risks:

  • Unlike certain EV plays (cough, cough, NKLA), GreenPower actually has revenues! The problem is that those revenues are entirely from California, and have been dependent on a subsidy program that we estimate accounted for ~74% of calendar year 2019 and 2020 YTD revenues
  • As a result of state budget constraints, the subsidy program itself is expected to keep shrinking – we believe this dynamic has already started to affect GreenPower’s revenues, which are down 41% compared to the same period in the prior year
  • We believe that GreenPower has prioritized G&A over R&D, having spent ~$2MM on R&D over the last five fiscal years while spending close to $8MM on “Administrative Fees”; this is perhaps the reason why GreenPower has no patents and licenses, and could explain the inconsistencies we found in how the company has marketed its products in press releases compared to how it discloses the specs on its vehicles
  • We believe that CEO Fraser Atkinson has kept some questionable people in his orbit of colleagues – his prior endeavors have seen SEC subpoenas, a delisting by the BC Securities Commission, and collapsing stock prices
  • One of GreenPower’s major shareholders is a BC bus entrepreneur who owned a company implicated in deaths of two teenagers in a crash that was determined to be due to a “flagrant disregard for safety provisions”
  • Another (former) major holder of GreenPower is reputed by penny stock investors as having a history of “toxic financings”. They were also a holder of SCWorx, a company recently halted by the SEC
  • The PCAOB imposed sanctions on GreenPower’s auditor, Crowe MacKay, related to a 2014/2015 audit, and the PCAOB noted deficiencies related to a 2017 audit that included “the inappropriate issuance of an audit report without having planned and performed an audit under PCAOB standards”
  • We believe that GreenPower’s revenue growth is likely to be significantly hampered due to the shrinking California subsidy program – this, compounded with the governance risks outlined above, leads us to assign a $2 price target to GreenPower’s stock, down 84% from the last close

Despite having real revenues, GreenPower has major risks misunderstood by retail investors

GreenPower Motor Company (TSX: GPV, NASDAQ: GP) is a British Columbia-based designer, builder, and distributor of all-electric buses used in various applications. It is the product of a 2014 reverse merger into Oakmont Minerals, which at the time was being run by current GreenPower CEO Fraser Atkinson.

GreenPower’s product offering is comprised of:

GreenPower EV Star Min-E – Which is an electric mini-bus available in four configurations and with a “life expectancy of ten years

The Beast– A Type-D School Bus which is offered in two different lengths and configurations

EV Transit Bus Line– GreenPower’s low-floor transit line that features multiple models: 30-ft EV250, 40-EV350 and the double decker EV550

With all the hype about EVs out there, and a great many charlatans pumping their technologies, the combination of EV and reverse merger might leave a skeptical investor questioning this company.

Much to our surprise, and, we would imagine, to yours, GreenPower has achieved the first step to establishing a real business and has booked approximately $25.3MM in revenue since March 2018, which on the surface, seems impressive, but we believe is unlikely to be sustainable.

GreenPower’s stock is up ~767% this year and up ~300% since July – before we delve into why we believe this is unjustified, let’s recap the long case:

  • GreenPower has revenue! More than what NKLA can claim – which gives GreenPower real legitimacy as an EV business
  • A hype-driven exponential increase in investor interest in the EV space and trade opportunities created because of the rise of EV stocks such as TSLA (up ~410% YTD) and NKLA (up ~167% YTD)
  • Electric buses are a unique segment of the EV market, not pursued by many public companies (perhaps the closest public competitor is Ballard Power)
  • Increased government investment in the EV infrastructure, especially electric buses

Mariner Reality Check: The wheels on the bus are slowing down

We believe GreenPower’s revenue is about to fall off a cliff as a result of its exposure to California’s subsidy program. GreenPower is only registered as a motor vehicle manufacturer and dealer in California, and the company has “not yet sought formal clarification of our ability to manufacture or sell our vehicles in any other states.”  In our view, this effectively makes GreenPower a “one-state” wonder. 

We believe that revenues to date have been supported significantly by one government program (we estimate that 74% of GreenPower’s total revenue in calendar years 2019 and 2020 YTD is from the program): California’s Hybrid and Zero-Emission Truck and Bus Voucher Inventive Project (HVIP).

Funds allocated to HVIP were fully claimed by November 2019, no new funds have been allocated, and HVIP expects the next allocation to be lower – thus far, we have seen GreenPower’s YTD 2020 revenues fall 41% from the same period in 2019 – we expect them to fall further given shrinking HVIP program funding.

Like the bus in Speed, we believe the shrinking HVIP program is the proverbial bomb in the bus, as EV truck/bus producers fight for a piece of a smaller pie – except Sandra Bullock isn’t there to steer the bus to safety and Keanu Reeves isn’t there to defuse the bomb.

In this report, we explore the risk of falling HVIP credits, GreenPower’s claims about its products and autonomous driving, the CEO’s history with seemingly questionable characters (hint: SEC allegations) and an auditor with PCAOB deficiencies.

The combination of all these factors leads us to believe that GreenPower’s stock, trading at 16x 2021 revenues, is inappropriately valued, and assign a price target of $2, down 84% from the last close.

We believe that a shrinking HVIP credit program poses the number one risk to GreenPower’s topline and its future growth

At first blush, electric vehicles are extremely expensive compared to their ICE counterparts. An average diesel transit bus costs $500,000, compared to an EV bus at $750,000, while a diesel school bus costs around $110,000 compared to an EV school bus at $230,000.

Because of this pricing differential, governments have long offered subsidies to bring the cost of the vehicles close to their cheaper, gas-powered peers and induce usage of cleaner technologies to mitigate harm to the environment.

Since GreenPower is only registered as a motor vehicle dealer in California, the ONLY truly relevant subsidy program in our view is California’s Hybrid and Zero-Emission Truck and Bus Voucher Inventive Project (HVIP). The HVIP program was established in California following the passage of the California Alternative and Renewable Fuel Carbon Reduction Act and to date, HVIP has deployed more than 4,000 medium-to-heavy duty vehicles across 1,100 participating fleets. 

The California HVIP works as follows:

  • Every budget year, the California Air Resources Board (CARB) sets a budget that will be allocated to the HVIP program
  • Vehicle buyers submit purchase orders to dealers, and the dealer uses that order to apply for the HVIP voucher
  • The purchaser will receive the vehicle at a discounted price at point of sale, while the dealer will receive the incentive payment from HVIP as well

In the case of GreenPower, HVIP provides the following incentives for its products:

These incentives allow for an effective reduction in the price of the vehicle for the end user, and have been a meaningful source of revenues for GreenPower. The Voucher Funding Map allows users to download a CSV file to show how much funding GreenPower has gotten from the HVIP program:

The data set shows GreenPower received approximately $13.5MM in funding from HVIP for what we believe to be calendar 2019 and YTD 2020 (since GreenPower only began mentioning the program starting in 2019). Over this same period, GreenPower has reported $18.3MM in revenues – this implies that HVIP has been responsible for 74% of GreenPower’s revenue for calendar years 2019 and YTD 2020, making it a very important source of revenue.

Why does this matter? If ~3/4ths of GreenPower’s revenues are associated with one state subsidy program and the budgetary authority is reducing their funding, that creates quite the pickle for GreenPower; not to mention that demand for these vouchers has been increasing.

  • We called HVIP, and learned that by May 2019, funds allocated for the HVIP voucher program for the July 1, 2018 to June 30, 2019 fiscal year had already been claimed, so a waitlist for the next fiscal year’s allocation was started
  • According to GreenPower, on October 24, 2019, CARB approved funding of $142MM for the fiscal year starting July 1, 2019 until June 30, 2020 – because there was a $125MM waitlist already extant, the entire $142MM was spoken for by November 2019 – it follows, in our view, that funds for any GreenPower order that arrived after November 2019 are simply not available
  • The implication, in our view, is that new HVIP subsidy funding for GreenPower has been effectively unavailable since November 2019, and will, best case, be available in early 2021 – this represents over a year without incremental subsidy funding to help drive demand for GreenPower’s orders

This dynamic seems to be hitting GreenPower already, as June 2020 YTD revenues are down 41% versus the same period in 2019.

Based off the press releases from the company, above are the orders/deployments announced by GreenPower since the beginning of the year. On top of most of these orders being announced since June (after the stock caught fire and almost 8 months since funding closed), the startling fact is that all these orders are from California based customers, suggesting their dependence on HVIP funds.

We view HVIP as a key demand driver for buyers of EV buses – without subsidization, we believe that few municipalities or customers have the wherewithal to purchase premium priced EV vehicles. This, combined with the fact that HVIP has been such a meaningful contributor to GreenPower’s revenues and concentration of orders in California, leads us to believe that GreenPower’s revenue growth is about to be seriously hampered as the HVIP program shrinks. If these customers do not receive HVIP funding, will they really follow through with these orders? 

The Company has shied away from talking much about subsidies and their significance as a potential headwind; however buried in its filings, GreenPower itself has also mentioned the negative impact of HVIP funding:

In the 2020 20-F:

“On November 1, 2019, CARB announced that it had received voucher requests for the entire $142 million budget allocated to the HVIP program for the current fiscal year and was no longer accepting new voucher requests until new funding for the program is identified. This announcement has negatively impacted new sales prospects for GreenPower buses in the state of California and any further reduction or elimination of the grants or incentives in the state of California would have a material negative impact on our business, financial condition, operating results and prospects.

For the quarter ending December 2019:

“by November 1, 2019, CARB announced that it had received voucher requests for the entire budget allocated to the HVIP program for the current fiscal year and was no longer accepting new voucher requests until new funding for the program is identified. This announcement has negatively impacted new sales prospects for GreenPower buses in the state of California.

We believe the market underappreciates the risk that is posed by the HVIP program:

  • While the program has led to revenues for GreenPower in the past, it has made the company almost entirely dependent on the HVIP and California ecosystem
  • Given our estimate that ~3/4 of the company’s revenues are from the HVIP program and all the announced orders since January originating in California, we believe that the shrinkage of the HVIP and its increased competitiveness poses a huge risk to the company’s topline
  • This has already started to impact the company in our opinion, with YTD revenues down 41% compared to the same period last year, but we fear the worst is yet to come

Not only are the state subsidies trouble for GreenPower, we believe that the company’s R&D and product marketing are a cause for concern.

Product marketing and R&D concern us…a lot

The EV industry is still very much at a nascent stage and companies within the industry need to be constantly innovative to stay on the forefront. Some of the most adopted EV products available today, i.e Tesla products, are the product of billions in R&D and product development costs.

Over the past five fiscal years, GreenPower has spent just $2.2MM on product development – a relatively small dollar expenditure when you consider that TSLA, in 2006, before it had ANY revenue to speak of, spent $25MM on R&D:

To put this in context, TSLA, in a year when it had zero revenues and was still very much a nascent business, spent over 10x what GreenPower has spent in the last five fiscal years.

What GreenPower has spent on is “Administrative Fees”, a cumulative ~$8MM over the same period, or almost 3.6x its product development spend. In our view, we do not believe that companies that claim to be innovative yet spend minimally on said innovations are good investments.

Why spend so much on “Administrative Fees” rather than pursue innovation, as Greenpower lacks substantive IP? “We do not currently have patents and licenses, but may choose to obtain patents and licenses on our designs, processes or inventions in the future.”

Why allocate funds to “Administrative Fees” when those funds could be used to legally protect its own designs and inventions?

We wonder if this lack of spend on product development is the reason for the inconsistencies we’ve discovered in some of GreenPower’s marketing and specifications. GreenPower’s media outreach appears to present outcomes that are much higher than the specifications outlined on its website.

Instance 1: EV550’s range

  • In 2016, GreenPower delivered an EV550 bus to the Greater Victoria Harbour Authority – the article covering the delivery noted that the “Last October, GreenPower supplied the Greater Victoria Harbour Authority with North America’s first fully electric double-decker bus. It was also the company’s first delivery, an ‘EV550’ that can travel up to 300 miles on a single charge (MPC)
  • But on GreenPower’s own product site, the EV550 today is characterized by a minimum range of 175 miles

Instance 2: A wide range of seating capacity on the Synapse Shuttle

  • But when it delivered the Synapse Shuttle to a client in 2019, the vehicle capacity appears to have shrunk – “The Synapse Shuttle is a thirty-six foot purpose built all-electric bus with seating for over 40 passengers and a range of up to 150 miles on a single charge. The Synapse Shuttle can be configured with multiple charging options including Level 2 on-board charging or Level 3 DC fast charging”

Instance 3: Range estimates for the EV 350

  • In April 2018, GreenPower announced that “its EV350 40-Foot All-Electric Transit Bus has outperformed its original range expectations. The zero-emission vehicle recently traveled 205 miles with 50% SOC (state of charge) remaining battery power after the trip” (this implies a 410 mile range in our view)

These inconsistencies make us question the credibility of GreenPower’s management team – our questions only increase with the announcement that it was developing a fully autonomous vehicle.

Autonomous driving, like EVs, has been used by to excite and entice investors curious about the future of transportation. During the quarter ending March 2020, GreenPower announced that it had entered into an agreement with Perrone Robotics (“Perrone”) to build a fully autonomous EV Star for the transit market. We are very skeptical that this is anything but hype – fully autonomous driving is notoriously hard and we believe it is unrealistic that this milestone will be achieved in the near future (from Business Insider):

What GreenPower seems to propose is Level 5 automation, which is “decades away”:

GreenPower ’s partner in this effort, Perrone – did a Series A with Intel in 2016 – by the time Perrone received this funding, Google had already spent $1.1B on its autonomous driving project. In 2019, Uber raised $1B JUST for its driverless cars business. We cannot comprehend how GreenPower and Perrone will be able to compete or innovate in this market given the level of capitalization required to invest and subsequently commercialize the technology.

Recall that GreenPower, in the last five fiscal years, has spent just ~$2.2MM in product development while it has spent $8MM on “Administrative Fees”. The company does not have patents or licenses – this causes us to question the company’s autonomous driving claims and goals. How is GreenPower supposed to compete or innovate without protected IP?

We believe that GreenPower should focus on aligning its specifications with its marketing, rather than marketing optimistic cases and instead presenting “minimum” specs. To us, this is not the sign of growing, innovative company.

We believe that the people in the GreenPower ecosystem have serious credibility issues

We are big believers that the people behind a company – the executives, directors, and major shareholders – are critical to the success or failure of the company and its strategy. Their prior business performance, personal conduct, and relationships should be an indicator of the likelihood of success of their current venture, especially in light of the nascent nature of the EV space.

When we evaluated GreenPower’s key personnel, we found what can best be described as a series of red flags – collapsing stock prices, an SEC subpoena, and major shareholders with issues that made us uncomfortable.

Enter Management: Not so “Versatile” after all

In February 2003, GreenPower’s current CEO, Fraser Atkinson, after leaving his position at KPMG, was appointed CFO of a Canadian company known as Versatile Mobile Systems, which traded on the TSX Venture Exchange under the ticker VV. Notably, another Versatile AND GreenPower board member, Malcolm Clay, was also a KPMG alum. At the time, VV was “primarily engaged in software development and sales of computer software, hardware and systems integration services related to wired and wireless mobile business solutions.”

In 2008, VV appointed one Alessandro Benedetti to its board – an Italian gentleman who had, in the early 1990s, been arrested “on charges which included false accounting”, and “entered into a plea bargain with the prosecuting authorities under which he entered a guilty plea and accepted a sentence of imprisonment.”

This doesn’t seem like someone you’d want on your board, right? It seems that Mr. Benedetti has continued to court controversy, having recently been identified by the WSJ as having worked in concert with Softbank’s Rajeev Misra to strike “at two of [Rajeev’s] main rivals inside SoftBank with a dark-arts campaign of personal sabotage”.

In 2009, shortly after Benedetti’s appointment, VV started a private equity subsidiary, Mobiquity Investments Limited, on the fact that the “core strength of our Board of Directors, in particular Alessandro Benedetti and Bertrand Des Pallieres, is in banking and private equity activities.”

Come October 2009, and we find that VV has taken an 8.3% in the Equus Total Return Fund (NYSE: EQS), a Houston-based business development company (BDC) making investments in the debt and equity securities of companies with an enterprise value of between $5MM and $75MM.

By January 2010, EQS’s stock price had fallen approximately 55%, and the VV players (CEO John Hardy, CFO Fraser Atkinson, and the aforementioned Des Pallieres and Benedetti) approached EQS’s existing board asking for board representation. On April 13, 2010, EQS filed a definitive proxy with the SEC to, among other things, consider the election the VV directors.

Just 13 days later, on April 26, 2010, the SEC “subpoenaed records of the Fund in connection with certain trades in the Fund’s shares by SPQR Capital LLP, SAE Capital Ltd., Versatile Systems Inc., Mobiquity Investments Limited, and anyone associated with those entities.”

These entities were all related to one another:

  • Mobiquity was a subsidiary of Versatility

We cannot speculate as to what this was related to or amounted to, but we believe it’s fair to say that drawing the attention of the SEC is never a good sign. A letter sent to EQS shareholders on May 3, 2010, characterized the SEC matter as follows: “the Securities and Exchange Commission issued a subpoena and notice that it was conducting an investigation into possible violations of federal securities laws in connection with trading in Equus stock.”

By June 2010, the VV group had been elected to the board on their promises to change the poor governance of EQS, with Hardy winning the Executive Chairman seat and Fraser becoming the Chairman of the Audit Committee. But it seems like they did not live up to their promises, being called to task by a shareholder for:

  • “Accounting inconsistencies” – remember that Fraser was Chairman of the Audit Committee!
  • “Ridiculous” board salaries, with John Hardy earning “2% of the fund’s current market cap annually”
  • “Within 6 months they announced plans for a massively dilutive rights offering”

Sure enough, it doesn’t look like Fraser and his crew generated much value at EQS – since being appointed to the board, EQS is down 50%.Versatile itself has suffered a similar fate – by March 2016, it had accumulated a working capital deficit of CAD $3.3MM, accumulated losses of CAD $63.7MM, and “material uncertainty that may cast significant doubt as to the ability of the Company to continue operating as a going concern”.

By January 2017, Versatile received a cease trade order from the British Columbia Securities Commission for failing to file its financials, and was subsequently delisted. Shareholders were caught unaware:

From its peak in 2011 until it was delisted, Versatile fell 14c to 3c, approximately 79%:

From 2009 to 2013, Fraser was also the Chairman at Rara Terra Minerals, a Canadian mining outfit that trumpeted developments at one of its rare earth properties in November 2012: they believe that they had found “numerous geophysical anomalies on the Xeno property meritorious of geochemical followup next summer.” Barely two months later in January, Fraser resigned from the board and the Company announced a private placement.

In May 2013, Rara Terra later abandoned rare earth mining, and rebranded itself Echelon Petroleum – in 2017, Echelon became Trenchant Capital Corp (TCC CN).

More importantly, Fraser presided over an 82% plunge in Rara Terra’s stock in 2011:

We believe that Fraser Atkinson’s track record speaks for itself – he has aligned himself with seemingly questionable individuals and several listed entities which he was associated with have virtually collapsed in price. Below, we show that his association with potentially dubious individuals continues today.

The RedDiamond connection conundrum

In May 2020, GreenPower released a prospectus to outline the sale of approximately 11.5MM shares by a group of shareholders who obtained their shares through private placements. The selling shareholder table reveals that one of these holders, RedDiamond Partners LLC, was selling all of its 737k shares in the company:

In the footnotes we learn that:

  • RedDiamond’s address is 156 West Saddle River Road, Saddle River, NJ 0745
  • John DeNobile exercises control over the shares RedDiamond owned

A quick look at RedDiamond’s SEC filings shows that in 2019, RedDiamond held shares in a company called SCWorx, a “provider of data content and services related to the repair, normalization and interoperability of information for healthcare providers and big data analytics for the healthcare industry.”

Yes, that SCWorx (WORX), which was halted for three months by the SEC in April 2020:

SCWorx’s CEO pled guilty to felony tax evasion charges and the Covid-19 test supplier they used had a CEO who was a convicted rapist – huge hat tip to Hindenburg Research for a job well done on this one.

Curiously, while RedDiamond is the DeNobile entity that reported its WORX holding to the SEC, another DeNobile entity, RDW Capital LLC, actually shows up as a stockholder in a share exchange agreement:

DeNobile and his business partners, through RDW and other entities they control, have been criticized by microcap investors as providers of “toxic financing” – a form of discounted financing where the convertible note holder is allowed to convert to equity at a price below market. These shares, since they are issued below market, provide an immediate return to the holder, who can then dump them in the open market, causing the stock price to collapse.

The prior presence of RedDiamond’s shareholder list is yet another apparent indication of the types of people Fraser Atkinson associates himself with, which we believe calls into question his credibility as CEO of GreenPower.

A principal shareholder and a potential “flagrant disregard for safety provisions”

In GreenPower’s US IPO filing, we learn that another principal shareholder of the company is Gerald Conrod:

Imagine if you owned shares in an EV bus company and one of the company’s principal shareholders used to run a bus company that had operations that resulted in death? In our view, this would cause us to be highly skeptical of said EV bus company. This is exactly the situation here.

In 1979, Gerald, along with a partner, started Conmac Stage Lines, after the BC government-owned operator ended tour and charter service. On January 30, 1984, one of Conmac’s buses lost its brakes and crashed, killing two high school students and injuring more than 50 others. A BC coroner’s jury cited a “flagrant disregard for safety provisions” as the primary cause of the crash. “During the 17-day inquest, the jury heard ConMac Stages Ltd. continued to use the 20-year-old bus for high-school trips despite inspections that revealed a cracked frame, poorly anchored seats, a broken speedometer and defects in the braking system.” The jury also heard a former driver say that the “company routinely swapped parts on its buses to meet the standards of motor vehicle branch inspectors.”

Gerald has in fact been involved with Fraser since Oakmont bought Greenpower in 2013, when he held approximately 15% of Greenpower’s shares. We find it hard to imagine why a bus company would want to partner with Gerald.

To recap, GreenPower’s CEO and principal shareholders have seen SEC investigations, significant price declines in the companies they were involved in, and a delisting – we view these are major red flags in the ability of management to execute on the stated vision of the company. We believe this complicates the already precarious situation that we believe exists as a result of the declining HVIP credits.

Given all this, one might hope that GreenPower’s auditors are the adults in the room, but we believe that this is NOT the case. Our findings below, regarding GreenPower’s auditors, further compound our concerns that GreenPower presents unquantifiable risk to investors.

Is GreenPower’s auditor credible?

Crowe MacKay, GreenPower’s auditor, has had its own issues that call into question the reliability and credibility of the company’s financials. In Dec 2018, the PCAOB imposed sanctions and fined Crowe MacKay $25,000:

These sanctions related to Crowe MacKay’s audit of Canadian mining company Hunt Mining Corp.’s 2014 and 2015 financial statements, where Crowe MacKay, among other issues:

  • [F]ailed to exercise due care and professional skepticism, and failed to plan audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for the Firm’s audit report”
  • “[F]ailed to consider information in the prior year’s audit working papers obtained from a predecessor auditor”
  • Conducted Hunt’s audits under Canadian GAAS instead of PCAOB standards, which was required due to Hunt’s status as a “foreign private issuer for the purposes of United States federal securities laws”

Insanely, Crowe MacKay, a Canadian accounting firm, failed to “evaluate relevant public information” to recognize that its audit client needed to be audited under PCAOB audit standards.

In 2019, the PCAOB released the results of a 2017 inspection which found deficiencies in both the audits that PCAOB inspected:

  • For one issuer, the PCAOB found “the inappropriate issuance of an audit report without having planned and performed an audit under PCAOB standards”
  • For the other issuer, the PCAOB found a failure to “perform sufficient procedures to test the valuation of a liability”

Let’s review that first one – basically, Crowe MacKay issued an audit report without conducting the audit using PCAOB standards – some of the standards that the PCAOB referred to are as follows:

It appears that Crowe MacKay’s shortcomings in its audit practices could be a significant risk to GreenPower shareholders, compounding what we view as management’s checkered history. How can GreenPower’s shareholder believe the company’s financials when the very firm in charge of vetting those financials appears to lack the policies and processes to do so?

Conclusion & valuation

The Mariner Instant Replay on GreenPower is as follows:

  • We believe that GreenPower’s revenue growth will collapse as the business is materially exposed to California’s shrinking HVIP subsidy program
  • We believe that GreenPower lack of R&D spend calls into questions its competitiveness. We believe that GreenPower’s autonomous driving partnership is unlikely to get off the ground given the difficulty and investment requirements to achieve fully autonomous driving
  • We believe that the people in the GreenPower ecosystem have past histories that call into question their credibility, including SEC subpoenas and delistings
  • We believe that auditor Crowe MacKay’s history suggests that GreenPower has little in the way of substantial auditor oversight, calling into question the reliability of reported numbers

Let’s be generous and assume a 25% reduction to the next HVIP budget – based on this, we model that GreenPower’s revenues could fall another 25% from the $6MM calendar year run rate implied by the first two calendar quarters of 2020, resulting in forward revenues of approximately $4.5MM.

Being generous (again) and applying TSLA’s FY21 price/sales multiple of 8.1x to GreenPower’s revenues, we arrive at a price target of $2, down ~84% from the most recent close and inline with the stock price before its massive run up. Given the hype and volatility typically associated with EV stocks, we believe the path to our target could be volatile.

Mariner’s Final Word: Remember Your ABCs (Always Be Cautious)

NOTE: Aside from confirming that GreenPower holder Gerald Conrod was in fact the bus entrepreneur that owned Conmac, Greenpower did not respond to our other questions.

More than meets the AudioEye – we see ~50% downside

Portfolio Manager Summary

AudioEye (AEYE) is a software-as-a-service (SaaS) company that provides website accessibility compliance – in plain English, it claims to use machine learning/AI to ensure that clients’ websites comply with web content accessibility guidelines (WCAG), specifically as they pertain to individuals with disabilities. 

From the lows in March, AEYE’s stock is up ~585% – key highlights of the bull thesis include AEYE’s recent performance in certain financial metrics and expected potential catalysts for the stock – for both 1Q and 2Q 2020 the company beat analyst revenue and EBITDA expectations. The company’s monthly recurring revenue (MRR) also increased 104% in Q1 and 105% in Q2 compared to the same period last year. Since the end of 2019, the company’s customer count has gone from 6,800 customers to over 20,000.  B. Riley recently upgraded its price target to $25 from $21 citing what has been a common theme among retail investors which is: “the pandemic-driven shift toward digital channels that could serve as a medium-term tailwind for web accessibility adoption”.

While these factors have pushed the stock price up, we believe, at its core, the business remains unchanged.  To capitalize on such momentum and be successful, a company needs good management, strong investment in innovation, a strong product and various other factors. In this article we delve into what we believe are serious issues with AudioEye, and why we think it lacks in all these areas, posing a great risk to shareholders.

AEYE has the following:

  • Founding team has experience starting businesses that seemingly go nowhere. Many of these businesses have engaged in related party deals and have been alleged pump and dumps, one of which was halted by the SEC and down 82%
  • Founder Nathaniel Bradley’s latest venture is Parallax (OTC: PRLX) which was recently halted by the SEC because of the accuracy of the claims made by the company regarding its COVID-19 test
  • At one point, “Pharma Bro” Martin Shkreli was a significant shareholder in AEYE. The connection to Shkreli continues to this day, as the current CEO was previously involved with Shkreli’s effort to revive KaloBios 
  • We believe AEYE already has weak governance – but further questions are raised when we investigate the background of another board member who sat on the board of another company with big promises that ended in bankruptcy  
  • The product category has been looked upon skeptically as automated accessibility remediation might not be the best solution 
  • For a company that claims to be innovative within their field, AEYE has spent minimally on R&D. Their R&D spend as a percent of revenue is well below the SaaS company median and nominally does not justify its valuation or claims of valuable IP 
  • Our research suggests that AudioEye’s financials should be looked at with the highest amount of skepticism. Their auditor appears to have a pattern of serious PCAOB deficiencies and was charged by the SEC for improper professional conduct
  • The company has amended and reclassified historical financials (and at one point restated 97% of its revenue) likely enabled or caused by material weaknesses in internal controls 

Because of these considerations, we believe that AEYE’s prospects are no better than they were before the stock started running in April, and assign an $8 price target to the stock, down ~50% from the last close.

Founders’ unusual entrepreneurial histories

AudioEye was allegedly founded in 2005 as “an R&D company” by a group including the company’s current SVP of Customer Advocacy and former President, Sean Bradley. Sean and his brother, Nathaniel (the former AEYE CEO through 2015), are prolific entrepreneurs, having started or run several entities alongside James Crawford and David IdeKino Digital, Kino Communications, Kino Interactive, Modavox, Augme, and Hipcricket.

Rather than run these companies privately, it appears that Nathaniel Bradley and his crew enjoyed listing them on the OTC markets – both Modavox and Augme were pink sheet companies, as is his current venture, Parallax (OTC: PRLX).

Curiously, the Kino/Modavox/Augme ecosystem not only had this group of people in common, but it also culminated in series of related party acquisitions, as helpfully explained by James Crawford:

So Modavox bought Kino and Augme, and Augme purchased Hipcricket in 2011 for an eye popping $45MM, and rebranded the entire company Hipcricket. Unfortunately for all parties involved, Hipcricket filed for bankruptcy in 2015, and its assets were acquired by SITO Mobile for just $5MM, just over 10% of what Augme paid back in 2011.  

Perhaps it is reasonable to say that the Bradley brothers are better at starting companies than running them, and we view Sean in a leadership seat at AEYE as a significant red flag.

If that weren’t enough, the SEC recently halted trading of Nathaniel Bradley’s Parallax Health Sciences, “because of questions regarding the accuracy and adequacy of information in the marketplace. Those questions relate to statements Parallax made about its purported development of a rapid screening test for COVID-19 and its purported access to large quantities of COVID-19 diagnostic testing kits and  personal protective equipment” Since the beginning of 2019, Parallax’s stock is down 82% – not a rousing endorsement for companies in Bradley’s world. 

One of AEYE’s other founders, David Ide, is worth a deeper look – in addition to founding AEYE, Ide claims to have founded Spindle Mobile, Spindle, Inc and sits on the board of SEFE and GlyEco:

  • In 2012, SEFE spiked from approximately 80c to $2.20, before utterly collapsing 98% to close the year at just 5c
  • Between September 2013 and March 2014, Spindle Inc. rallied approximately 368%, only to collapse 93% to just 24c by September 2014 – the stock was recently halted at $0.003
  • GlyEco appears to have suffered the same fate as SEFE and Spindle – it has gone from mid-teens in 2017 to just 3c today

Now if this has you thinking, “are these pump and dumps?” – maybe you’re on to something. We’ve seen several posts critical of SEFE and the people involved, Ide included, but this Seeking Alpha comment really caught our eye:

While we readily admit that neither Nathaniel Bradley and David Ide are involved in AEYE today, their troubling past activities cause us to cast a skeptical eye on anything AEYE does.  And that is just the beginning of this story.  Later we’ll dig into the auditor, product and investment in the company’s future.

A troubled ‘Toosie Slide’: we believe that repeated reshuffling at the executive level is concerning

In April 2015, Nathaniel Bradley resigned as CEO and President of AEYE, coinciding with the company’s announcement that it needed to restate certain financials (more on that later).  His brother, Sean, was moved to the President role, and Nathaniel was inexplicably kept on as Chief Innovation Officer and Treasurer.  James Crawford also resigned as COO and Treasurer.

In November that year, Todd Bankofier was named CEO, remaining there until he was apparently demoted to Chief Revenue Officer in September 2019, when executive chairman Carr Bettis stepped in as interim CEO.  Then, in January 2020, what we would assume to be an unhappy Bankofier notified the company of his resignation.

Just two short months later, AEYE announced the appointment of Heath Thompson as CEO, with Bettis quoted: “Heath has a decorated past in leading technology and specifically SaaS business model transformations.  In Heath, we found a leader who possesses the skills that we were looking for to execute on AudioEye’s long-term growth plans.  We are looking forward to leveraging Heath’s track record and unique skill set to take advantage of the rapidly growing market opportunity for our products and technology.”

And then, barely five months later, we learn that Heath Thompson has moved away from the CEO role into a “strategic advisor” positionDoes this mean Heath is even employed at AEYE? What could he have experienced that would make him step down as CEO in such short order? 

A “Pharma Bro” Shkreli associate takes over as CEO

Upon Heath Thompson’s departure, David Moradi, who joined the board in 2019, took over as CEO.  Moradi is the Founder and Manager of Sero Capital, LLC, a Miami Beach-based entity that owns approximately 28% of AEYE.  Moradi, like the Bradley brothers before him, has an “interesting” background.  

In November 2015, “Pharma Bro” Martin Shkreli and other investors took a majority stake in OTC-listed KaloBios, a CA-based biopharmaceutical company, in an effort to revive the company’s leukemia drug.  The other investors here included one David Moradi, who was elected to the board of KaloBios.  KaloBios eventually filed for bankruptcy in December 2015 and terminated Shkreli as its CEO when he was arrested, and has since been restructured as Humanigen (OTC: HGEN).

Moradi and Shkreli do appear to work together in more ways than one, since Shkreli himself owned 7.7% of AEYE at the end of 2016:

On top of being connected through Moradi, one of the Directors who resigned very recently was also involved in KaloBios.  Alexandre Zyngier (LinkedIn), lists himself as the Founder of Batuta Capital Advisors. This same firm is named in a bankruptcy document as the financial advisor to KaloBios. He served on the board of Audio Eye from October 2015 to July 2020.

We view these relationships as significant red flags, as Martin Shkreli was convicted of securities fraud charges in 2017.  

And if this were not enough, AEYE has Marc Lehmann on its board – for those of you not familiar with Marc, he has a sterling resume with degrees from NYU and Wharton, and stints at Appaloosa, SAC, and JANA Partners.  

This would be well and good for AEYE, but unfortunately Marc was also a director at Green Growth Brands (GGB), a Canadian cannabis company.  GGB was critically evaluated as a hostile suitor for Aphria by Hindenburg Research, who characterized GGB as follows:

Hindenburg’s commentary was prescient, as GGB filed for bankruptcy protection in May 2020, after it faced a “severe liquidity crisis”.  We tip our hat to Hindenburg Research for their work here.

We would question the judgment and intentions of anyone who would sit on a board of a company like GGB, and view Marc’s presence on the AEYE as a red flag.  

This, combined with Moradi and Zyngier’s apparent Shkreli affiliation, Heath Thompson’s surprisingly short tenure, and the Bradley brothers’ track record, causes us to question management’s claims and credibility.  These are by no means dispositive of untoward activity, but we view them as significant red flags and risks to shareholders.

We believe the questionable business practices of management have planted their seeds within the company. A pattern of product and technology reshuffles combined with negative industry commentary about the product category suggests that investors may be expecting too much from too little. 

AEYE’s evolving product suite

AEYE, despite being incorporated in Delaware in 2005, actually goes back a bit further – it was started in 2001 as a product which allowed “site owners convert any text-based web site into an intuitive, mirrored audio format” so that users could “navigate the internet solely by listening to Streaming Audio prompts and performing simple keystroke commands from any internet-enabled device”.

By 2005, AEYE was marketing itself as a social entrepreneurship venture:

“The development of AudioEye reflects our core values of social entrepreneurship. The company was founded as a private market solution to an important public policy problem. Many learning-disabled, visually impaired, elderly, young children, non-English speakers, and sighted individuals are faced with a low quality Internet experience. It is improving everyday, but we believe AudioEye can open many doors for those left behind by the first Internet revolution”

By 2011, AEYE had decided it had been founded in 2003 and billed itself as a developer of “Internet content publication and distribution software that enables conversion of any media into accessible formats and allows for real time distribution to end users on any Internet connected device”, adding several new products to its existing audio platform:

  • An emergency alert system that claimed to deploy instant alerts to a community of subscribers
  • “E-Learning” systems “accessibility at the forefront”
  • The IF Factory – “Internet Factum (Factum: do everything) offers a specific accessible product line including internet pay-per-view, mobile, enterprise broadcasting, accounting venue and event based technology products”

By 2013, AEYE had added new lines of business – licensing and patent enforcement:

None of these alterations and products seems to create a sustainable revenue stream, with revenues peaking in 2013 and falling 78% to a nadir of $339k in 2015:

Then, after spending an average of just $443k per year in R&D in 2014, 2015, and 2016, we have essentially what AEYE pitches as its product set today – an “always-on, proprietary machine-learning/AI-driven technology automatically identifying and resolving the most common WCAG accessibility errors (approximately 35-percent) coupled with AudioEye’s team of digital accessibility subject matter experts monitoring, manually testing and resolving the remaining errors.”

But, according to our research, it doesn’t seem like website accessibility software packages are as easy to deploy or as effective as the players in the industry would like you to believe. 

The first product review that shows up on Google for AEYE is from Kris Rivenburgh, the Chief Legal Officer and Chief Accessibility officer of Essential Accessibility and an expert on website accessibility compliance, who reviewed AEYE’s products and came to following conclusions:

“AI hasn’t come very far with accessibility”

The best automated scans only flag ¼ of accessibility issues (AEYE claims 35%!)

What Kris implies is that true website compliance only happens with manual reviews and testing of the code, as confirmed by his conversation with an AEYE salesperson:

The second review, from, ranks AEYE at the top of their product reviews with a score of 4.7 out of 5, with an overwhelmingly positive assessment:

Even this review, however, cites the difficultly of automated compliance: provides links to receive quotes from the accessibility providers that it reviews, and in its fine print discloses that it may receive compensation through affiliate program for the products reviews on its site:

Searches on Reddit found conclusions similar to Rivenburgh’s:

A Reddit thread titled “Questions for AudioEye buyers and users” asks about the reasons behind using AEYE as well as perceived user experience:

Some of the responses are insightful as to the difficulty successfully achieving website compliance as well as the decision to market the products as mitigating legal risk vs actually helping disabled users:

100% compliance is only achieved by changing code

Why do people sign up for WCAG compliance?

Significant skepticism from a reviewer

“Technical individuals in all sectors that understand that these solutions are nonsense”

“We’re simply not there yet”

Another thread, about competitor AccessiBe, has similar commentary about the product category:

“…I found their claims to be ridiculous. The same is true for AudioEye, UsableNet, and more.”

A June 2020 piece critical of AccessiBe’s product goes further, saying:

R&D spend appears to lag industry median, nominal spend doesn’t appear to get it done

For a company that claims its roots as an “an R&D company”, AEYE appears to spend much less on R&D than the average SaaS company.  A 2018 review of public SaaS company R&D spend by Sammy Abdullah of Blossom Street Ventures found that “SaaS companies spent on median 23% of revenue on R&D”, with “the 10 smallest companies by revenue spent 41% of revenue on R&D”.  

AEYE, on the other hand, has spent just $3MM in R&D from 2011 to 2Q20 on $32.5MM in revenue, or just 9.4%.  While R&D as a % of revenue exceeded 100% in 2014 and 2015, from 2017 onwards it has averaged just 5.7%:

Curiously, what AEYE does spends on is G&A – since 2017, AEYE has spent 81% of its revenues on G&A:

To put this in context, a study of SaaS operating expenses shows that the average SaaS company (the 50th percentile) with AEYE’s approximate revenues, spends a little less than 20% of its revenues on G&A:

Where is all this G&A going? Well, a quick look at the proxies and 10-Ks shows that the named executives, including board chairs, have received total compensation equal to 48% of AEYE’s revenues from 2012 to 2019Sean Bradley, the only remaining member of the founding team left at AEYE, has emerged the winner – from 2012-2019, Sean received $2.2MM in total compensation, or an eye-popping 9.8% of AEYE’s revenues during the same period.

This rather stark difference between AEYE’s R&D and G&A spend as a percentage of revenue compared to SaaS peers is troubling, in our opinion, as it suggests that management has been and continues to enrich itself at the expense of developing cutting-edge products.

From this, Mariner gathers that:

  • Accessibility compliance is hard to achieve with an automated solution
  • Current providers of the solutions are focused on mitigating legal risk rather than enhancing usability
  • These providers are likely overstating their claims and value add, given the difficulties outlined above

Despite these product and category concerns, AEYE has seen its operating metrics and revenue improve.  In the next section, we raise issues that should cause investors to stop and question AEYE’s impressive results – we found an alarming and material restatement, weak internal controls, and a questionable auditor. 

Is AEYE’s 2015 restatement the tip of the iceberg?

In 2015, AEYE announced a restatement for:

“…its quarters ended March 31, June 30 and September 30, 2014.  The Audit Committee also authorized an internal review of controls and policies.  Accordingly, investors should no longer rely upon the Company’s previously released financial statements or other financial data for these periods, including any interim period financial statements, and any earnings releases relating to these periods.  In addition, investors should no longer rely on the preliminary earnings release issued by the Company on January 12, 2015 relating to the quarter and year ended December 31, 2014.

Based on the review to date, the Company anticipates removing all revenue derived from non-cash exchanges of a license of the Company for the license of the Company’s customer and all revenue from non-cash exchanges of a license of the Company for services of the Company’s customer, and reducing by a material amount previously reported license cash revenue.  The aggregate amount of revenue reported for the first nine months of 2014 for non-cash transactions was approximately $8,100,000.  The reversal of revenue on the non-cash exchange transactions will also impact additional accounts including reductions in Prepaid Assets, Intangible Assets and Amortization Expense. The Company also expects that certain expenses will be reclassified.  Additional adjustments may be identified pursuant to the ongoing review and analysis.  The Company has also begun a review of calendar year 2013 activity to determine whether there are any adjustment that may impact previously issued financial statements.  There are no known adjustments to 2013 financials at this time.  The cash balance is not impacted by these changes.”

One would think that after such a major restatement – the restatement reduced $8.8MM in revenues reported for the first 9 months of 2014 by 97% – that AEYE would fire its auditors, MaloneBailey. But it didn’t, and MaloneBailey continues as AEYE’s auditor – and, we believe, that this is a red flag which may cast doubt on AEYE’s financials.  If MaloneBailey can’t get revenue right – quite literally the top of the P&L and the driver of the business – why was it allowed to remain as the company’s auditor? Worse yet, does their continued presence mean that this previous level of inattention persist today? We are befuddled. 

We believe AEYE’s auditor lacks credibility and presents meaningful risk to investors

MaloneBailey, it turns out, seems to have a pattern of audit issues – from 2009 to 2017, the PCAOB inspected a total of 97 of MaloneBailey’s audits, and found 33 audits with deficiencies, 34% of the sample.  We present findings from the last four inspections below – we believe that this commentary shows a pattern of simply accepting whatever company management teams present MaloneBailey as their financials:

Sources: 2017, 2016, 2015, 2014 PCAOB inspections

The 2014 inspection commentary is particularly striking:

It should perhaps come as no surprise that the SEC charged MaloneBailey’s and one of its audit partners with improper professional conduct in connection with its audit of Left Behind Games. Just the year before, the audit client referred to in the charges, Left Behind Games, had its executive Ronald Zaucha fined $2.6M by the SEC and was permanently banned from trading stocks. The charges imply that Zaucha and Lydon altered language proposed by MaloneBailey.

This is made worse by the fact that AEYE continues to have a material weakness in internal controls over financial reporting:

Changes to historical accounts

We believe that AEYE’s combination of a material weakness in internal controls over financial reporting and its auditor’s numerous negative regulatory comments and SEC charges should not inspire confidence in investors.  In fact, we found changes their most recent quarterly results that should be cause for concern – it appears that AEYE’s management has reallocated costs (“reclassified” and “amended the categorization of”, in their words) in its historical financials in a manner that could make them look “better” in the eyes of investors.  

In both the June 2020 and March 2020 10-Qs, the prior period (June 2019 and March 2019) quarterly income statements have had costs reallocated:

While there has been no change in operating income:

  • It appears that costs of revenue were shifted (and moved from opex) from June 2019 to March 2019, making the sequential gross margin transition from March to June go up 30bps versus going down 160bps, creating a more stable gross margin trend
  • Operating expenses also changed, with dollars being reallocated from G&A to sales & marketing – this, in our view, also “dresses up” the financials – investors are much more likely to look favorably on a business that is spending more on sales & marketing than G&A

Deferred revenue growth is nonexistent in 2020

In the face of improving metrics and revenue growth, one would expect to see growth in key SaaS metrics.  Typically, for SaaS businesses, growing deferred revenues and bookings are a sign of continued customer adoption and future revenue growth, which is why SaaS businesses command high valuation multiples.  After a large one-time customer win in 2Q19, which was reflected in AEYE’s bookings (and the reason why 2Q20 bookings were down 41%), bookings have steadily fallen, and deferred revenue is down 5% from YE19:

Contrast this to MSFT, for example, which is a giant company whose growth should be constrained by its size – MSFT’s June deferred revenue balance is up 26% in the first six months of 2020. One would think a smaller, more nimble company like AEYE in an allegedly attractive space would be able to beat that.

The Mariner Instant Replay:

  • AEYE has previously had to restate its financials due to issues related to revenue recognition 
  • AEYE’s auditors, MaloneBailey, displays a pattern of failing to obtain sufficient evidence for its audit opinions and has been charged by the SEC
  • AEYE currently has a material weakness in its internal controls over financial reporting
  • AEYE has recast its historical expenses
  • AEYE’s stalled out deferred revenues may be a signal that growth is not as sustainable as reported

All this begs the questions: 

  • Can shareholders really trust AEYE financial statements or auditors after such material restatements and questionable activity in its accounting practices? 
  • If the company’s financial metrics improve over the next few quarters, is such an improvement believable? In our opinion, AEYE’s accounting practices and auditors create an unquantifiable risk for shareholders

Even if we were to believe the company can fix its management and accounting slip-ups, the company’s core product is at best uncompetitive, in our view.  

  • Finally, can shareholders trust management (and a board) with questionable histories who decide to double down on auditors who can’t catch basic restatements?
  • If they keep them around, are they hiding something we are missing?

Conclusion & valuation: reasons to steer clear

Given our concerns about management credibility, a seemingly undecided product strategy, low relative R&D spend, what appears to be a weak, if not captured, auditor, a material weakness in internal controls, and historical accounting changes, we believe AEYE presents significant risks to investors.

We believe that the stock’s ~585% move from March to now is largely unjustified, and has to with investor perception about AEYE’s growth.  

After scoring a large one-time deal in 2Q19 that grew bookings 140% year over year, bookings in 2Q20 have normalized down 41% to approximately $4.3MM a year.  This places the company at a bookings run rate of just 25% above where it was running in 1Q19, making the 38% revenue growth estimates for 2021 likely unattainable. 

We believe that, assuming the numbers reported by the company are true, that this performance does not justify an 8.6x FY20 price/sales multiple.  MSFT, by contrast, trades at 10.2x FY20 sales. We think that AEYE, given our management concerns and stalling deferred revenue growth should trade at no more than 4x forward sales of $20MM, implying a price target of $8.24, down approximately 50% from the last close.

Mariner’s Final Word: Remember Your ABCs (Always Be Cautious)

Don’t get charged up on BLNK – questionable origin story, management history and product issues portend potential 90%+ downside

PM Summary – 90% downside in the BLNK of an eye

  • Blink Charging (BLNK) is an owner and operator of electric vehicle charging infrastructure whose stock has appreciated 505% since June on TSLA’s meteoric rise, increased Robinhood attention and potential that we will show is likely unrealistic
  • BLNK’s origins trace back to a 2009 reverse merger with ties to Barry Honig whom settled with the SEC for $27MM for “classic pump-and-dump schemes”. In addition to the potential Honig connection, CEO Michael Farkas’s ties to other alleged pump and dump artists and SEC charges of its 2nd largest shareholder lead us to believe that the people behind BLNK could present serious risks
  • BLNK’s core assets come from the 2013 asset acquisition of bankrupt EV charging company ECOtality – it has no technological IP; as such, BLNK’s revenue growth has significantly seriously lagged the EV industry –  yet CEO Farkas made >$7m in compensation during this period
  • We believe that this is due to persistent issues around product quality, customer churn, and user experience, and believe that these issues will continue to hamper BLNK’s growth
  • We believe BLNK’s management team and underlying products do not justify its 46x FY20 revenue, and assign a ~$1 base case price target to the stock, down 91% from here

Executive Summary – BLNK’s origins as a reverse merger in the orbit of SEC-charged pump-and-dumpers combined with its acquisition of inferior assets out of bankruptcy are a significant risk to investors 

Blink Charging (BLNK) is an owner and operator of electric vehicle (EV) charging equipment and networked EV charging services proclaiming to capitalize on the ever-growing EV industry.  However, this report aims to prove otherwise and bring question into the people and underlying business.  BLNK’s performance in the EV market has been tepid and is obscured by consistent promotion and retail mania over the EV space. 

BLNK began as Car Charging Group, a 2009 reverse merger starring SEC-charged Barry Honig (more on him later) that in 2013 acquired the Blink assets from ECOtality, a charging station business that went bankrupt despite being the beneficiary of over $100MM in government grants.   That same year, BLNK also acquired Beam LLC and 350Green, both subscale companies where the CEO of the latter company was charged with fraudulently obtaining federal grants.  We believe that the management team and underlying asset base are a significant cause for concern.

To begin with, CEO Michael Farkas appears to step in as a controlling shareholder when Honig and company sold out of the stock in the 2010-2011 timeframe as it skyrocketed up and subsequently collapsed.  Farkas was previously the principal shareholder of an entity whose executives were charged with a pump-and-dump scheme, and whose assets were caught smuggling cocaine.  Despite this questionable background, he collected over $7MM in compensation from Blink through 2015-2019 for near no growth, which has broadly lagged the broader EV space.  Management concerns extend to the fact that the company is on its third CFO since 2015, and it has disclosed a material weakness in internal controls over financing reporting.  It seems like this lack of oversight and controls could allow an unscrupulous management team to present dubious figured or pay itself excessive compensation (which they did, over $27m of compensation since inception). 

For a “technology” company, BLNK doesn’t even have a P&L line item for R&D spend, and has what appears to be minimal technology related IP – it has just 4 active US patents, all of which came from the ECOtality deal.  The patents (USD626063S1, USD674334S1, USD626065S1, USD626064S1) solely pertain to the visual design of their stations, not the underlying technology (note to reader: unless you are Apple and we’re talking about the iPhone design, visual design patents don’t have much value).  This stands in stark contrast to competitor ChargePoint, who has about 59 patents assigned, several of which are related to their technology.  User reviews of the chargers suggest poor maintenance, low functionality, and high fees – a major hindrance when TSLA, has a network of free (in some cases) rapid chargers for its fleet of cars, which lead EV sales in the US.  Our proprietary research shows that charger counts have FALLEN at two key customers since the ECOtality deal, making us question the level of effort BLNK’s management has taken to grow the business.  Not to mention at least one client BLNK claims that doesn’t appear to have BLNK chargers…

All this makes us question the ability of this business to be competitive and causes us to question the legitimacy of the price move from approximately $2 to over $10 over two months.  Combined with revenue growth well behind that of the EV industry and the proximity of alleged pump and dump artists to the company lead us to believe that the stock is unsupported by fundamentals and the price move is entirely unjustified.  We assign a price target of approximately $1 to BLNK, representing downside of 91%, and caution shareholders against chasing this stock.

Company ties to alleged pump and dumpers starring the infamous Barry Honig

BLNK has its origins in Car Charging Group (CGGI), which itself is the product of a 2009 reverse merger with a Nevada shell known as New Image Concepts. In its 2009 10-K ownership table, we find that 33% of the company is owned by none other than Barry Honig (yes, that Barry Honig), his son Jonathan Honig, and father-in-law Herb Hersey:

Recently, and unrelated to BLNK, the SEC alleged that Barry Honig and other codefendants, “amassed a controlling interest in the issuer, concealed their control, drove up the price and trading volume of the stock through manipulative trading and/or paid promotional activity, and then dumped their shares into the artificially inflated market on unsuspecting retail investors…Across all three schemes, Honig was the primary strategist, calling upon other Defendants to, among other things, acquire or sell stock, arrange for the issuance of shares, negotiate transactions, and/or engage in promotional activity.”

Barry has a certain way with companies, and that way is usually down a lot, by near 90%:

In fact, in the 2009 filing, we learn that CGGI hit a low of just $0.002 that year, climbing to $1.01, thereafter rocketing to $75 sometime in 2010, only to collapse to $1.00 low in 2011 – a 97% drop in split-adjusted price from $2250 on 12/31/09 to $68 at 12/31/11:

Not only was the origin of the company related to a pump and dump artist, current management also has ties to similarly accused individuals.

CEO Michael Farkas’s ties to alleged pump and dumpers and penny stock dealers

In 2011, and unsurprisingly in the context of the Honig SEC complaint, we see that Honig and his associates disappear from CGGI’s ownership:

Two new names emerge, Ze’evi Group and Michael Farkas – Farkas, it turns out, “has served as our Chief Executive Officer and as a member of our board of directors since 2009” (but is not shown as a beneficial owner and not mentioned once in the 2009 10-K, which cites Belen Flores as CEO).  In fact, Farkas appears to have been named CEO in an April 30, 2010 filingIf BLNK’s own filings can’t accurately represent when Farkas became CEO, should they be relied upon for other information?

But the story gets stranger – in the 2013 10-K, we learn that Farkas in fact, controlled Ze’evi Group, controlling just over 44% of CGGI in at the end of 2013Corporate records show that Farkas was actually an officer of Ze’evi Group going back to 2009, which would imply that he controlled approximately 60% of CGGI once Honig and co blew out of the name.  We can only speculate as to what relationship Farkas has or had with Honig, but we can say that based on the stock performance of other Honig names, stepping into a post-Honig situation could lead to tears.

Farkas appears to have hidden his initial control over the entity as its stock price cratered in 2011, which makes us wonder what role, if any, he had in helping the Honig crew exit their holdings.

Why is this important now?  Farkas, as we will show later, as current CEO since 2018 and prior CEO from 2010 to 2015, has presided over growth far behind that of BLNK’s industry and made acquisitions which appear to have created little, if no, value for BLNK shareholders.  But before that, we show that Farkas has been in proximity of some questionable, if not outright illegal, activities.

In 2009, the SEC accused Brent Kovar and Glenn Kovar, among others, principals in a company known as Sky Way Global, LLC, of defrauding investors through multiple so-called ‘pump-and-dump’ schemes”, “timing stock sales from at least 2002 until 2005 to news releases that claimed President George W. Bush and others had endorsed company technology that would protect airplanes from terrorism.  In 2003, Sky Way Global itself was merged into a public shell to become known as SkyWay Communications Holding Corp.  Michael Farkas, it turns out, was characterized as SkyWay’s “principal shareholder”, owning almost 10% of the company:

And if the Kovar pump-and-dump was not enough, Skyway was involved with potential drug trafficking:

“In 2006 an airplane Skyway said it had acquired in exchange for stock was caught in Mexico with 5 1/2 tons of cocaine on board.

In an email Friday, Farkas said, “Skyway was thoroughly investigated by several government agencies although there were indictments given to others, I was never accused or charged with any wrong doing.”

We are certainly not alleging that Farkas had anything to do with smuggling cocaine, but the actions of a company that he was principal shareholder of dictate the level of skepticism with which investors should view his ventures.

Farkas reminds us of Pigpen from Peanuts, with a cloud of “something” just following him around – BLNK’s second largest shareholder Justin Keener (9.9% ownership), was recently charged by the SEC for “failing to register as a securities dealer with the SEC. Keener allegedly bought and sold billions of newly issued shares of penny stock, generating millions of dollars in profits.”

Management quality can present risk to investors

To recap, BLNK and Farkas have been in some proximity to:

  • Barry Honig, who was accused of and settled pump-and-dump charges
  • Brent Kovar and Glenn Kovar, who were accused of “defrauding investors through multiple so-called ‘pump-and-dump’ schemes” – Farkas was involved as a key investor in the entity
  • Justin Keener, BLNK’s #2 shareholder, who was charged by the SEC for being an “Unregistered Penny Stock Dealer” 

And let’s not forget Balance Labs (not to be confused with BLNK), which Farkas owns 88% of, has collapsed from over $3 in 2016 to just $0.75 at the end of 2019 (it barely trades now, calling into question whether it has any value):

With so many EV companies out there, why invest in a company with questionable individuals with less than stellar track records? We continue to dive deeper in the story and find even more issues internally with the company…particularly with governance and management turnover.

Executive turnover and a material weakness leaves investors exposed

It should perhaps come as no surprise that over the last four years, BLNK has gone through 3 principal financial officers/chief financial officers and has seen several board members resign, including Kevin Evans, who resigned under the following circumstances: “To the knowledge of the Company’s executives and Board members, Mr. Evans resigned due to a failure to find common ground with the Executive Chairman [Michael Farkas]

And if all this were not sufficiently concerning, BLNK has a material weakness in its internal controls over financial reporting, specifically “related to lack of (i) formalized controls and procedures required to ensure that information necessary to properly record transactions is adequately communicated on a timely basis from non-financial personnel to those responsible for financial reporting, (ii) segregation of duties in our accounting function, and (iii) monitoring of our internal controls.”

This, to us, suggests that not only do the players in the BLNK ecosystem present outsized risk to investors, but the ability of the company to accurately report its performance is insufficient to offset the risk of potentially risky conduct by those same players. 

We believe that on this basis alone, BLNK presents significant downside risk to investors at these levels. In addition to the concerning origin of the company, we find that the current business has been struggling dramatically as well and yet management continues to receive hefty compensation.

Little growth in a growth industry, while Michael Farkas makes millions

In its 10-K, BLNK characterizes itself as a “leading owner, operator, and provider of electric vehicle (“EV”) charging equipment and networked EV charging services.” We question the basis of this claim. 

To begin with, BLNK appears to significantly lag its competitors in market share – for Level 2 EVSE stations (commercial chargers), BLNK’s market share is just 8% compared to competitors: ChargePoint’s 37%, TSLA’s 13%, and just 4% in DC Fast Chargers:

This market share differential appears to reflect BLNK’s inability to keep up with the growth of the overall EV and EV charging markets. According to the IEA, electric vehicle and charging station growth since 2014 has greatly exceeded BLNK’s revenue growth – BLNK’s revenues from 2014 to 2018 were down 3.8%, while the total of public and private chargers grew 277% in the same period:

In fact, the number of BLNK charging stations have barely grown over the last two years, going from 14,165 at May 2018 to 15,151 at June 2020, a growth of just 6.9% – BLNK actually LOST about 135 charges in 1Q20 (and note the 269 drop in the charger count over 6 days in 2019):

In the context of its most recent results, BLNK’s TTM 2Q20 revenues of $4.34MM is just 10% greater than its 2015 revenues of $3.96MM. Despite this growth, operating income has remained persistently negative at -$11.8MM:

For this performance, CEO Michael Farkas has made approximately $15MM since 2009, and in the period from 2015 to 2019, he has made close to $7.2MM.

Source: BLNK 10-Ks

In 2018 alone, Farkas made 17.9x and 21.7x what BLNK’s CFO and COO, made, respectively:

In light of this misaligned compensation versus company growth dynamic, we sought to understand the reason why BLNK’s growth lagged its industry.  We believe that this is due to acquisition of subscale assets from failing companies whose management teams either couldn’t successfully execute or simply attempted to defraud the government.

BLNK’s underperformance is rooted in acquisitions of sub-scale and bankrupt competitors 

The question remains – why is BLNK’s growth underperforming its industry? 
In 2013, BLNK embarked on an acquisition spree of four companies – Beam LLC, Synapse/EV Pass LLC, 350Green LLC, and ECOtality’s Blink assets – the Beam and Synapse deals were small, we believe, with Beam ($2.1MM in consideration) having just 40 chargers and Synapse ($892k in consideration) just 68. 350Green, at $1.2MM in consideration, came with its own management baggage:

It would follow that the substance of 350Green’s business may not have been very significant, if at all existent.

BLNK’s core assets come from the purchase of assets from bankrupt ECOtality

We believe that the answer to BLNK’s underperformance lies in the 2013 ECOtality acquisition that turned CGGI into Blink.  In 2013, CGGI acquired ECOtality’s Blink-related assets (and subsequently changed its name in 2017) out of bankruptcy, picking up more than 12,450 Level 2 commercial charging stations, 110 fast-charging stations, and a network supporting them.

By that time, ECOtality had received over $100MM in Department of Energy grants, but its SEC filings suggested serious underlying business issues, the most critical being a “failure to attain sales volumes of its commercial Electric Vehicle Service Equipment (“EVSE”) sufficient to support the Company’s operations in the second half of 2013.”:

This lack of sales is likely tied to bad user experiences and low user reliability ratings dating back to 2013 related to the Blink brand:

Our research on Blink today suggests that these issues persist and are the most likely driver of BLNK’s lagging results – users complain about broken chargers, long charge times, and high fees:

Slow charging complaints

Reliability and functionality issues

Stations in terrible shape?

Expensive and poorly maintained

The complaints and poor reviews are not limited to Reddit, however – people have reviewed individual stations in a similar manner:

A San Diego station reviewed on Yelp

Plugshare reviews on a Walgreens station in Elk Grove, IL

Plugshare review at Whole Foods

Even the BLNK app has bad reviews on the Google Play App store, with barely 2.5 stars

One of the biggest headwinds to BLNK’s growth is related to TSLA – in 2019, TSLA accounted for 78% of all US EV sales, making it the #1 seller of EVs domestically.  TSLA drivers can access one of its 16,103 Supercharger fast charging stations and one of 23,963 regular TSLA chargers to charge their vehicles (both free to use for certain drivers).  Said another way, the leading vendor of EVs already has a charging infrastructure tailor-made for its cars, significantly lowering the likelihood that TSLA drivers would choose a BLNK charger over a TSLA one.

The case of the missing chargers

We spent quite a bit of time scouring BLNK’s charger map and its client highlights (in BLNK’s investor deck) to understand its infrastructure.  What we found suggests that little effort has been made to grow the business.  In using the charger map to count chargers at BLNK’s “select clients” (pasted below), we found several interesting data points that suggest BLNK has not expanded its network beyond what it acquired from ECOtality:

  • Kroger – according to the charger map, BLNK has 52 chargers at Kroger locations.  In this article, we learn that back in 2013, Kroger was planning to invest $1.5MM to expand its charger base from 74 to 225 through its partnership with ECOtality.  Even though ECOtality went bankrupt in the same year, BLNK doesn’t appear to have pursued the partnership, and even saw total Kroger chargers fall from 74 to 52, a 30% reduction
  • Fred Meyer – according to the charger map, BLNK has 63 chargers at Fred Meyer locations.  Here, we learn that by 2015, Fred Meyer had installed 68 chargers across 33 stores.  Even though the article quotes a Fred Meyer spokesperson saying it plans on adding another 18 chargers, we wonder if this ever happened – it is 2020, five years later, and the charger count at Fred Meyer locations has FALLEN from 68 to 63, about 7%.   

This makes us wonder why BLNK management didn’t capitalize on these opportunities that it inherited from the ECOtality deal.  But we found something even more unusual at St. Joseph, a healthcare organization based in California which BLNK claims as a client:

St. Joseph has just two hospital locations, one on Dolbeer Street in Eureka, CA 95501, and another on Renner Drive in Fortuna, CA 95540 – but neither location has a BLNK charger, according to BLNK’s own site:

Plugshare actually just shows competitor ChargePoint’s stations at the Eureka and Fortuna locations:

The Redwood Coast Energy Authority, which “is a local government Joint Powers Agency whose members include the County of Humboldt; the Cities of Arcata, Blue Lake, Eureka, Ferndale, Fortuna, Rio Dell, and Trinidad; and the Humboldt Bay Municipal Water District,” would be the governing organization for charging infrastructure in this geography – IT DOES NOT MENTION BLINK CHARGERS IN ITS DESCRIPTION OF LOCAL CHARGING INFRASTRUCTURE.

We wonder why BLNK would show St. Joseph as a client when it doesn’t appear to be – more importantly, what does this say about the rest of the client list? We believe that this could indicate that the number of BLNK chargers is potentially overstated.

This, in our view, combined with poor user reviews about charger reliability, maintenance, and price does not bode well for the future prospects of the company – we believe that BLNK will continue to underperform the rapid growth in the EV industry at the ultimate cost to the shareholder.

Conclusion & valuation

In this note, we laid out several key findings that we believe makes BLNK a seriously risky investment that is likely to disappoint investors:

  • CEO Michael Farkas’s seeming proximity to individuals charged by the SEC with pump and dump schemes
  • A richly compensated CEO despite revenue significantly lagging industry growth and persistently negative profitability 
  • Asset base (chargers) appears to be the legacy assets of failed or bankrupt companies 
  • Ongoing user complaints about BLNK’s product stretching as far back as 2013
  • Churn at key customers, and a potentially overstated charger base
  • No intellectual property related to the underlying charger technology

We believe that the underlying business here is not positioned to compete with its peers and thus will not “catch up” to industry growth.  We believe that the stock price run from approximately $2 in June to approximately $10 today should be considered skeptically given the history of the individuals involved here.  

At 46x FY20 revenues, its valuation strains credulity.  The business is significantly unprofitable with what we believe are limited prospects to catching up to the EV industry broadly and has hemorrhaged an estimated $115MM in FCF since 2010.  

Given this, we believe the business should be valued at its liquidation, or book value, of just 17c in a downside scenario and at $2 a share in a bull case scenario (basically where it was before this non-fundamental move).  The average of our price targets produces a base case target of $1.09, a drop of 91% from the 8/18/20 close.

Timbercreek Financial (TF) – a tenuous business model with hidden balance sheet risks (50% base case downside)

Portfolio Manager Summary (all amounts in CAD$)

  • We believe that the COVID-19 pandemic will accelerate the stresses already hidden in TF’s portfolio and expose TF’s underwriting and financing strategy
  • We believe that Timbercreek is grossly underprovisioned compared to its small-cap MIC peers – its current loan provision is 73% below the peer average – unusual to say the least. While its peers have taken actions to protect their balance sheets, TF has not, and we believe the dividend is at risk
  • In this report, we unveil two large exposures that collectively account for 14% of book value today – we believe they were significantly underprovisioned and that investors were inadequately informed about the issues at these properties – these assets were “sold” in a manner that, in our opinion, allowed TF to avoid taking appropriate provisions (our diligence, presented below, shows these “sales”)
  • These issues are critical in light of what we believe to be TF’s inability to sustain itself and its growth through internal cashflow generation. This calls into question the stability and security of the dividend given limited disclosure about the inherent risk embedded in their mortgage portfolio, as evidenced by the Sunrise portfolio and the Northumberland mall
  • We believe that this limited disclosure about underlying risks allows the company to retain the ability to obtain critical capital markets funding to support the dividend and support the stock in order to raise equity to (again) fund the dividend
  • Consider that old habits die hard – if TF is underprovisioned on two significant loans as our diligence suggests, we believe that is reflective of the tone at the top and likely throughout the organization. We infer that they must be materially underprovisioned elsewhere – COVID is likely to put TF’s book and provisions to the ultimate test and we believe the dividend is at riskin light of this, we assign a $4 price target to TF
  • Our summarized loan findings follow:
    • The Sunrise Properties’ loan appears to have been impaired since 2016 based on appraisals and bids received during the CCAA bankruptcy process that would imply material asset impairment
      • While TF no longer has a mortgage investment in Sunrise, it now owns the assets outright. After various attempts to sell the assets, TF had to abandon the sale process in late 2019 – these assets were likely impaired before COVID, thereby harming TF shareholders (the assets could only be worse after)
      • While Sunrise was initially a $28MM exposure to TF, management has since added almost $20MM to the investment as part of the credit bid and subsequent capital investment, avoiding a write down to their initial exposure
      • Since abandoning the sale process, management has been curiously quiet about the state of Sunset
    • The Northumberland Mall loan has been in the TF book since 2012 – the borrower went bankrupt in 2018. Despite 35% vacancy at Northumberland at foreclosure and plunging comparable mall valuations in the US, TF barely provisioned the exposure
      • We visited the mall in March, prior to COVID closures – it is despairingly vacant and stressed, as you can see in the photos below
      • TF appears to have used financial engineering to avoiding provisioning the mall – it “sold” the mall in 4Q19 by providing the “buyer” with over 100% financing – which brought the loan back into the “performing” category
      • With COVID further disrupting mall traffic, Northumberland is unlikely to be servicing its debt – we believe TF has limited tools left to avoid these losses
      • While initially a ~$35MM exposure, TF provided the mall “buyer” with a $55MM mortgage to potentially facilitate redevelopment and, we believe, to avoid a write-down

Executive Summary: Why COVID will expose TF’s hidden risks

Before the market sell-off, Timbercreek Financial (“TF”) appreciated over 37% in the last 5 years due to continue access to the capital markets and investor appetite for yield.  Unlike its Canadian counterparts who are down ~40% since COVID started, TF is down a mere 16% – we believe that this dislocation is unlikely to last (EQB – down ~37%, HCG – down ~41%, LB – down ~34%). Our diligence suggests that the impact of COVID will lay bare TF’s underwriting and put its dividend in jeopardy. We believe that TF is worth 53% below its current trading price, as we will detail what we believe are significant risks with filings and photographic evidence of their assets and loan portfolio.

In this article, we share with you our bespoke diligence which highlights two examples of significant loans made by Timbercreek (that reflect 14% of TF’s equity today) – we show how TF took what appear to be minimal provisions against clearly distressed loans and painted what we believe to be a rosy picture for investors. We believe that any provision taken on either asset would materially increase provisions while also constraining the company’s ability to fund its dividend through external financing. For example, we visited a mall 70 miles from Toronto that represents over 7% of TF’s book value – its vacancy is at least 25% and the property is in disrepair; we believe that COVID makes recovery here near impossible, yet TF provided over 100% financing to a buyer to move the loan into the “performing category” from the “impaired” category, likely making it wildly underprovisioned given the considerable risk. If we were able to find evidence for this for just two large loans, what does it say about the rest of the portfolio?

We believe that this, combined with a levered balance sheet and COVID-driven industry stresses, calls into question the stability of the dividend going forward, and we assign a $4 price target to TF’s stock.

Timbercreek Financial seems too good to be true

To begin, it’s important to understand why we started researching TF in the first place. TF’s February 2018 equity offering caught our eye – we noticed that TF was operating at 46.4% leverage, by their own definition, at 4Q17, implying that this equity offering was necessary to provide the funds required to continue growing the loan book (i.e., TF was unable to take on more debt). This led us to examine TF’s 4Q17 provision for mortgage losses, which we found to be just 9.7bps of the total $1.1B in mortgages, net of syndications, dramatically lower than its peers by a minimum of 82%. Put simply, the red flag investors should see here is that a company that is paying a healthy dividend should not be raising capital to fund that dividend over time.

A further examination of other small-cap Canadian mortgage investment corporations that lend into the residential, multi-residential, and commercial construction spaces shows that TF carries the lowest provision of the entire group, approximately 73% below the peer average of 87.9bps in 1Q20:

Worse, this seems to indicate that either TF is a superb underwriter of credit risk, or that it is not adequately provisioning for credit losses – the fact that the provision keeps rising would suggest the latter, and so does our deep diligence into two of TF’s large exposures. This is deeply concerning to us as most Canadian financial institutions are increasing loan-loss provisions. Despite indications of loan impairment and asset distress, we believe that the provisioning is inadequate and investors are unaware of the significant risks embedded in these exposures.

The Sunrise Portfolio – not as sunny as hoped

On TF’s 4Q16 conference call, then-CEO Andrew Jones mentioned a Saskatchewan investment that had sought protection from creditors through the Companies’ Creditors Arrangement Act (CCAA), Canada’s equivalent of the Chapter 11, restructuring process. 

A search of CCAA records revealed that this investment was most likely the Sunrise/Saskatoon Apartments partnership.

In late 2015, one of TF’s predecessor companies, along with other lenders, agreed to finance the acquisition and redevelopment by New Summit Partners of a set of apartment properties in Saskatchewan – of the 15 properties New Summit acquired, TF was the senior lender on 11 properties, which were known as the Sunrise properties. TF agreed to commit $115MM in funds for the transaction, and we believe they syndicated most of this amount, leaving it with ~$28MM of on-balance sheet exposure to the Sunrise properties, or approximately 4.3% of 4Q16 book value.

In June 2016, the Timbercreek entity associated with this loan became part of TF as we know it, through an amalgamation under the Business Corporations Act (Ontario).

Just six short months later, in December 2016, the Sunrise properties borrower applied for CCAA protection, citing “insufficient cash flow to complete development on the Properties in the face of demands for payment by their secured creditors and trades.” (unfortunately, the PWC CCAA page for the Sunrise properties was taken down sometime in the last few months, but the Government of Canada confirms PWC as the monitor and provides the same web address (now dead) where the documents we mention were sourced). You can try to obtain the records using the contact information found in the above link, which includes Michael Vermette at PWC, or by reaching out directly to the Vancouver Registry.

The CCAA process, which we show in the appendix to this article, resulted in appraisals and bids that showed that TF’s position as senior lender was in fact impaired, which we believe was not communicated to equity investors.

In the end, there was no market price for the Sunrise properties that would NOT impair TF and the other senior lenders’ positions in Sunrise, so TF ponied up additional capital to participate in the credit bid to acquire a 20% interest in 14 of the New Summit properties (including Sunrise), which increased their on-balance sheet exposure to $41MM (now $47MM).

In the 4Q16, 1Q17, and 2Q17 financial statements, TF repeatedly indicated that “there is no objective evidence of impairment”, which we believe contradicts evidence from the CCAA process – the following clippings are from the PWC monitor reports and/or affidavits taken during the CCAA process:

  • While appraisals were ongoing in 1Q17 and bids showed significant impairment in 2Q17:

While we believe that TF’s lack of provisioning (which it could have eventually reversed) in the face of numerous market indications of impairment was imprudent, and TF’s communications about this situation to its investors appear to contradict what was disclosed during the CCAA process.

Below we contrast comments made by TF’s founder and then CEO, Andrew Jones, to TF’s equity investors with statements found in the CCAA documentation: 

  • On TF’s 4Q16 earnings call, Jones said the properties had “…a sizeable amount of cash flow coming off…” them – but Tim Clark, New Summit’s GP, had the following to say in an affidavit dated 12/16/16
  • On TF’s 1Q17 earnings call, Jones said that the “renovation and lease up of those assets by the receiver or monitor is going very well” – but Jamie Dysart, Executive Director, Mortgage Investments, at fellow senior lender Kingsett stated the following in a May 2017 affidavit:
  • Lastly, on TF’s 2Q17 earnings call on 8/11/17, Jones said that TF was “controlling the asset and we have lots of equity” – but on 8/8/17, the lender group’s credit bid had been approved; by definition, a credit bid is equal to the value of the loan outstanding, implying that no equity existed. 

We believe that TF had to credit bid for these assets to avoid a significant impairment to their position as lender.

So what’s become of this portfolio? For several quarters after the credit bid, TF’s CEO Cameron Goodnough talked about selling the asset, as recently as the 2Q19 conference call:

But during the 3Q19 call, it looks like management abandoned the process:

This example is significant – at 4Q16, TF’s average loan size was just $8.2MM – the Sunrise exposure at this date was $27.6MM, or over 3x the company average. We believe that investors were largely unaware of the events and evidence we present here – evidence that could have significantly affected the company’s P&L to the detriment of its shareholders.

Our next example is similarly large but is a current loan exposure that materially deteriorated and could seriously affect TF’s financials.

The Northumberland Mall – can financial engineering hide bankruptcy forever?

In TF’s 2Q18 filings, a $36.9MM exposure move from Stage 2 (performing but increased credit risk) to Stage 3 (impaired) but with only a 1.2% provision:



On the 2Q18 earnings call in August, management reported to investors that the asset in question was current and in Toronto, per Director Ugo Bizzarri (but “near” Toronto, according to CFO Gigi Wong):

According to Teranet, on May 8, 2018 (in 2Q18), the mortgage for the Northumberland Shopping Centre, Inc., a mall in Cobourg, Ontario (population ~20k), was transferred to 2292912 Ontario, Inc, a subsidiary of TF, per TF’s 2017 Annual Information Form:

Not quite two weeks after the 2Q18 call, the Cobourg News Blog published an item saying Timbercreek had, in fact, taken over as owner of the mall:

And in fact, a Notice to Creditors filed on September 26, 2018 shows that the Northumberland Shopping Centre Inc, the borrower and owner of the Northumberland Mall, filed for bankruptcy, making TF the effective lender in possession of the Northumberland Mall:

Now why does this matter? Well, around the time that TF took possession of the asset, it was seriously distressed. Sandalwood, the property manager at the time, showed vacancy of approximately 130,973 square feet against leasable area of 370,769 square feet of leasable area, or occupancy of just 64.7%!

Even TripAdvisor visitors noted the level of disrepair the property was in:

We believe that given the high vacancy alone, TF should have provisioned more than just $463k on the property at the time. However, as the situation has become worse over time given the secular trend affecting malls and the ongoing despair at the Northumberland property, the provision needs to be materially higher, which will likely hurt earnings when this provision is appropriately taken.

In fact, a 2019 TripAdvisor post echoes the sentiment of the prior posts:

A new property manager, Trinity Group, was engaged last year to attempt to lease up the property, and has made progress – on January 17, 2020 the Cobourg News Blog posted an item outlining 95,966 square feet of vacancy against 375,000 square feet of leasable area (per Trinity Group), or an occupancy rate of 74.4%. It is also notable that as of February 3, 2020, Trinity Group removed the site plan shortly after the January 17th blog post.

If the stores looked like this before COVID, what might they look like after?

We visited the mall between the hours of 10am and 1:30pm on March 12, before the COVID closures.  This visit supports the conclusion that it still remains in distress and in need of capital – there is significant vacancy and lack of traffic:

Ocean Jewellers looks like it might just be opening late, but the mall directory shows it is no longer a tenant:

Even the existing stores are limited in staff, customers and size:


Dollarama – a couple long empty aisles:

HR Fashion Plus



Photos above indicate the emptiness and lack of staff this mall has in its stores. The outdated “entertainment” storefronts such as the cinema and bowling alley shows a low level of quality and care given to this piece of property.

The cinema has just three movies playing:

Mall employees said that 8 stores closed in the second half of 2019, and that every tenant in the mall is on month-to-month leases – which could heavily affect occupancy rate during COVID.

Given the level of vacancy and appearance of the property, we believe that investors may overestimate TF’s ability to “resolve” the asset:

2Q18, when the loan first moved into the Stage 3 category – this call occurred about 6 weeks before the borrower filed bankruptcy:

3Q18, after the bankruptcy filing, with guidance that the loan would be resolved by year end:

4Q18, guiding that the property will get “resolved” in the second quarter of 2019

On the 1Q19 call, no one mentioned the mall, but it was still on the books, and on the 2Q19 call, management claimed there were no questions AT ALL:

These clippings show that TF was telling investors it would resolve the asset, but nothing happened until over a year after foreclosing on the asset.

Well, so what’s happened to the Northumberland mall? According to Teranet filings, the mall was “sold” to Trinity Northumberland, Inc (presumably the same Trinity who was initially appointed as property manager) on 12/19/19 for $35MM, which happens to be pretty close to the carrying value of the outstanding loan on the balance sheet. At the same time, the purchaser took out a $55MM mortgage on the property, essentially financing 100% of the purchase and getting some more cash in the door for redevelopment purposes:

Now before we give you more details here, let’s talk about malls as an asset class. Much has been said about the demise of malls, most of it valid and relevant to this property. The Teranet data shows the initial mortgage being created in 2012, a time when lenders didn’t anticipate the kind of carnage that has ripped through B and C mall land (see NYSE:CBL and NYSE:WPG, for example) as a result of falling foot traffic and ecommerce. Today, lenders are underwriting B and C mall assets at upwards of 15% cap rates – but for a mall with a 25% vacancy rate and in sore need of capital investment, there is no telling what kind of valuation it could fetch.

In fact, similarly situated properties in the US have seen their loans massively impaired at maturity:

  • Fashion Outlets of Las Vegas, a now REO asset in Primm, NV, defaulted on its mortgage in 2017 with a year end occupancy of approximately 75%. It appraised for $125MM in June of 2012, when a $73MM mortgage was put in place, but the value of the property has since fallen to $28.8MM as of June 2019. The current appraisal value implies a 60% loan loss to the mortgage
  • Salem Center, a Salem, OR mall also defaulted on its mortgage in 2017 with a year end occupancy of approximately 79%. It appraised for $18.5MM in June of 2019, compared to $44MM when its $33.3MM mortgage was originated in 2012. The current appraisal value implies a 44% loan loss to the mortgage

Knowing this, how could TF justify financing 100% of the purchase price of a mall asset, and then throw another 57% of the purchase in as additional cash?

When asked about amount of the new mortgage on the 4Q19 call, Managing Director Scott Rowland simply didn’t answer the question:

So, dear shareholder, TF has “sold” an asset (and moved the loan backing it back from Stage 3 impaired to Stage 1 performing) by providing the lucky buyer with 100% financing (and then some)! We believe that TF likely rolled their loan outstanding into a new mortgage and threw in another $20MM in for the borrower to redevelop the asset, allowing the buyer to take ZERO equity risk in the transaction. Who wouldn’t want to buy an asset with no skin in the game?

Balance sheet risks are compounded by TF’s financing strategy

So why do Sunrise and Northumberland even matter?

  • They are/were disproportionately large exposures–the Sunrise properties’ loan balance of $28MM (4.3% of book value at 4Q16 and 6.6% of BV at 1Q20) was almost 3x TF’s average mortgage investment size, and Northumberland’s new loan balance of $55MM (7.6% of book value at 1Q20) is 5.8x the size of the average TF mortgage investment size
  • It was clear from appraisals and bids that TF’s position as senior lender to Sunrise was impaired, but investors were unaware of this
  • Given the state of the Northumberland asset and comparable transactions, TF’s position as a lender is likely materially impaired, but management provided a buyer with over 100% financing to take the asset out of an impaired category
  • What does this say about other loans that might face the same issues or fate at Timbercreek?

We believe that TF has been, and continues to be, dangerously under-provisioned and that as a result investors have been/are unaware of the underlying risks on the balance sheet. This reminds us of Home Capital (TSX: HCG) in 2017, which had a perceived high quality loan book but was subsequently exposed as hosting dubious mortgages with increased risk that were never disclosed to the market, reflecting >10% of their book value; the stock then fell over 90% reflecting these undisclosed issues. We are concerned that similar patterns could be taking place at Timbercreek Financial, and that TF is behind its peers in preserving capital flexibility:

These issues we’ve highlighted here are critical, as the TF bull case is largely based on Timbercreek’s perceived expertise and continued dividend payments. In addition to issues with individual loans, TF’s financing strategy poses significant risk to the dividend. We believe that TF doesn’t generate enough cash to service its dividend and grow the loan book, and that it is essentially borrowing money to pay the dividend. This represents an outsized and underestimated risks to shareholders, especially in light of TF’s already high payout ratio and tendency to roll a significant amount of maturities every year, coupled with the fact that, according to Trepp, CMBS mortgage delinquency rates are approaching all-time highs.

With the exception of 2019, in the fourth quarter of the prior three fiscal years, TF’s borrowers have missed over 40% of the scheduled maturities for that quarter, implying that TF had been regularly extending loan maturities at year end:

Practically, this dynamic means that TF is not receiving enough capital back at the end of each year to grow the loan book and service the dividend without external financing. In fact, over the last 21 quarters (1Q15 to 1Q20), TF’s operating and investing outflows have exceeded its operating and investing inflows by $71MM: 

The obvious implication here is that since operating and investing inflows are less than outflows, TF is actually unable to service the dividend without external financing – in fact, in order to plug the operating and investing deficit and address the buyback, interest payments, and service the dividend, TF has had to find over $403MM in external financing over the last 21 quarters:

Sure enough, over the same period, TF has drawn $409MM from the capital markets:

In addition to the dividend risk embedded in this sort of unsustainable model, we believe that an appropriate level of provisioning would result in a much lower stock price. In a normal scenario, we’d expect TF to appropriately provision for the Northumberland mall based on a combination of its peers’ provisioning and a loan loss severity for Northumberland consistent with the previously mentioned Fashion Outlets and Salem Center.

Things are hardly normal now though – Northumberland is a distressed asset whose traffic is now likely near zero, in a city whose population overindexes to older people, the demographic most seriously affected by COVID. We believe that the likelihood that the property ever really recovers is low, and that TF’s debt is materially impaired, if not entirely so. The ability of the mall to service the new $55MM note has likely evaporated, as news of malls tenants in other properties choosing not to pay rent abounds. We believe that a more reasonable loss severity for the Northumberland Mall is closer to 70% vs. the average 52% from Fashion Outlets and Salem Center, given that the asset and loan are now likely teetering on non-performance and the likelihood of turnaround is low. Assuming a 70% loss to Northumberland, we get to an average price target near $4, down 53% from the 7/28 close:

We believe that given the reliance on external funding, TF has to choose between growing the loan book or maintaining the dividend – unfortunately, given what we believe to be less than ideal capital recycling, TF cannot do the latter without the former. The Northumberland exposure, in addition to broad portfolio distress due to COVID, makes a dividend cut over the next 4 quarters a frighteningly likely outcome.

Wrapping it all up

In addition to what appears to be a risky financing strategy, we believe that the shareholder base is unaware of the risks we’ve outlined here. In fact, we are willing to bet that shareholders aren’t aware that TF provided a $100MM mortgage to Cresford Developments, a real estate developer who is subject of a lawsuit alleging a “cash crisis”and the misrepresentation of financial condition (Anthanasoulis v. Cresford; CV-20-00634836-0000; Ontario Superior Court of Justice):

Sure enough, in late March 2020, three of Cresford’s projects entered receivership – while the property for which TF provided capital was NOT impaired and included in receivership, the receiver’s findings included “evidence of a number of questionable accounting and management practices by the Cresford Group that had the effect of hiding substantial cost overruns on all the Cresford Projects [the projects in receivership]”.

These findings related to a TF loan recipient call into question the level of diligence and prudence with which TF underwrites its investments:

With one significant finding that could eventually affect TF’s own position:

In the end, we expect shareholders may be hurt by these dynamics and we hope that this article helps to illuminate the apparent risks hidden in this business.

Appendix – Excerpts from the Sunrise CCAA process

At 12/31/16, we see that TF is the largest creditor to the properties with $104MM of exposure, of which we estimate $28MM was on TF’s balance sheet, while the remainder was syndicated:

Thus begins a process by which TF received numerous market-based indications that its loan was impaired, but did not take a provision to reflect this impairment:

  • On April 4, 2017, TF and Kingsett (another senior lender) received property appraisals from Altus, which revealed that at current market values, the First Secured Lenders would be in a shortfall position:
  • In fact, the appraisals show the current market value of the Sunrise properties at $101.6MM against first lien debt of $103.3MM, an approximate 2% impairment to TF’s position, but no provision was taken to anticipate this loss in value
  • As the CCAA process continued, the lenders sought to sell the properties in groups – in May of 2017, a discussion was held concerning offers received for 5 properties known as the Group 1 Lands, showing that the properties with TF mortgages were significantly impaired

In June 2017, senior lender Kingsett sought the approval of a credit bid for the Group 1 properties and indicated it would also seek approval of a credit bid for the remaining nine Group 2 Sunrise properties. On June 16, 2017, the Court approved the sale of the Group 1 and Group 3 properties to various entities controlled by Timbercreek and Kingsett and ordered that the Group 2 properties (the remaining 9 Sunrise properties) be listed with Kingsett’s credit bid serving as the floor price for the process.

  • Unfortunately for the lenders:
  • But on 7/26, Bondstreet, who had only conducted limited due diligence, approached with a $131.5MM bid for these 9 properties, which it subsequently reduced to $115MM, below the value of Kingsett credit bid, thus implying an impairment to the creditor’s outstanding loans

Can’t FIXX this – We believe Homology’s HMI-102 is in trouble

Portfolio manager summary (Idea originally posted May 4, 2020)

  • Homology (FIXX) is a gene therapy company whose technology has been criticized by scientists as “untrue to the scientific community”
  • On April 15th, 2020, a key patient in FIXX’s only Phase 1/2 clinical trial shared test results on Facebook that suggest FIXX’s HMI-102 gene therapy is unlikely to be efficacious
  • In response, FIXX stock fell almost 25%, and instead of providing all investors with an update, management quietly updated the sellside, stressing product safety but not efficacy
  • In light of this result, we believe that the HMI-102 trial will not reach its primary endpoint, and that the stock should trade to cash value, or $5.80 per share
  • Social media is important – early stage drug company Allakos also had trial revelations posted to FB – the exposure of these led the stock to fall over 50%

Executive summary

It’s an understatement to say that Facebook has changed the world – it’s created an ability for people to be transparent about their experiences, lives, and opinions, for better or worse. In the case of Homology, it’s for the latter. Homology, a gene therapy company whose technology has already been scrutinized by scientists as “untrue,” has just one product in clinical trials, HMI-102, for the rare disease phenylketonuria (“PKU”). As Med Genie reported back in January, FIXX’s trial update showed interim phenylalanine (Phe) results that suggested HMI-102 was not efficacious for low and mid-dose patients.

Our note highlights a data point the company would very much like you not to know – the only patient in FIXX’s high dose cohort posted her results on Facebook, and they show that HMI-102 is unlikely to reach trial endpoints even at a high dose. We believe this patient was forced to take her posts down as a result, and management selectively disclosed the issue to the sell side, providing comments about the drug’s safety, and conveniently ignoring the implications to efficacy and the business. Maybe they were hoping to raise capital before officially announcing trial results. Who knows? We believe that the HMI-102 program is dead in the water, and since its progress is the major driver of FIXX’s value, we believe that the stock should trade to cash value, or $5.80, down 56% from the April 27th close.


The best shorts are often one-trick ponies, but rarely do we find one where a single data point completely upends the long investment case. Homology Medicines, FIXX, is one of those rare finds.

Homology is a gene therapy company which has their first and lead product candidate, HMI-102, in a dose-escalation Phase 1/2 trial (pheNIX) for phenylketonuria. FIXX also has 2 IND-enabling programs and some discovery stage programs, but the HMI-102 trial is the company’s main shot at viability.

PKU is a relatively rare disease, with a U.S. incidence of approximately 350 cases per year and a prevalence of just 16,500, per FIXX’s 10-k. PKU is tied to mutations in the gene that control PAH, an enzyme that metabolizes phenylalanine, or Phe. The condition results in a deficiency in the enzymatic activity of PAH, causing an excess in Phe in the bloodstream that can result in intellectual disability. PKU patients are identified soon after birth, and are primarily treated with a Phe-restricted diet. FIXX’s HMI-102 seeks to modify the underlying genetic cause of PKU, effectively curing the disease and allowing patients to eat normally and not experience the cognitive and metabolic issues from higher than normal Phe.

FIXX’s technology, which does not use the CRISPR approach to gene therapy, has already been subject to scrutiny, with David Russell, a researcher at the University of Washington, saying, “What’s surprising is this company raised so much money on something thought to be untrue in the scientific community,” in a piece in MIT Technology Review.

We believe that recent revelations about the efficacy of HMI-102 support this skepticism and show that the drug is not efficacious, kicking out the one leg holding up FIXX’s business, and that FIXX should trade to cash value, or $5.80 per share, down 56% from the April 27th closing price.

The pheNIX trial

The pheNIX trial for HMI-102 launched in June 2019, and its primary efficacy endpoint is two plasma Phe measurements below 360 umol/L (or 6 mg/dL) between 16 and 24 weeks after dosing. Following evaluation of the first two patients in a cohort, “a decision can be made to either escalate to the next dose level, add a third patient or expand the cohort at the selected dose level”.

Now before we review what’s new, it’s helpful to note that a mouse study presented at the 21st Annual Meeting of the American Society of Gene & Cell Therapy titled “Sustained Correction of Phenylketonuria by a Single Dose of AAVHSC Packaging a Human Phenylalanine Hydroxylase Transgene” showed that HMI-102 showed an effect to mouse Phe levels just one week after dosing – in fact, mouse Phe levels remained relatively flat after that first drop.

This would imply that the therapy shows its effect soon after dosing and the longer timelines contemplated in the study endpoints are to indicate that the effect is long lasting. Sure enough, we see a similar dynamic in the pheNIX trial data released by FIXX in December 2019. There were 3 patients examined here – from the 10-k: “(n=2 patients in the low-dose Cohort 1 and n=1 patient in the mid-dose Cohort 2) as of the data cutoff of December 2, 2019. A fourth patient was dosed in Cohort 2 subsequent to the data cutoff date and was therefore not included in the analysis.”

In this release, we see the two patients in the low-dose cohort experienced no improvement in fasting Phe after dosing or even 12 weeks later. The cohort 2 patient, getting a mid-dose, showed an improvement in Phe level immediately after dosing, but their Phe level did not fall below the 360 umol/L threshold defined as the primary endpoint (it stayed around 500) calling into question the efficacy of the treatment, which Med Genie mentions in their piece (from the 10-k):

Damning revelations

On March 5, 2020, a woman we will call Miss A started a Facebook group (since made private or taken down on April 15, 2020) to discuss her experience getting gene therapy for PKU:

On March 9, 2020, Miss A, who lives in Normal, IL tells us she’s going to Chicago, which happens to be one of the pheNIX trial sites:

The next day, Miss A provides us with enough to data to know that she is Patient 5, part of the high dose cohort 3 in FIXX’s HMI-102 trial (cohort 3, mentioned by Miss A, would be the next dose up from the cohort 2, the mid-dose cohort):

Dr. Burton appears to be Dr. Barbara K. Burton, a physician focused on PKU at the Ann & Robert H. Lurie Children’s Hospital of Chicago, a trial site mentioned in the pheNIX trial description on

This, taken together with the fact that Biomarin’s own PKU trial was in too early a stage to enroll a Cohort 3 patient in March 2020, it’s probably safe to say that Miss A is taking part in FIXX’s pheNIX trial.

On March 11, Miss A receives her infusion:

Miss A then shares a series of updates on how she is feeling and the progress of her weekly visits post-infusion. Six days post infusion, she says she hasn’t gotten any test results back, but that it may take 2 or 3 weeks to get a Phe level:

27 days post-infusion, Miss A tells a FB commenter that she won’t get Phe levels till six weeks post-infusion:

And then 35 days post-infusion, on April 15, 2020, a bombshell – Miss A gets her Phe levels, and at 25 mg/dL or 1497uMol/L, they are well above the 360 uMol/L endpoint threshold after 5 weeks (and after the drug typically takes effect), suggesting that HMI-102 is not efficacious even for a high dose patient:

Just a few hours after her post, Miss A’s entire group is either taken down or made private, perhaps at the demands of FIXX itself.

Management’s disclosure problem

We believe that management was aware of this post and tried to manage the perception of it by talking to the sell side and to select investors. In fact, Oppenheimer’s equity sales desk was sharing the below email conversation between their analyst Matt Biegler and FIXX’s Theresa McNeely to explain the price action on April 15th:

Who was Theresa planning to speak to? We know that Baird’s Madhu Kumar got a call:

But when we asked Theresa ourselves, she was much less forthcoming:

It appears to us that FIXX chose to inform the sell side and potential larger investors, who appear to be selling the stock (it has dramatically underperformed biotech broadly), but not the average investor. This is a significant red flag that investors should be aware of.

Why all this matters

Because the mouse study and the Cohort 2 data showed an effect to Phe levels one week after dosing rather than a gradual reduction, we can conclude that Miss A’s level, at 1497 uMol/L, is probably not going to get better, unfortunately. Further, her levels several weeks into the trial are still much higher than the threshold level specified in the primary endpoint of 360 uMol/L. This means that the therapy is showing zero efficacy even for a high dose patient. This data point is damning given the size of the trial and importance of the high dose patient in light of the lack of efficacy in the low and mid-dose cohorts.

Now the sell side may parrot management and say that there is no way to know whether Miss A is who she says she is, but the evidence is certainly strong supporting her case. They may say that there was no way for her to know her Phe level, but her posts show that she expected to receive them. They may also say that the drug is safe, and that liver enzyme elevation should be expected in a therapy like HMI-102, but that’s all beside the point. The point is that the Phe level Miss A received 5 weeks after infusion show that HMI-102 is not efficacious.

These results support the skepticism around FIXX’s use of the AAVHSC vector in liver directed gene therapy, which, based on the results thus far, and in particular Miss A’s results, appear to show zero efficacy and thus makes it inferior to Biomarin’s AAV5 vector.

Furthermore, if management thought this information was material enough to talk to the sell side analysts covering the stock, why not put it in an 8-k or even a press release for the benefit of their entire shareholder base? Given the materiality of the information, wouldn’t all shareholders have benefited from the same level of disclosure rather than be kept in the dark? This is behavior consistent with that of MDXG and ALLK, both companies with executives formerly from reputed companies who have seen their stock prices demolished.

For FIXX, we believe that this is a huge problem – the HMI-102 pheNIX trial is the ONLY program in their portfolio that is in the Phase 1/2 stage, and thus the primary path to viability for the company. With this piece of data showing that HMI-102 is not efficacious, we believe that the program is likely worthless and unlikely to proceed to commercialization. While FIXX may try to apply HMI-102 to other indications, we believe that doing so would essentially restart the trial and approval clock without making up for the lost time to market from a failed PKU trial.

Furthermore, social media matters. While FIXX management may be dismissive of people posting on Facebook, these posts have value. In the case of Allakos (ALLK), Seligman Research put together a barn burner of a report which included numerous Facebook posts questioning the efficacy, safety, and trial design of ALLK’s drug candidate. Since that report, ALLK stock is down approximately 51%, and ALLK actually has several later stage trials.

In the case of FIXX, we believe that HMI-102 in PKU is the ONLY path to viability – given the lack of efficacy of HMI-102 at high dose, we believe that the HMI-102 program is dead, and that the stock should trade to its cash value per share, or $5.80 per share, down 56% from the April 27th close price.