Church & Dwight Co., Inc.

    • Spruce Point has significant concerns about Church & Dwight (NYSE: CHD), an S&P 500 company, and roll-up acquiror of personal care and consumer products. Under its older leadership, management pursued a conservative strategy to leverage its core Arm & Hammer brand by diversifying and integrating acquisitions, while still prioritizing product innovation, and manufacturing excellence. With the elevation of Matt Farrell to CEO in 2016, Spruce Point believes CHD’s strategy has pivoted towards extreme financial engineering, aggressive accounting, and managerial self-enrichment practices. As fundamentals deteriorate in CHD’s retail environment, and it’s now clear that 60% of its legacy Power Brand acquisitions are failing, Spruce Point believes that CHD’s recent Waterpik and FLAWLESS levered acquisitions were made in desperation at outlandish valuations. If history is any guide, recent deals will disappointment investors. With CHD’s shares at a 8% premium to average analyst price targets, and debt rising, investors seeking safety in CHD’s stock face 35%–50% downside ($40 – $52/share).
    • Old School Brands Traditionally Following A Copy-Cat Like Strategy Against Leaders Proctor & Gamble, Clorox, And Others. Best known for its iconic Arm & Hammer brand, CHD embarked on an acquisition strategy in the early part of the 2000s to diversify into condoms, sex toys, hair care, rectal cream, vitamin gummies, oral care and other assorted product categories. However, we believe 6 out of 10 of its “Power Brands” acquired pre-2017 are struggling or outright failures. With 23% of sales through Wal-Mart, and reliance on struggling brick-and-mortar channels such as ULTA, Sally Beauty, Bed, Bath & Beyond, pharmacy (ex: Walgreens, CVS, Rite Aid), and discount stores, we believe CHD is experiencing channel pressures, and has been slow to transition to online sales and marketing to millennials. These factors, along with an increasingly promotional environment, has been pressuring margins.
    • Long promising international growth opportunities, CHD hasn’t been strategic about acquiring brands that can readily be sold in foreign markets (most notably vitamins) and has failed to implement common sense strategies (e.g., multilanguage labeling) to accelerate and scale the “export” strategy. Our research indicates that recent international success is attributable to new market entries, establishing distribution agreements and putting through significant price increases. We don’t believe that any of these drivers are sustainable and that CHD is now too late to many of its core product categories around the world. As a result, we believe that international growth is likely to disappoint
    • Investors Fail To Appreciate The Change of Leadership Style Under Matt Farrell, An Executive Who Blind-Sided Investors At Alpharma. In early 2016, Matt Farrell and Rick Dierker were appointed CEO and CFO, respectively. Based on our interviews of former employees in key roles, CHD experienced a culture shift that would deemphasis manufacturing, R&D and supply chain investment in favor of greater financially engineered acquisitions. One former employee even described management as “financial magicians”. We believe investors fail to appreciate the abysmal failure overseen by Farrell when CFO of Alpharma (formerly NYSE: ALO). While we acknowledge that some of Alpharma’s issue may have pre-dated his arrival in 2002, there is evidence that under Farrell’s leadership, the situation became even worse, culminating in Alpharma issuing more material weaknesses, a “non-reliance” opinion on its financial statements, a covenant breach, and later a DOJ settlement for bad sales and payment practices to promote unsafe products
    • Under Pressure To Financially Engineer Results, CHD’s Two Recent And Expensive Deals Already Showing Signs of Disappointment. In August 2017, CHD spent $1 billion to acquire Waterpik, a dental water flossing product that has been flipped twice by private equity owners. From the deal conf call, management showed little understanding of the business, punting on simple questions such has what % of sales is online, and the split of kit vs. consumable sales. When we asked a former long-time executive about the deal: “Waterpik has been for sale for years, and I’m a bit surprised they bought it given product liability concerns”. Sales Decline Quickly Post Acquisition: CHD obscured the contribution of sales by Waterpik post acquisition, lumping results in consumer domestic and international with smaller acquisitions Anusol and Viviscal. However, total consumer revenues from acquisitions declined from $102m (Q4’17), to $85m (Q1’18), to $79m (Q2’18) in the following quarters that can be cleanly analyzed. The FDA also recalled products mid 2018 for safety issues.
    • Margins Already Failing: Documents show Waterpik’s gross margins were 47.7% – 49.1% pre-acquisition, and the CFO said he expected 200-300bp gross margin expansion. Fast forward to early 2019, the CFO’s recent comment that gross margins are now “on par” with the company’s gross margin (pre-China tariffs), indicate that margins have contracted lower and are now closer to 44%
    • MSpruce Point Has Identified Many Flaws In The Flawless Acquisition That Should Give Investors Grave Concerns. In May 2019, CHD announced it acquired FLAWLESS hair care removal product for $450m. The product has grown quickly to $180m of sales since its 2017 launch, but has unproven staying power in a rapidly maturing category. Management is using bold and potentially misleading language to promote the deal, even claiming to be creating a “brand new category” for an “unmet need” and that it will “blow out” sales. Spruce Point finds undeniable evidence of aggressive accounting, revenue recognition problems, and operational delays at FLAWLESS: Notably, we have sourced Nielsen retail data for recent FLAWLESS product introductions. The data shows slowing growth for its headline Finishing Touch FLAWLESS brand, and rapid maturation cycles historically for new product introductions. FLAWLESS and CHD’s Batiste are sold at ULTA Beauty, which just cut guidance, and said recent new product cycles in women’s cosmetics are not driving growth.
    • CHD Touts Its Industry Leading Cash Conversion >100% of Net Income, But It’s Not As Sexy As It Appears. Aggressive M&A Accounting: On average, CHD accounts for 96% of its deal values as intangibles and goodwill, enabling it to receive tax deductions over 15yrs that improve cash flow. As an example of how aggressive management has been towards applying this strategy, it said on the FLAWLESS conference call that it had no synergies, yet later marked $82m of the value as goodwill and attributed it to synergies!

Penumbra, Inc.

    • Penumbra, Inc. (“PEN” or “the Company”) is a one-trick-pony surgical instrument company which, in our opinion, produces a low-tech and undifferentiated product in an increasingly competitive space. Penumbra was first to market with an aspiration catheter (“AC”) FDA-approved to treat acute ischemic stroke (“AIS”). Major medtech companies have entered the space within the last 9 months and, per the medical community, offer neurovascular ACs at least as good as Penumbra’s at far superior economic terms, often as part of discounted bundles. While analysts are aware of the new competition, they seem blind to the pace of Penumbra’s market share losses: IQVIA transaction data reveals that its U.S. neuro AC sales growth has contracted in recent months. Heavy competition and a limited TAM will also curtail peripheral AC sales – a revenue stream which analysts see as a major growth engine for Penumbra. Non-core M&A, distributor acquisitions, and rising DSOs suggest that management – which has a history of promotional activity – may be reaching to defend its medtech hype train as competitors eat at Penumbra market share. We believe that underestimated competition could cut Penumbra’s expected sales growth by nearly half in FY20, from 20% to close to 10%.
    • Wave Of Competition Entering Penumbra’s Vertical For The First Time: Penumbra was the first to market with an AC cleared by the FDA for treatment of acute ischemic stroke. Major medical device companies left the space alone for most of the 2010s, instead focusing their efforts on stent retrievers – the standard of care in mechanical thrombectomy until recently. However, now that aspiration thrombectomy for ischemic stroke has gained wider acceptance as a cheaper (by 30-50%) and sufficiently-effective approach, four major device companies have entered the space within the last two quarters.
    • Rapid Pace Of Market Share Loss Deeply Misunderstood By Market: Analysts have grown to understand Penumbra as a dominant player in its vertical, with ~90% share. While they recognize that competition is coming, they have no historical basis for modeling the pace of market share loss, and appear to assume only low-to-mid single-digit annual losses through the coming years. IQVIA Medical Device and Supply Audit (MDSA) data, which project nation-wide sales for individual medical devices from a panel of 650 U.S. hospitals, indicate that, even as the mechanical thrombectomy market grows, Penumbra is losing U.S. share so rapidly that monthly unit sales have been DOWN through 5 of the last 6 months, with monthly declines of up to 28%. Our conversations with doctors corroborate this data, with many neurosurgeons indicating that, over just the last 6 to 9 months, they have shifted from using Penumbra in 70-90% of neuro aspiration therapy procedures to just 10-30% of these procedures.
    • Penumbra’s Core “Device” A Commoditized Plastic Consumable Sold Cheaply By Competitors: While Penumbra has had the only AC approved for acute ischemic stroke treatment through most of the 2010s, ACs are functionally little different from intermediate guide catheters, mechanical thrombectomy accessories priced 75% or more below ACs. Many doctors have used these catheters as “off-label” ACs due to price differences or product preferences. Large medical device companies will have, and have had, little trouble entering the market with products already equivalent or superior to Penumbra’s. They also sell their ACs in bundles with SRs and other adjacent products, which support per-item savings of up to 33%. Penumbra – an almost purely AC-driven company with a poorly-rated “3D separator” SR and few other products – cannot offer similar bundles and is likely to experience significant pricing pressure as the sector migrates to this purchasing model.
    • Promotional And Aggressive Management Playing Defense Against Slowing Growth?: Industry contacts indicate that management is highly promotional and liberal in their spending on medical professionals. Open Payments data from the Centers for Medicare & Medicaid Services reveal that Company spending on doctor travel reimbursement – often to sites like Las Vegas and Miami – is unusually high. They have also granted an unusually large quantity of stock to non-employee doctors, which we find suspicious for a young medical device company which has been eager to find clinical support for its products. Further, we observe hallmark executive actions which may signal a coming sales slowdown: rising DSOs, non-core M&A / distributor acquisitions, hyping up secondary businesses, and aggressive stock sales.
    • A Commoditized, One-Product Company Valued As A Growth Story: PEN is valued on par with high-tech medical device companies with significant IP protection. PEN’s products are far more commoditized and subject to competition, which it is now experiencing for the first time. Valuing PEN in-line with a more appropriate peer universe of commodity producers would reduce PEN’s multiple from 10x to 5-6.5x FY20 sales. Even bullish sell-side analysts have an average price target 7% below current levels as valuations have climbed to nosebleed levels through the past several weeks. Spruce Point sees 40-55% downside ($85-$110) in the stock after adjusting future sales growth to reflect the onset of competition and applying a more reasonable 5-6.5x FY20 sales multiple.

Mettler-Toledo International, Inc.

    • Spruce Point has significant concerns about Mettler-Toledo. Since CEO Olivier Filliol took over in 2008, Mettler’s ability to never miss quarterly Wall St earnings estimates raises doubts about the quality of its financial statements. Run by secretive management in Switzerland, and with key U.S.-based financial, tax, and audit managers all having worked at current auditor PwC, we worry that adequate, independent questioning of its financial results are lacking. Prior allegations of financial misreporting 15yrs ago may hold weight in light of our fresh look at the allegations and broader information available today. We find strong evidence of aggressive financial, tax and accounting policies used to bolster earnings, notably outlandish share repurchases that are being conducted at 36x P/E, which rewards management with cash bonuses for buying stock. Our diligence into Mettler’s China business through tax filings shows evidence of significant profit overstatement, and cash running through shell entities, and an empty office, and a location where individuals on site had never heard of Mettler. We call for an independent committee to evaluate our findings.
    • MTD trades 14% above the current average analyst price targets of $705/sh and at an all-time high valuation multiples, yet is not expected to grow any faster than its peers such as Thermo Fisher (TMO), Ametek (AME), Agilent (A), Waters (WAT), PerkinElmer (PKI), Bruker (BRKR) and Bio-Rad (BIO) to name a few. A rotation into perceived safety stocks provides an incredible short-term inflation in the share price.
    • Insiders are selling a record amount of stock despite owning <4% of the company. Notably, one of the biggest holders is the Chairman, who signaled his intention to sell 33% of his holdings in Feb 2019
    • Mettler has exceeded sell-side quarterly EPS targets 100% of the time since 2008, and by no coincidence, management has always met 100% of its annual cash bonus targets. This is a miraculous achievement given our belief it has a ruthless culture that fires business managers quickly that don’t hit numbers:
    • Able to navigate black swan currency events: EUR/CHF and USD/CHF are two of its biggest FX exposures. In 2015, during the unexpected Swiss Franc revaluation, causing a 20%+ move, Mettler claimed only a modest guidance revision, and that it had miraculously timed an increase to 90% of its EUR/CHF hedge. Yet, it rapidly borrowed money and its audit director abruptly resigned thereafter.
    • No material customer concentrations: Mettler claims no customer is >1%, however, we believe it may be exposed to Pitney Bowes, a significant customer based on import trade records, who is facing increasing bankruptcy risk and a disruption headwind is not priced in.
    • While claiming no need for financial restatement, Mettler stated further “the Audit Committee and the Board have determined that it would be in the best interests of the Company to make changes in the leadership for the oversight and control of its financial operations to correct the “tone at the top” and ensure it is consistent with the Board’s commitment to maintaining strong corporate governance. The Company will enhance the accounting organization, both by adding personnel to that function and by increasing training for all members of the organization.” Many of the same managers are still at Mettler (notably CEO Filliol) from the time of this investigation
    • Relationship Too Close With PwC, An Auditor Slapped With Dozens of Lawsuits For Failing To Catch Fraud
    • CEO With A Potentially Misrepresented Bio Undermines Confidence
    • Various company sources suggest he ran the Analytics Division, was Head of Marketing, Sales, Service, and ran the China business too all at the same time, a major concern we will detail further. With a CEO in charge of so many aspects of the business, we worry that Mettler does not have the appropriate separation of duties in place. This concern is mirrored by the fact that long time CFO William Donnelly was in charge of Investor Relations, Finance, Supply Chain Management, Information Technology, and the Blue Ocean Program all at the same time
    • Employee allegation of financial misconduct came weeks after Filliol was promoted to Head of Marketing, Sales, & Service. We estimate Filliol has extracted $257m from Mettler (salary, bonus, stock sales) and controls another $270m of stock post the implementation of aggressive financial, accounting and tax policies, notably diverting billions of cash flow to buybacks while always hitting cash-incentive based Adjusted EPS targets that don’t adjust for excessive stock repurchases
    • Evidence of Massive Cost Capitalization of Software And A 12yr ERP Implementation Dubbed “Blue Ocean”. Around the time CEO Filliol took charge in 2007, Mettler embarked on its “Blue Ocean Program” described as “a new global operating model, with standardized, automated and integrated processes, with high levels of global data transparency”.  12yrs later, Mettler claims the program has another 15-20% to completion. Mettler stopped disclosing direct costs related to the program in 2012, and has made $133m of total restructuring payments since 2009 (recognizing them every single year
    • Numerous Signs of Aggressive Accounting and Financial Policies To Embellish Margins. From our experience, it is more common to see companies fudge financial data – sales and EBITDA – than employee data. We observe that Mettler’s EBITDA margins are slightly above the average of its industry peers. However, its revenue and EBITDA per employee is the worst among peers. This is atypical among the data observed, where companies with above average margins tend to have above average sales and EBITDA per employee results, while those with below average margins exhibit below average per employee metrics. Most of Mettler’s lab products are <$10k, though claimed to be premium and market-leading
    • We sent our investigators to China to see what we could learn. Mettler has a complex structure of 10 entities, but there are three entities that account for a substantial portion of financial activity. When investigators visited Mettler’s two registered addresses in Shanghai accounting for >$700m of sales, they found an empty office in a building, and another gated building with no signs of Mettler. When asked, people on site had never heard of Mettler. This raises the possibility Mettler is engaging in a tax dodge scheme
    • Mettler’s total assets in China per its tax filings are lower than reported in SEC filings. The Chinese fillings of the 10 subsidiaries record $564m in assets vs $1.2bn in SEC filings. We estimate inflated asset values could be a hallmark of inflated profits of $50m/yr
    • Mettler has largely eschewed a balanced M&A program and greater R&D spend in favor of share buybacks. We estimate since 2008, it has deployed 83% of operating cash flow to stock repurchases, a percentage far in excess of its analytical instrument peers
    • Part of management’s annual cash bonus is tied to “Adjusted EPS”, which ironically doesn’t adjust for it artificially increasing EPS with repurchases at ever increasing multiples. The repurchase strategy is experiencing diminishing returns
    • Now trading at 37x book value, 7x, 26x, and 36x 2019E sales, EBITDA, and P/E, Mettler is the most expensive stock among its peer group, and will face significant comp challenges and headwinds from slower growth being signaled in Lab spending and in China
    • Six analysts are a “Hold” and two are “Underweight”, and two are “Sell”. With the average analyst price target at $705, there’s an implied 14% downside on valuation alone
    • However, we believe investors will re-calibrate Mettler’s true EPS once they re-think the past allegations of financial issues raised by a former employee, proof of a qualified audit opinion in India, and reassess the probability and risk of financial restatement.
    • By normalizing street estimates for aggressive accounting choices, never-ending restructuring charges, and lower sales and profits in China, we estimate normalized Adj EPS of $18.09 – $20.31, materially lower than consensus at $22.70. Mettler’s valuation premium should contract as investors re-think the quality of earnings and management. By valuing shares at our normalized earnings and a slight discount to industry multiples, it’s easy to justify 30%-50% downside risk ($410-$575/sh).

Axon Enterprises, Inc.

  • Axon Enterprises (Nasdaq: AAXN), the maker of the Taser stun gun, has been positioning itself more as SaaS provider of analytics through body cams to law enforcement agencies. With a history of SEC inquires, delinquent filings, and material weaknesses, we believe Axon will shock investors with significant earnings disappointment and increasing cash burn as it fails to scale beyond these niche businesses. Furthermore, we believe investors misunderstand Axon’s exposure to China tariffs, which will constrain margin growth, and its aggressive revenue recognition policies, which have pulled forward revenues. As part of our research, we spoke with a law enforcement expert at one of the 5 largest police departments in the US, a former Axon product executive, and a leading global competitor. With its shares and valuation trading near an all-time high, and analysts price targets of $72 (implying 9% upside), we think the risk/reward is terrible and believe investors should brace for 40% – 60% downside risk ($27.50 – $40.00).
  • Taser’s core stun gun product is mature with limited domestic unit growth opportunities. A new Taser 7 introduction, over three years in development, is unlikely to materially change this trend aside from a short-term benefit
  • Meanwhile, its faster growing Software and Sensors (including Axon Cloud) is experiencing a slowdown, while its margins are also contracting. We believe these trends will continue as costs escalate from offering unlimited video storage, and competition increases
  • Now 5 years into the Taser 60 program introduced in 2014, and with the Taser having a 5yr expected life, we believe its early mover advantage is being eroded by competitors pricing and solutions on the software and sensor side. Axon’s best gains are now behind it
  • Axon’s Q1 operating cash burn was the worst in its public history. In addition, Axon quietly increased its line of credit from $10m to $100m (without filing an 8-K), an odd move given it has $350m of cash on its balance sheet, no debt, and is forecasted to produce profits this year of $56m according to analyst projections
  • Axon raised $234m of equity in June 2018 for no defined purpose, has spent only $5m on the plagued acquisition of VIEVU, and announced its intention to build a new HQ despite underlying Taser unit growth struggles. From our experience exposing Chinese financial schemes, capital raises for undefined purpose and suspect capex projects are significant red flags
  • We believe Axon has concealed its dependence on Chinese imports. It removed the word “China” from its recent 10-K, but in Q1’19 said that “tariff and customs expenses” weighed on margins without quantifying the amount or country source
  • Based on import records, we believe Axon has become increasingly dependent on China imports tied to the body cam business in the past few years, and given on-going tariffs, we believe these costs will weigh on margins, and could easily cause it to miss 2019E EBITDA by 10%. Based on our field research (not disclosed by Axon), we find some evidence it has implement upwards of 5% price increases in Q1’19, yet despite this increase, gross margins were still under pressure and missed company estimates by 250bps
  • There are many data points to cast doubt on the accuracy of Axon’s margins beyond it having recently reported a material weakness tied to revenue recognition and cost of sales, fail to promptly address SEC comment letters, and have its CFO resign:
  • Axon released its Taser 60 plan in 2014, allowing customers to save by bundling and paying for product and services over 5 yrs. Axon increasingly recognizes revenues under “multiple performance obligation” accounting tests which gives it discretion to decide the timing and value of revenue recognition. It claims its bundles have “stand-alone” value, and books revenue for hardware upfront. Bolstering our concerns, public contracts we’ve evaluated include no stated value for the hardware. We estimate this has inflated revenues by 6% – 9% in the past few years
  • In addition, Axon has never disclosed errors or accounting issues tied to compensation expenses. However, Spruce Point has unearthed 401k plan filings at the IRS where Axon admits errors dating back to 2014. SEC reported expenses do not match IRS filings
  • Axon’s $17m acquisition of VIEVU in May 2018, during a company reposting period, stoked a $1.8bn increase in market value. Based on our estimate, the market for bodycams is at best a $356m market, but the TAM is constrained, margins are shrinking and losses are accelerating
  • Axon stated significant cost synergies as part of the deal rationale. However, more than a year later, Axon still operates a separate call center for VIEVU. Based on our work, it appears that sales declined sharply after the acquisition, while losses intensified. We believe there are no synergies, and VIEVU was a defensive acquisition to buy into the NY Police Dept. We also find that Axon took an enormous inventory reserve amounting to 70% of the total amount of inventory it acquired in the transaction
  • Axon has rapidly inflated its Total Addressable Market (TAM) from $4.8bn (2016), $6.5bn (2017) to $8.4bn (2019). Yet, by closely analyzing assumptions, it becomes obvious that much of this TAM is largely unproven, and being exaggerated with unrealistic pricing assumptions:
  • Axon Records / Dispatch: Significant entrenched competition in these critical areas will make it extremely difficult to crack this market. Axon has given the records away for free to try to whet customer appetite. However, the purchasing decision is not always tied to police chiefs, where they have their best relationships. We believe the market is dominated by Motorola, Tyler Technologies, and CentralSquare Technologies. These three players have largely consolidated the market through acquisitions, leaving Axon no alternatives to buy its way into the market, and punting its future on a greenfield development strategy with a high risk of failure
  • Analysts’ average price targets for Axon is $72.30, or just 9% upside from the current price. A majority of analysts (9) are bullish, but there are five (5) that are neutral or expect Axon to perform in-line with the market. Four (4) brokers fail to offer a price target
  • Analysts have bought into the narrative that Axon is a superior “razor / razor blade” model with a promising recurring revenue and cloud business. However, we believe this is a one-time boost from a move to the Taser 60 subscription model in 2014, that is now maturing five years into the program. All the while, future growth opportunities will remain challenging, and analysts have amnesia as it relates to Axon’s past SEC investigations, material weaknesses, and legal spats and view them as one-off “non-recurring” issues. Based on our recent findings, we beg to differ, and don’t believe that Axon is worthy of its super valuation of 7.4x, 46x, 65x 2019E sales, EBITDA and EPS, respectively
  • Meanwhile a key executive and Board member recently departed, which we believe signals waning confidence in Axon’s future, and supports our case that Axon has a technology roadmap challenge, and constrained ability to acquire deeper penetration in its verticals. Axon’s EVP of World Wide Products, recruited from Apple, quietly left in less then two years. Brett Taylor, Chairman of Axon’s Technology Committee (and M&A Board member), also just resigned as disclosed on June 14th
  • We believe a majority of the brokers pitch Axon’s stock to retail investors. Sophisticated institutional investors have been selling shares over time, side-by-side with insiders


Verint Systems, Inc.

  • Verint Systems Inc. (VRNT or “the Company”) is a call center software provider which has fallen far behind the industry’s evolving technological standards and which is making up for slow growth with aggressive M&A and dubious accounting. While Verint reported 8% sales growth in FY19, we believe that, netting out M&A contributions, FX, and the effects of ASC 606, organic growth – which the Company never discloses – was negative. Despite Verint spending ~$1B on M&A since FY15, sales have grown at only a 2% CAGR, and FCF / share has declined at a CAGR of 1%. Management nevertheless rewards itself with compensation 3x that of its most comparable (but far healthier) peer, hitting comp targets through nonsensical earnings adjustments which appear nowhere in its filings except deep in the appendices of its proxy statements. Management’s questionable conduct persists over calls for improved governance and transparency, which have culminated in a proxy battle with long-time shareholder Neuberger Berman. Its disregard for shareholders concerns us given its deep connections with other infamous frauds and history of engaging in dubious business practices to flatter reported results. Even then, bulls interpret reported growth as a sign that the purported cloud-oriented strategy is working, leaving VRNT trading at all-time high multiples even as organic growth sputters and ASC 606 benefits anniversary.
  • A Poor Business Lagging Peers: Verint’s core business is “customer engagement solutions” – a euphemism for call center software. Industry incumbents Verint and NICE were once near-duopolists, but NICE acted on the industry’s shift to the cloud much more effectively, and it continues to grow alongside technologically-savvy upstarts at a high-single-digit rate, while Verint suffers from the industry’s rising technological demands and lower barriers to entry.
  • Aggressive Spending On Low-Quality M&A Obfuscates Organic Growth And Appears To Create A Cookie Jar For “Beat & Raises”: Since FY15, Verint has spent ~$1B on M&A. KANA, its biggest acquisition, failed spectacularly in our view, as sales growth immediately turned negative once the acquisition was anniversaried. Verint has continued to pursue smaller tuck-in acquisitions since, but most deals go unannounced, and are not explicitly named in SEC filings. We believe that, after taking into account M&A, FX, and the effects of ASC 606, organic growth was in the low single digits in FY18 and negative in FY19, far below reported top-line growth in the high single digits. Last quarter, management raised guidance by just $20M upon acquiring ForeSee Results, Inc., whereas court filings indicate that ForeSee was generating ~$80M in sales at the time of the bankruptcy of its former parent, Answers Corp. (2016), and was projected to grow to $130M by this year. We believe that subsequent sales growth characterized as organic was largely driven by this and other acquisitions, and that its underreported inorganic sales contribution created a “cookie jar” which Verint used to beat Q4 and raise FY20 guidance.
  • Key Executives With Dubious Pasts: Dan Bodner has been CEO of Verint since its founding in 1994. For much of the 1990s and 2000s, it was a subsidiary of Comverse Technology, whose CEO, CFO, and GC orchestrated a massive options backdating scandal during this time. All three sat on Verint’s Board and were the sole members (with Bodner) of key Board committees. A later investigation found that Verint had carried out aggressive business practices under Bodner to decrease sales volatility and inflate reserves. CFO Douglas Robinson worked for Computer Associates for 17 years through the 1990s and 2000s, including stints as a senior member of the finance department. CA was similarly shown to have engaged in aggressive revenue recognition practices to inflate sales and earnings. Though Robinson was never implicated, his close association with CA’s finance department at the time of the fraud concerns us.
  • Aggressive Accounting Measures And Non-GAAP Add-Backs Inflate Performance: We find it curious that, in FY19, for the first time, management announced that it would capitalize commissions. Whereas Adj. EBITDA and Non-GAAP Income were reported to have grown by 16% and 18% in FY19, respectively, growth in these metrics would have been just 2% and less than 0% when capitalized commission costs alone are added back to expenses. We also estimate that ~11% of Adj. EBITDA and ~45% of Non-GAAP Net Income are attributed to add-backs which we consider unusual or otherwise unjustifiable. As is the case with many companies researched by Spruce Point, Verint shows a widening gap between unadjusted and adjusted EBITDA, suggesting that management is growing increasingly aggressive to present attractive results as organic sales and earnings continue to underperform.
  • Questionable ASC 606-Related Accounting Changes Inflate Sales And Earnings Growth: ASC 606 adoption boosted Verint revenue by $47M (5%) and net income by a massive $51M (75%) in FY19. This is entirely out of line with peers such as NICE, whose revenue declined due to ASC 606, and whose net income went largely unaffected. Management also claims to have made changes to its business practices in anticipation of its adoption of ASC 606 – something we find oddly suspicious – and, in FY19, to have double-counted revenue which it had recognized as revenue in prior periods. Of course, it made all of these changes with far less transparency than peers such as NICE, which was not only far less aggressive in its application of ASC 606, but which, unlike Verint, provided clear reconciliations against its financial presentations under ASC 605 standards.
  • Non-Transparent Earnings And Cash Flow Adjustments Help Management Achieve Comp Targets: Performance metrics used by Verint to determine management compensation are riddled with questionable add-backs which are included in no other financial metrics reported by the Company. Management inexplicably adds net interest expense back to operating cash flow to achieve its cash flow targets. Also included in its adjustments are phantom “non-recurring payments” which appear nowhere else in Verint’s financial statements. Further, management recognizes material contingent consideration write-downs on an annual basis, thereby increasing its performance metrics as these reversals boost Company earnings. In so doing, management effectively gives itself credit for its poor acquisitions failing to meet their financial targets. We wonder how Verint’s acquisitions could be underachieving their targets when management appears to understate their prospective inorganic sales contributions.
  • Proxy Fight With Neuberger Reveals Atrocious Governance: Neuberger Berman sees that Verint is struggling to keep up with industry-wide technological change and has pushed it to add new Board members and focus on the cloud. Management has been playing coy with Neuberger for months: it fails to respond to requests in a timely manner, has Neuberger-recommended Board members interview with employees who report directly to the CEO, never appears to seriously consider recommended Board members in the first place, and offers bizarre compromises to Neuberger in an attempt to settle the dispute. While stating publicly that it is focused on the cloud, management tells Neuberger that the cloud is not a primary focus, and that “customers are not interested in the cloud.” We see management’s double-speak, evasiveness towards Neuberger, and generally irregular behavior a significant red flags.
  • Reported Cloud Revenue An Inappropriate And Non-Transparent Measure Of Cloud-Related Sales: Management recently began to report a number of proprietary cloud sales metrics as investors such as Neuberger demand more transparency on cloud-related growth. Company disclosures are inconsistent regarding the fact that its reported cloud sales figures include sales from term-based licenses, for which it can now more aggressively recognize revenue under ASC 606. Accordingly, its cloud sales metrics present a skewed view of its “recurring” cloud-related sales, which will be lumpier than investors currently believe and which could easily disappoint in the near future if the pace of customer adds slows. Industry experts generally do not consider such term-based arrangements to accurately represent true cloud / SaaS revenue, which is more typically arranged in subscription-like agreements, and which therefore produces a steadier and less volatile stream of revenue than would Verint’s term-based contracts for its “hybrid cloud” services.
  • Insiders Bailing As VRNT Is Up 45% YTD And Trading Near All-Time Highs: The Street believes that VRNT trades at a ~35% discount to peers based on an improper view of Adj. EBITDA and net debt. Even then, the avg. analyst price target of $66 yields just 8% upside. After restating EBITDA for questionable add-backs and newly-capitalized expenses, and after removing non-transparent restricted cash items from liquidity, we find that VRNT trades at almost exactly its peer median multiple, despite contracting organic sales and stagnant cash flow. Meanwhile, insiders are dumping the stock just as it approaches all-time highs (up 45% YTD). We believe that its current multiples – its highest in recent history, and comparable to high-quality take-outs SAAS and BSFT – are unsustainable as M&A fails to grow cash flow, as it falls further behind BPO software peers and out-of-favor with SaaS-oriented investors, and as it laps FY19 ASC 606 tailwinds. We value the slow-growing Company at an EV/EBITDA multiple of 8-10x for a price target of $17-25, yielding 60-70% downside.


Kornit Digital Ltd. (Update 1)

  • Spruce Point believes Kornit Digital (“the Company” or KRNT) saw 2018 revenues, and particularly cash flow, driven entirely by Amazon’s expansion of its Merch program, which are likely to taper based on a slow-down of program growth, and would leave a gaping hole in Kornit’s aggressive revenue growth strategy. Forensic evidence from warrants granted to Amazon suggests that 105% of 2018 operating cash flow came from Amazon gross payments, and a cessation of new orders and rebate incentives coming due will depress future results. In addition, we believe Amazon is expanding into Japan, and that Kornit is not well positioned to win. Investors’ faith in Kornit’s financial results needs to be evaluated relative to its CFO having been the CFO at MRV Communications, which suspended reliance on its financials related to an option-backdating scandal. With shares up 55% YTD and trading near all-time highs at a substantial premium to digital printing peers, Kornit has 75% – 85% downside risk ($4.50 – $9.30/ sh)
  • Kornit’s revenues to Amazon were 17% in 2018, and grew substantially after Amazon faced environmental permitting delays in 2017. The sales to Amazon are primarily linked to printers supplied to its Merch by Amazon program, which allows merchants to design and sell printed shirts and sweaters, while outsourcing production and logistics to Amazon. Caution: Based on shipping records and weight tonnage, we can estimate unit printer shipments. We believe Kornit has discounted list prices to Amazon up to 50%. We also cannot accurately back into Kornit’s 2018 reported revenues, and have extreme concerns about the potential for revenue recognition issues.
  • While the program enjoyed early success, Spruce Point believes US program growth has plateaued, and has hard evidence that printer orders delivered to Amazon in the US have dramatically slowed YTD 2019. Furthermore, we believe Kornit will lose Amazon’s next leg of expansion of the Merch program to Japan:
  • Selling digital printers is akin to selling a commodity product in a hyper competitive industry. In order to entice Amazon, Kornit issued it cashless warrants (a weak form that requires no capital commitment by Amazon) for its stock, which should be viewed as price discounts and are netted against sales.
  • Based on the warrant vesting formula, we can determine that total payments by Amazon to Kornit in 2018 were 105% of total 2018 operating cash flow. This suggests underlying organic cash flow decline from its remaining business.
  • In addition to warrants (and price discounts to list price), Amazon also gets price rebates, and Kornit is not adequately disclosing the rebate terms in the contract or in the 20-F. This amounts to an effective “triple incentive” to win Amazon.
  • Based on our research, we believe the rebates will kick-in up to a year afterwards, causing short-term inflation in Kornit’s cash flow, and will be a drag on Kornit’s operating cash flow in 2019.
  • If Kornit received a multiple closer to printing and computer equipment peers, and our concerns about Amazon come to fruition, it’s easy to justify a price target of $4.50 – $9.30 or 75% – 85% downside risk.


Kornit Digital Ltd.

  • Spruce Point believes Kornit Digital (“the Company” or KRNT) saw 2018 revenues, and particularly cash flow, driven entirely by Amazon’s expansion of its Merch program, which are likely to taper based on a slow-down of program growth, and would leave a gaping hole in Kornit’s aggressive revenue growth strategy. Forensic evidence from warrants granted to Amazon suggests that 105% of 2018 operating cash flow came from Amazon gross payments, and a cessation of new orders and rebate incentives coming due will depress future results. In addition, we believe Amazon is expanding into Japan, and that Kornit is not well positioned to win. Investors’ faith in Kornit’s financial results needs to be evaluated relative to its CFO having been the CFO at MRV Communications, which suspended reliance on its financials related to an option-backdating scandal. With shares up 55% YTD and trading near all-time highs at a substantial premium to digital printing peers, Kornit has 75% – 85% downside risk ($4.50 – $9.30/ sh)
  • Kornit’s revenues to Amazon were 17% in 2018, and grew substantially after Amazon faced environmental permitting delays in 2017. The sales to Amazon are primarily linked to printers supplied to its Merch by Amazon program, which allows merchants to design and sell printed shirts and sweaters, while outsourcing production and logistics to Amazon. Caution: Based on shipping records and weight tonnage, we can estimate unit printer shipments. We believe Kornit has discounted list prices to Amazon up to 50%. We also cannot accurately back into Kornit’s 2018 reported revenues, and have extreme concerns about the potential for revenue recognition issues.
  • While the program enjoyed early success, Spruce Point believes US program growth has plateaued, and has hard evidence that printer orders delivered to Amazon in the US have dramatically slowed YTD 2019. Furthermore, we believe Kornit will lose Amazon’s next leg of expansion of the Merch program to Japan:
  • Selling digital printers is akin to selling a commodity product in a hyper competitive industry. In order to entice Amazon, Kornit issued it cashless warrants (a weak form that requires no capital commitment by Amazon) for its stock, which should be viewed as price discounts and are netted against sales.
  • Based on the warrant vesting formula, we can determine that total payments by Amazon to Kornit in 2018 were 105% of total 2018 operating cash flow. This suggests underlying organic cash flow decline from its remaining business.
  • In addition to warrants (and price discounts to list price), Amazon also gets price rebates, and Kornit is not adequately disclosing the rebate terms in the contract or in the 20-F. This amounts to an effective “triple incentive” to win Amazon.
  • Based on our research, we believe the rebates will kick-in up to a year afterwards, causing short-term inflation in Kornit’s cash flow, and will be a drag on Kornit’s operating cash flow in 2019.
  • Kornit uses the non-standard Monte Carlo analysis to value the warrants, instead of the more common Black-Scholes method, allowing it wider discretion to value the warrants. It claims it cannot issue warrant expense guidance. Warrants are effectively options, and plenty of public companies issue guidance on stock compensation expense.
  • Kornit avoided including warrants in its diluted share count calculation, despite the fact 1.1m are vested and exercisable, with an approximately market value of $16m. Kornit’s diluted EPS is lower than it appears.
  • Warning: There’s a discrepancy between reported Amazon revenues in Kornit’s filings. In addition, because it appears Kornit received more cash than revenues booked from Amazon, deferred revenues should have increased more than reported.
  • Warning: Kornit initially tried to exclude the warrant cost from Non-GAAP EPS, an aggressive tactic that the SEC questioned, and made it restate results. In our view, this illustrates how aggressive management is using the warrants.
  • Extreme Warning: Kornit’s CFO was the CFO, and named in the option backdating scandal, at MRV Communications (Nasdaq: MRVC), which was delisted to the pink sheets, restated financials and settled a shareholder lawsuit. He omits from his bio that he started his career at Ernst & Young, which served as MRVC’s auditor and as Kornit’s. We observe that Kornit backdated the warrant expense in 2016 – before the Amazon deal was announced in Jan 2017. The backdating amount in Q4’16 has represented the single largest charge since inception, which suggest front-loading of expense recognition and could allow Kornit to inflate future revenues.
  • Kornit’s second biggest customer, Cimpress NV (Nasdaq: CMPR) known for its Vistaprint business, revealed in late Jan 2019 that it is under severe pressure, and going through a management shake-up. Kornit conceals the extent of its exposure to Cimpress.
  • Kornit’s long-time CEO abruptly and unexpectedly resigned in the middle of 2018, right after shipments were made to TX and PA, and ahead of the miraculous recovery in its financial performance and stock price explosion. Before leaving, he received a “special bonus” for what amounts to the ordinary role of helping the company raise capital.
  • The new CEO has issued wildly optimistic long-term revenue goals of $500m. Kornit focuses investors to revenue over cash flow, which has remained elusive. To illustrate, from 2015-2017 it converted just 1.5% of sales to cash.
  • After presenting its long-term vision to investors, Kornit’s earliest and biggest shareholder, sold all of its stock in December 2018. The appears to be a vote of no confidence in management’s long-term growth plan.
  • Kornit’s current valuation is at an all-time high, and significantly above its long-term average. In addition, when viewed in the context of its competitors’ multiple and other low-technology computer and printer peers, Kornit’s valuation is at an extreme we’ve never seen. Kornit’s average sales, book, and cash flow multiple are 4.4x, 4.0x, 80x vs. current 5.6x, 5.8x, and 182x on our estimates. Digital printing peers trade at 1x, 1.4x, and 9x.
  • If Kornit received a multiple closer to printing and computer equipment peers, and our concerns about Amazon come to fruition, it’s easy to justify a price target of $4.50 – $9.30 or 75% – 85% downside risk.



  • PetIQ, Inc. (“PetIQ,” “PETQ,” or “the Company”), a recent JOBS Act IPO, is the product of an acquisition of an unattractive veterinary services business by a shady veterinary drug distribution business. The distribution business, built on the ethically-nebulous practice of veterinary drug diversion into the retail channel, appears to depend heavily on access to vendor rebates for earnings, and is currently at risk to changes in drug manufacturers’ approach to retail distribution. PetIQ’s planned rollout of 1,000 new pet wellness centers could also burn over $200M in cash over the next five years without even achieving break-even profitability until FY23. The Company has already changed its story and growth targets numerous times despite being public for just 20 months, and is not fully transparent about the risks facing both businesses. Management is asking investors to trust it to execute despite having missed nearly all prior projections. Further, we find that PetIQ management – whose CEO has close ties to the notorious Petters Ponzi scheme and the Fleming Corp accounting fraud (which go undisclosed on his online bio) – has a history of engaging in business practices which have come under legal and regulatory scrutiny. Investors should proceed with extreme caution.
  • PetIQ Occupies A Murky Space In The Pet Pharmaceuticals Market: PetIQ purchases prescription and OTC veterinary pharmaceuticals from veterinarians and licensed distributors. Manufacturers have historically restricted themselves from selling to non-licensed distributors or directly into the retail channel in order to protect veterinarians from retail competition for pet medicine sales. However, veterinary drugs do ultimately reach the retail channel – both brick-and-mortar and online – through non-veterinarian distributors (such as PetIQ) which purchase excess product from veterinarians, and which often form arrangements with veterinarians to purchase inventory in size. While not technically illegal in most states, the practice is frowned upon by vets, and has been the subject of congressional hearings and FTC commentary through the last several years. PetIQ’s General Counsel, who presumably blessed its business practices – yet whose personal bankruptcy was never disclosed to investors – recently resigned in Mar 2019. Manufacturers are increasingly beginning to bypass the grey market and sell directly to retail – as is Merial with its Frontline product, as of FY18 – showing cracks in PetIQ’s economic ecosystem. Wider competition in the pet medicine distribution space and greater transparency into distributor margins among retailers could bring PetIQ product segment operating margins – 8-9% as of today – closer to the 1-3% margins shown by other pharmaceutical distributors.
  • Core Pharmaceutical Distribution Business Is Under Pressure: Consumers are shifting away from topical flea and tick medications (30-40% of PetIQ sales) in favor of more dependable and hassle-free oral and other treatments. Frontline, one of PetIQ’s major sellers, is facing pressure from both this and the proliferation of cheaper substitutes. Consumers are also reporting that Frontline has become less effective following a recent formula change.
  • Recently-Acquired Services Segment From VIP Will Deliver Slow Sales Growth And Burn Significant Cash: Whereas PetIQ management has publicized its new services business as a 25% organic grower, total segment growth was just 9% in FY18, and we estimate that growth from existing stores was just 1-2%. Management is planning to roll out 1,000 new health and wellness centers in retailers such as Walmart through 2023, and expects each store to offer 30% contribution margins at maturity, but we estimate that the roll-out could burn $200M of cash through the next five years (perhaps more thereafter) while just barely achieving break-even profitability in FY23.
  • Suspicious Circumstances Around VIP Acquisition: PetIQ eliminated $111M of inter-company sales in the combined company’s pro forma 2017 income statement (over half of PetIQ’s COGS), revealing the closeness of the relationship between PetIQ and VIP. Of the $220M purchase price, $76M was allocated to VIP’s “customer relationships” which were written down twice from $90M, suggesting that these relationships were of declining quality or were reduced to suppress amortization and cut prospective GAAP losses in half. After the acquisition, over 100% of earnings for the pro forma 2017 combined company were attributable to vendor rebates, which grew by 175% in the year prior to the deal. We find it suspicious that PetIQ would spend $220M on the $250M-revenue VIP business after its EBITDA appears to have declined for two straight quarters and go negative prior to the acquisition.
  • Acquisition Driven By Fragile Industry Dynamics: Spruce Point believes that PetIQ was motivated to acquire VIP for more direct access to manufacturer relationships and vendor rebates as it outgrew the capacity of its previous vendors. At the time, this arrangement would have been beneficial to Merial as well, as it would have allowed Merial to drive retail sales of its pet medications more directly while maintaining the appearance of selling only to vets. However, now that Merial has begun selling directly to retail, PetIQ is at risk of seeing its margins regress to those of pharmaceutical distributor peers as retailers gain greater visibility into distributor margins and wholesale pricing.
  • A Company With A Dubious Past And A History of Questionable Vendor Arrangements: PetIQ appears to have been born as W.T.F. Wholesale in the early 2000s. W.T.F. formally closed shop in 2011 – but not before accepting hundreds of thousands of dollars’ worth of product from veterinary suppliers without paying, after which it appears to have continued to do business as “True Lines Distributors,” as alleged in lawsuits. True Lines was a subsidiary of “True Science Holdings, LLC,” which became PetIQ in 2016. True Science appears to have formed non-arms-length relationships with veterinary drug wholesalers through the first half of the 2010s. A former supplier alleged that, during this period, True Science used these close relationships to manufacture artificially inflated assets and earnings. He also alleged that its accounting practices triggered a federal investigation in 2014.
  • CEO With A History Tied To Vendor Rebate Schemes: CEO McCord “Cord” Christensen was a major funnel of investor money into the Petters Ponzi scheme – a fact which goes unmentioned on his online bio. He was characterized as an unknowing victim in court proceedings, but was closely associated with Petters as an employee and business partner through the 2000s, and controlled several entities which recruited millions of dollars of investor money for Petters. He was also involved with subsidiaries of Fleming Corp, which was identified as an accounting fraud for inflating earnings through the improper application of vendor rebates. The fraud was so egregious that the business was nicknamed “Flem-ron” in the scheme’s fallout.
  • Downside Risks To Valuation Abound: We believe that PetIQ earnings are heavily dependent on access to manufacturer rebates. We consider these earnings of low quality at best. With Merial now selling Frontline directly to retail, we expect the value of PetIQ’s rebates to dwindle as Merial and larger retailers increasingly squeeze its markups. Should regulation surrounding the grey market change – for example, if regulators legitimize the retail channel for veterinary drugs – PetIQ could be at risk of disintermediation, and industry legitimization would likely lead to greater industry competition and pressure PetIQ’s unusually high margins. We also wonder whether PetIQ’s demonstrated profitability is sustainable given its questionable rebate accounting. The possibility of further regulatory investigation into PetIQ’s accounting builds further downside risk into the stock.


Aerojet Rocketdyne Holdings, Inc.

  • In our opinion, Aerojet Rocketdyne (NYSE: AJRD) – formerly Gencorp (NYSE: GY) – is facing fundamental pressures, masked by complicated and aggressive accounting, which gives investors a potentially misleading impression of stability and growth. While holding no conference calls, and having only four analysts cover the stock, we believe the market is fundamentally ignoring ~$900M of liabilities associated with the business, making the Company 5x more levered than it appears and its valuation “cheap”. Furthermore, analysts blindly pencil in 4% revenue growth in the next two years, despite hundreds of millions of dollars in revenue programs that are disappearing. We see 40% – 60% downside once investors piece the puzzle together.
  • Aerojet’s primary rocket propulsion business has historically benefited from high barriers to entry, oligopolistic pricing and favorable cost-reimbursable contracts. In our opinion, these dynamics appear to have enabled the Company to win business and protect margins, despite many claims it lacks a culture of innovation
  • These dynamics have shifted in recent years with the emergence of disruptive low-cost competitors driven by lionized CEOs (Blue Origin / Bezos and SpaceX / Musk ), and the impact of the Northrop’s Orbital ATK acquisition on AJRD’s missile business
  • The winding down of various platforms (AJ-60 + RS-J8) and failure of AR1 to low cost competitor Blue Origin’s BE-4 engine for the Vulcan Rocket. We believe the loss to Blue Origin was the death blow to Aerojet by losing ULA, its only customer in space launch. ULA, a material 17% customer, is expecting to coming under pressure: earnings are forecasted to be down 47% in 2019. Spruce Point estimates these losses eliminate $300m of expected revenues in the near and long-term
  • Revenues from RS-25 for the SLS program (14% of 2018 revenues), are set to decline from the Sept 2018 completion of a $2.0bn contract, and the run-off from the 2015 $1.5bn contract to be completed by 2023. Longer-term challenges remain with NASA’s over-budget Space Launch Systems (SLS) program dubbed the “rocket to nowhere”, and a recent change of tone at NASA suggest it is taking steps to find cheaper commercial alternatives to the RS-25.
  • In 2018, Aerojet benefitted from boosts in missile orders from key programs which are set to decline by 5% and 11% in 2019/2020, respectively, according to the recent March 2019 DoD budget request. We estimate that Aerojet’s revenues increased $117m in 2018 from the growth in just two key programs: Standard Missile and THAAD. These two key programs are budgeted to decline by 2% and 35% in 2019 and 2020, respectively
  • Management And The Board Have Little At Risk Owning Just 3.0% Of The Company (1.9% ex: Chairman Lichtenstein’s Ownership). Years Ago, The Employee Savings Plan Was A Material Owner >10%, Now It’s Effectively 0%. Short-Term Incentive Bonus Definitions Becoming Much More Subjective, Conveniently Allowing The Board To Lavish Management With Credit For Maximum Cash Compensation
  • Upon Hiring, The CFO’s Bio Claimed He Was A CPA, Yet His Bio Now States He “Completed Exam Requirements”. General McPeak was the Lead Director at Miller Energy Resources (NYSE: MILL), a bona-fide accounting fraud that went to zero. The SEC charged management with securities violations and even fined the auditor. Perry was CFO and Treasurer of United Industrial Corp during a period the SEC blasted it for fraud concerning foreign corruption and stated the Company “lacked meaningful controls to prevent illicit payments.
  • By applying a discounted multiple range to our adjusted enterprise value and financial results, we derive a price target of $13.00 – $20.00 (40% – 60% downside) including entitled land value. Follow the money: Many long-term owners are consistently selling stock and reducing ownership. Aside from passive investor Vanguard, Aerojet has attracted only one new fundamental investor of size in recent years


Dexcom, Inc.

  • Dexcom, Inc. (“Dexcom,” “DXCM,” or “the Company”) manufactures continuous glucose monitoring systems (“CGMs”) for diabetic patients. It competes with Abbott’s FreeStyle Libre in the stand-alone CGM space. Dexcom’s G-Series has until now been considered the gold standard, with the Libre a cheaper, user-friendly alternative. However, Abbott is set to release the Libre 2 in the U.S. imminently – in a matter of weeks or months, we believe – and will close most, if not all, of the technological gaps which separate it from Dexcom’s G-Series. CGM commoditization will promote heavy price competition – and Abbott, as the low-cost manufacturer by a factor of 4, can put heavy pressure on Dexcom profits with little downside to its own margins. The Street believes that the down-market Libre is not a serious threat to Dexcom’s market, but the Libre has taken >70% incremental share of the U.S. Type 1 (“T1”) market and >95% incremental share of the U.S. Type 2 (“T2”) market since first being released in the U.S. – even before the release of the more advanced Libre 2. We believe that the G6’s target U.S. T1 market offers just 1-2 years of remaining patient growth, severely restricting Dexcom’s patient base until the release of the T2-oriented G7 in late 2020-21 at earliest. Importantly, we also find evidence that Dexcom’s recent sales growth acceleration was driven by an effective price increase and stockpiling of cheaper legacy G-Series models – and is not an indication of recent patient growth (which management conveniently stopped disclosing).
  • Abbott Set To Close Technological Gap Between Libre And Dexcom G-Series: Until now, Dexcom’s alarm-equipped, accurate G-Series has been considered the gold standard of stand-alone CGMs, with Abbott’s Libre (new in the U.S. as of 2018) a low-cost, easy-to-use alternative. Abbott, however, is set to release the Libre 2, which includes a similar high/low glucose alarm and is sufficiently accurate to serve the needs of most, if not all, diabetics. Priced at an ~80% discount to the G6, the Libre is the far more sensible option for T2 diabetics, and even T1 diabetics – a surprisingly price-sensitive population, per our proprietary survey – will be drawn to the cheap yet advanced Libre 2. Whereas Dexcom was once a technologically-superior first mover, it is now fighting with near-equals for mass-market adoption.
  • Dexcom Has Few Avenues To Near-Term Patient Growth: U.S. T2 patients did not adopt CGMs in material size until the release of the far cheaper Libre 1. Abbott is now taking >95% incremental share of U.S. T2 patients, suggesting that T2 patients may have never been part of the G-Series TAM. Dexcom will effectively be locked out of the T2 market until it releases a cheaper, down-market CGM similar to the Libre (late 2020-21 at earliest, per management, after having failed to meet its initial target of 2018). Libre is also taking >70% incremental share of U.S. T1 patients, even before the technologically-comparable Libre 2 hits the market. With the U.S. T1 market already ~50% penetrated (with a likely ceiling of 70-80%), Dexcom has limited room for patient growth through the next 1-3 years as T1 patient adoption decelerates, as it competes against the cheap yet technologically-comparable Libre 2 in its core T1 market, and as it fails to make significant headway in the T2 market – by far the largest source of CGM patient growth through FY19-21 and beyond.
  • Abbott’s Economies Of Scale As A Large Medical Device Player Could Overwhelm Dexcom Amidst Industry Pricing Pressure: The leveling of the technological playing field between Abbott’s and Dexcom’s CGMs will likely bring downward price pressure to the space, particularly given the Libre’s current ~80% discount to the G6. Abbott is the low-cost CGM manufacturer by a factor of 4, and could overwhelm the one-product Dexcom in an aggressive price war. If Dexcom is forced to price its current CGM lineup on par with the Libre, Abbott could wipe out Dexcom’s gross profit in its entirety given Dexcom’s while taking only a 100 bps hit to its own gross margin, per our estimates. Dexcom’s vast scale disadvantage could also potentially prevent it from ever producing a cheaper T2-targeted CGM profitably.
  • Investors Misinterpreting Recent Growth Acceleration As Growth In Patient Base: Bulls believe that recent sales growth acceleration to >50% yoy has been driven largely by patient base expansion. However, the decoupling of transmitter sales growth from sensor sales growth suggests that the growth acceleration is a consequence of A) recent effective sensor price hikes and B) stockpiling of cheaper legacy G-Series sensors ahead of the release of the more expensive G6. Management no longer discloses patient base growth as of February 2019, hiding any recent slowdowns in patient base growth from investors’ view.
  • A Risky One-Product Company Valued As A Growth Story: DXCM is valued at a 57% premium to peers on its seemingly exciting growth story despite exposure to competition / TAM saturation. Even bullish sell-side analysts see only ~5% upside, and smart money seems to be wary of DXCM’s growth prospects. We see 45-60% near-term downside in DXCM shares on disappointing sales growth and a multiple rerating, and even more potential future downside on longer-term price pressure.


iROBOT CORP (Update 5)

  • Spruce Point has discovered new evidence that SharkNinja (“Shark”) – a major competitor of iRobot (IRBT or “the Company”) – is primed to release a new, high-end, smart, and home connected robot vacuum cleaner (RVC) priced at a 25% discount to the comparable Roomba i7. Another competitor has already begun selling a comparable product at close to half the price of the i7. Whereas Shark and other competitors have until now taken share primarily at the lower and middle tiers of the robot vacuum market, they now will compete at the premium tier. The consensus among bulls is that Roomba is a technologically superior product and the market leader at the premium tier, affording it some protection from pricing pressure. We believe that this narrative is no longer valid: iRobot will now face legitimate competition at the high end of the market.
  • Management has attempted to drum up investor confidence by pitching the potential of its non-Roomba products – specifically, its robot mop (Braava) and forthcoming robo-lawnmower (Terra) – but we believe that guidance is aggressive on the former (by management’s own admission), and we are skeptical that the latter will meet with commercial success in the U.S. Investors should brace for significant disappointment.
  • Release Of High-End RV950 Shark Robot Vacuum Appears Imminent: Spruce Point recently discovered that Shark is prepared to release the RV950 – a high-end robot vacuum with features comparable to those of the Roomba i7, but priced at a 25% discount. Product listings for the vacuum have already been prepared on Wayfair and Walmart’s online stores. Shark’s entry into the lower and middle tiers of the market in 2017 represented one of the first non-Roomba robot vacuum product launches by a recognizable and respected home appliance brand, and Shark has since competed aggressively with iRobot’s mid-tier vacuums and has successfully taken market share. We believe that Shark will apply similar competitive pressure to the higher end of the robot vacuum market with the launch of the RV950.
  • RV950 Representative Of Trend Of Heightened Competition At Top Tier Of The RVC Market: We see the impending release of the RV950, and other recent product launches, as evidence that iRobot competitors – once considered “off-brand” or “no-name” products occupying the lower end of the market – are rapidly closing the technological gap between themselves and Roomba, and that robovacs are thus becoming increasingly commoditized. Formerly-unknown brands are quickly gaining respect from the tech world and are seen as legitimate Roomba alternatives. Even then, competing products continue to be priced at a material discount to comparable Roombas. We estimate that pricing pressure at the high end of the market could cost iRobot ~12 points of gross margin on its Roomba segment.
  • Aggressive Braava Projections Unlikely To Come To Fruition: Management is aiming for Braava to contribute 10% of FY19 total sales. Given iRobot’s FY19 sales guidance, this implies that management expects Braava sales to grow by over 50% in FY19. This would be entirely out of line with historical growth rates and with Braava’s recent performance in markets in which it has achieved some level of popularity – namely Japan. We believe that Braava sales will grow by no more than 20-25% in FY19 at the high end. Management’s Braava guidance also implies that it expects Roomba sales to grow by just 14-17% in FY19, a meaningful step down from recent growth rates.
  • Terra A Poor Fit For The U.S. Market: After nearly a decade of development, iRobot finally announced the launch of its robot lawnmower on the Q4 FY18 call. iRobot has a tremendously poor record of developing and selling products outside of its core Roomba line – particularly products meant for outdoor use. We believe that the Terra is a poor fit for the U.S., where lawns are large and difficult to navigate by global standards. In Europe, where the robot mower market is already developed, iRobot will compete with established, respected brands with technologically-advanced mowers, yet with sufficiently deep pockets to weather a price war. This stands in contrast to the conditions which led to Roomba’s success in the U.S., where it came to dominate the market by establishing itself as a first mover and a relatively premium product.
  • Valuation Makes Little Sense: IRBT shares have run up from $75 to as high as $130 through the recent bull market on little more than sporadic optimism regarding U.S.-China trade talks. We find it puzzling that IRBT shares reacted so positively to what was at best a mixed Q4 earnings call. We believe that increasing competition and downward pricing pressure will continue to weigh on top-line growth and margins, and that multiples are tremendously overextended – how else could every single sell-side price target be below current share prices? A potential tariff hike to 25% remains a material risk for iRobot, and could drive another ~15% downside to IRBT shares.


Carvana Co. (Update)

  • Spruce Point believes that the recent terrible financial results reported by Carvana continue to validate our concern about its uneconomic business model that isn’t scaling, is capital destructive, and favors insider enrichment over shareholder wealth creation. Our revised price target is $7.50 – $19.60 (56% to 83%).
  • Q4’18 Results Disappoint By A Mile..Retail Units: 27,750 (vs Bloomberg cons 29,200, vs guidance 27,500 – 30,000)
  • Reported Revenue: $535m v $605m expected (original guidance: $570m – $630m)
  • At The Current Burn Rate of $1.1m/Day, Carvana Had Just 70 Days of Operating Cash On Hand At Yr End
  • We estimate just $12.8m of unrestricted cash on hand by March 1st
  • 100% Gross Margin Finance Revenue Driving GPU: Carvana generates an outsized share (~50%) of GPU from 100% gross margin finance and insurance (F&I) sales, vs. <20% for KMX. Underlying GPU on car sales alone are >10% below industry average and less than half that of KMX
  • In Spruce Point’s opinion, Carvana will require more equity capital to continue operations, and has limited flexibility to incur more debt given its deep junk CCC rating. Yet, despite the accelerating cash burn, management received a 100% increase in cash compensation at the approval of an “independent” Board, further compounding the pain to investors.
  • Other liquidity alternatives include going further into debt by tapping the floor plan facility and/or sale leaseback agreements with $331m of capacity. However, this could be incrementally negative from a credit perspective
  • We caution investors that Carvana’s stated belief that it won’t need to raise additional debt or equity appears aggressive. Importantly, management has a poor track record of hitting its stated financial targets.
  • “The Board also approved annual base salary increases for the Company’s executive officers as part of its annual performance review, including Ernie Garcia III, the Company’s Chief Executive Officer, whose annual base salary was increased from $400,000 to $885,000, Mark Jenkins, the Company’s Chief Financial Officer, whose annual base salary was increased from $375,000 to $735,000, and Benjamin Huston, the Company’s Chief Operating Officer, whose annual base salary was increased from $375,000 to $735,000. The salary increase were approved retroactively to January 1, 2019, consistent with the Company’s practices for annual merit increases.”
  • By reporting on Feb 27th, Carvana is already 2/3rds through the quarter and should be able to provide investors visibility into expected results


Amdocs, Ltd.

  • Amdocs (DOX or “the Company”) is a cryptic entity based in the tax-dodge haven of Guernsey that provides revenue management, BPO and IT services primarily to telecoms. Industry forces have dragged on sales growth to the point that Amdocs appears to be in organic decline. We believe that DOX has engineered superficial top and bottom-line growth alongside unusually stable margins through opaque M&A, aggressive percentage-of-completion accounting, software cost capitalization, and repeated one-off net tax benefits. Challenged FCF growth, self-imposed minimum cash balances, and likely leverage limits will constrain DOX’s ability to pursue growth via M&A going forward. We are also concerned that DOX is accelerating its earnings-inflating cost capitalization scheme by constructing a new Israeli campus. An obscured JV loan, receivable factoring, and capex statements which hide asset sales all point to slowed underlying FCF growth. With insider ownership at an all-time low, evidence that management is milking DOX’s cash through aggressive option comp schemes, and Board members tied to allegations of option back-dating and software cost capitalization, we believe that shareholders should keep a vigilant eye on management’s accounting practices and compensation decisions.
  • Suspiciously Steady Margins: Amdocs shows remarkably steady margins for a firm which frequently absorbs acquisitions ($1.6B since 2012), which should have some degree of operating leverage, and whose business has come under pressure from its largest customer (AT&T). Peers and telcos show much more natural margin variability. Unusually steady margins support our suspicion that Amdocs engages in aggressive percentage-of-completion accounting.
  • Growing Divergence Between Adjusted And GAAP Metrics: Amdocs’ proprietary Adjusted EPS measure has grown steadily through the last 5 years, while GAAP EPS and cash flow have been flat to down over the same period despite the Company’s M&A-fueled growth. Spruce Point has observed both of these patterns among numerous companies on which it has published research, and feels that they are strong indicators of impending financial strain.
  • Questionable One-Off Tax Items: DOX claims up to $60M of one-off net tax benefits on a yearly basis, with the specific sources of these benefits changing almost every year (it claimed $28M in benefits related to its spending on its new campus in FY 2018). We do not believe that these benefits – worth 10% of EBT in FY 2018 – are a sustainable source of earnings. Excluding these items, Amdocs’ tax rate looks much closer to that of most companies.
  • Struggles Generating Cash: In Dec ‘18, DOX began to disclose that it factors accounts receivable (on non-transparent terms). It also obscured a loan issued via a recently-formed JV to finance its new HQ, despite saying previously that it could finance the project internally without material impact to results.
  • Who Signs DOX’s 20-F And Credit Agreement: We observe that DOX’s Head of IR/Secretary signs its 20-F and Credit Agreement. Our research shows that this is a highly unusual practice: the CEO generally signs the 20-F, while the CFO and/or Treasurer normally signs Credit Agreements.
  • Closely Tied To A Low-Growth Industry: As IT support for major telcos, Amdocs’ organic growth is ultimately tied to a stagnant industry – AT&T in particular (~30% of sales). Management attempts to describe industry trends such as consolidation as a tailwind for the Company, but, in reality, slow growth among telcos translates into slow organic growth for Amdocs – particularly as elements of revenue management software become less complex.
  • Management Engages In Frequent M&A To Grow Sales: Amdocs has purchased a jumble of IT and media businesses through the past decade to support growth where it can’t generate its own. Many of these businesses appear to be only tangentially relevant to Amdocs’ core services, and are only partially integrated into Amdocs once acquired. Without these acquisitions, we estimate that Amdocs generates zero to negative organic growth.
  • Management Not Transparent About Inorganic Sales Contributions: Management is frequently asked on earnings calls about the contribution of acquired businesses to total revenue. It often writes them off as “small” even when the announced purchase price is relatively sizable – and, when it does give more granular details, it appears to understate their likely contribution, thus inflating implied organic revenue growth.


XPO Logistics Inc.

  • Spruce Point has been following XPO Logistics (NYSE: XPO) for years, a transportation and logistics roll-up founded by Bradley Jacobs, co-founder of United Rentals (URI) which collapsed in an accounting scandal during his leadership. Based on our forensic investigation, we believe XPO is executing an identical playbook to URI – resulting in financial irregularities that conveniently cover its growing financial strain and inability to complete additional acquisitions despite repeated promises. Given its unreliable and dubious financials, $4.7 bn debt burden, inability to generate sustaining free cash flow, and dependency on external capital and asset sales, we have a worst-case terminal price target of zero.

  • XPO has completed 17 acquisitions since Jacobs took control in 2011 and deployed $6.1 billion of capital. Yet by our calculations, the Company has generated $73m of cumulative adjusted free cash flow in an expansionary economic period. In our view, this is indicative of a failed business strategy yielding a paltry 1.2% return on invested capital. XPO is dependent on external capital, asset sales, and factoring receivables to survive and is covering up a working capital crunch that can been seen by bank overdrafts – just like Maxar Technologies (MAXR). As credit conditions tighten, cost of capital increases, and XPO’s business practices come under greater scrutiny (eg. U.S. Senate), its share price could swiftly collapse in Enron-style fashion.

  • CEO Jacobs has surrounded himself with a web of associates from his United Waste Systems and United Rentals days. Two of his partners, Mike Nolan and John Milne, were convicted of accounting fraud. XPO’s director G.C. Andersen recently employed Milne at his financial advisory firm during a time the company worked on private placements (potentially XPO’s deals) and was sanctioned by FINRA. This wasn’t disclosed to investors. XPO’s audit committee director, Adrian Kingshott, has omitted from his bio his role in the distribution of note securities in the $700m Marc Drier Ponzi scheme.

  • In our opinion, XPO has used a nearly identical playbook from United Rentals leading up to its SEC investigation, executive felony convictions, and share price collapse. We find concrete evidence to suggest dubious tax accounting, under-reporting of bad debts, phantom income through unaccountable M&A earn-out labilities, and aggressive amortization assumptions: all designed to portray glowing “Non-GAAP” results. Additionally, we provide evidence that its “organic revenue growth” cannot be relied upon, its free cash flow does not reflect its fragile financial condition, and numerous headwinds will pressure earnings.

  • XPO insiders have aggressively reduced their ownership interest in the Company since coming public, and recently enacted a new compensation structure tied to “Adjusted Cash Flow Per Share” – defined in such a non-standard way that it is practically meaningless. Conveniently, it ignores any measure of capital efficiency, which is critical in the capital intensive transportation industry, and would expose XPO’s poorly constructed roll-up. In our opinion, the Board is stacked with rubber-stamping Jacobs loyalists, none of which have requisite experience in the transportation and logistics industry. As noted above, the Board includes an audit committee member who abetted a notorious $700m Ponzi scheme.

  • XPO has recruited 19 brokers to cover it, with only 1 “Sell” opinion and an avg. fantasy price target of $114 (implying 90% upside). No analyst has conducted a forensic look at XPO’s earnings quality, or revealed its Board and management’s connections to convicted felons. XPO promotes itself to investors as a “technology” company and how it uses “robots” for warehouse automation, but ignores its growing financial strain, precarious $4.7 billion debt load, and inability to hit its cash flow target. Warren Buffett famously said, “Only when the tide rolls out do you know who as been swimming naked” – words of wisdom for XPO shareholders. A crisis of confidence in management and a loss of access to capital could wipe out shareholders. In the interim, we see 40% – 60% downside risk as the market reassess XPO’s earnings quality, outlook, and sum-of-parts multiple.


    iROBOT CORP (Update 4)

      • Spruce Point has released a number of reports on iRobot (IRBT or “the Company”) highlighting impending competitive pressures and defensive distributor acquisitions designed to forestall revenue growth contraction and margin compression. We have evidence that the competitive forces which we foresaw are materializing, resulting in significant ASP declines, market share losses, and cash flow contraction. With the uplift benefit from distributor acquisitions set to lapse, and with punitive Chinese tariffs set to expand from 10% to 25% in 2019, we believe that iRobot’s is set up for significant revenue growth deceleration, margin contraction, and earnings headwinds next year. As a result, we see 70-80% downside risk.
      • Technological Advantages Dwindling: As the first mover in the robot vacuum space, iRobot has until now enjoyed perceived technological dominance over other brands. That advantage has narrowed materially: more established consumer technology brands have entered the market, and consumers have taken notice that competitors meet or exceed Roomba’s technological capabilities.
      • Amazon Enabling And Promoting Aggressive Competition: Amazon is becoming an increasingly important sales channel for iRobot: it was responsible for ~25% of iRobot sales in Q3, up from just ~10% in Q3 of the prior year. iRobot products generally do not receive preferential placement on Amazon search pages, due to both its high price tag and aggressive promotional activity among peers. Amazon also has less incentive to promote brands with high name recognition than do brick-and-mortar stores. Amazon enables a level of competition which undermines the importance of iRobot’s recognizable brand.
      • Industry Competition Dragging On Sales Prices: Robot vacuums are classic deflationary pieces of technology: commoditized products which experience rapid industry catch-up with each incremental technological development, and which have little room for substantive differentiation (but which require consistent R&D spend nonetheless). iRobot has not been able to raise product prices materially for years, and is pushing sales by offering a wider range of products priced below its top-line vacuum. This strategy will drag on margins over time.
      • Worrisome Cash Flow Developments: iRobot’s net spending on working capital has ballooned in the wake of its distributor acquisitions – a concerning development resulting in YTD operating cash flow contracting by 21% YoY. We believe the financial strain was telegraphed in July when iRobot unexpectedly doubled its line of credit from $75 to $150m for no obvious reason, given that it has $126m of cash on hand, and that it was on pace for $50m+ of operating cash flow. Rising DSOs may be a signal of channel-stuffing at its own distributors. Massive inventory growth and record DIOs may also be both a signal of slowing sales growth ahead and a result of management accumulating lower-cost inventory in anticipation of tariffs.
      • Tariffs Potentially A Highly Significant Drag On Earnings: Management has been dodgy about the potential impact of tariffs when asked about it on calls. Investors now have a better sense of the impact of a 10% tariff following the Q3 call, but management continues to avoid discussing the potential impact of the impending 25% tariff – perhaps in hopes that the tariffs are cancelled before it would have to do so. We expect iRobot to take a massive 70% hit to FY 2019 EPS should the 25% tariff to be instituted on Jan 1 remain in place through the year (barring the passing-on of tariffs cost increases to customers, which we feel iRobot has limited ability to do). Sell-side analysts are either ignoring tariff risks or entirely off on the potential magnitude of the impact.
      • Insider Selling Is Exploding Out Of Control: In our first report on iRobot, we noted that insiders were selling the stock aggressively: insider ownership fell from ~60% in 2005 to ~12% in 2013 – and then to 5% only a year later. Insiders have continued to be sellers through the last several years, and insider ownership is now at an all-time low of 3.5%. While iRobot appears desperate to dangle carrots to the press – in particular, partnerships with big name technology companies – its insiders have enacted a record amount of 10b5-1 stock sale programs. For example, in Feb 2017, only CEO Colin Angle had a 10b5-1 stock sale program in place, but by May 2018 a total of six directors and executives were unloading shares under similar stock sale programs.
      • Share Price Above Even Lofty Sell-Side Targets: IRBT shares have soared from ~$60 in mid-2018 to close to $100 today, and reached as high as ~$115 ahead of CEO Angle’s much-anticipated presentation at the Disrupt SF conference – where, yet again, after years of hyping the Company’s potential in other home robotics categories, he failed to deliver anything new beyond the stagnant Roomba product. All sell-side analysts remain perennially bullish on the Company’s growth story, but the rapid rise in IRBT shares forced some analysts to issue downgrades on the basis of valuation alone. Long-term institutional shareholders continue to sell, while those buying classify IRBT under “consumer discretionary” and “homebuilding” and not technology!
    • High Valuation, Slowing Growth, Changing Distribution Model And Tariff Threat All Pose Risks To IRBT Shares: We see up to ~50% downside in IRBT shares on valuation alone, even when taking consensus earnings estimates for granted. The prospect of slowing sales growth and margin compression would imply even more significant downside, and 25% tariffs would wipe out a large chunk of earnings for however long they remain in place. We can envision a scenario in which business deterioration and 25% tariffs wipe out all 2019 EPS. Given the fundamental threats to the business, current trading multiples, and the possibility that iRobot must bear 25% tariffs for an extended period of time, we value IRBT shares at $20 – $30/sh, 70%-80% below current levels.
    Download the report to read more.

    Dollarama Inc.

  • Dollarama (DOL or “the Company”) is a dollar store which, following a series of price hikes over the course of several years, is no longer a true “dollar store.” As a result, DOL has fallen out of favor with value-oriented customers, causing average store traffic to contract and thus necessitating further price hikes to support SSS growth. Management is nonetheless aggressively pursuing unrealistic growth targets even as competitors flood the discount retail market and threaten its improbable margins. DOL’s shares trade at a 50% premium to peers in the value retail space – even following a ~20% drop after a disappointing Q2 – questionable governance and poor earnings quality notwithstanding. We believe that DOL will continue to miss lofty investor expectations, and that its premium valuation will continue to be pressured.

  • Undifferentiated Products: Dollarama sells a variety of low-priced products, mostly sourced directly from China. Its purported advantage in “sourcing” is contradicted by conversations with industry sources as well as numerous IP infringement lawsuits filed against the Company.

  • Moving Upmarket Is A Risky Strategy: Faced with years of negative average traffic growth and an increasingly saturated market, Dollarama is driving comparable store sales growth by selling higher-priced items. However, in doing so, it is quickly losing its reputation as a true “dollar store,” and per-store traffic numbers are declining as a result. Big Lots (NYSE: BIG) undertook a similar strategy in the 2000s, but reversed course after admitting its failure.

  • Saturation Is Imminent: Dollarama cited a 900 store target at the time of its IPO in 2009, when it had just 585 stores. Management has since revised this number upwards multiple times: first to 1,200, then to 1,400, and most recently to 1,700. Our analysis shows that this target is unrealistic, and that the market is already bordering on oversaturation. Dollarama’s FY ‘19 store opening pace has thus far been its slowest in years.

  • Margins Inexplicably High And Likely Unsustainable: Gross margins of 39-40% are remarkably high for a discount retailer, but intensifying competition, rising labor costs, rising transportation costs, and a lapsing currency hedge benefit all threaten Dollarama’s high profitability levels. Patterns in Dollarama’s hedging profits and gross margins ex-hedging suggest that management may be leaning on its FX-related profits to prevent its headline gross margin number from declining (see note on next page).

  • Founding Family (And A Director) Have Significant Related-Party Deals: The Rossy family launched Dollarama from its legacy retail chain in 1992 and owns significant real estate assets that are employed by the enterprise. This may have played a role in management’s recent decision to acquire Dollarama’s existing Montreal distribution center from the Rossys rather than open a second distribution facility in western Canada, as have most peers.

  • CEO Stepped Down And Installed His Son: Larry Rossy stepped down as CEO in 2016 (and as Chairman in 2018), selecting as his replacement his son Neil – previously Dollarama’s Chief Merchandising Officer. We question whether a thorough and arms-length search was conducted to fill this position.

  • Opaque Supplier Relationship: As part of a deal struck in 2013, Dollarama supplies goods (at an undisclosed profit margin) to Central American discount retailer Dollar City in exchange for an option to acquire the chain in 2020. However, Dollarama currently has no formal stake in Dollar City, and therefore does not consolidate Dollar City’s results. We are concerned that Dollar City could be overpaying its vendors to lessen the financial burden on Dollarama.

  • Insider Ownership Declining: Former CEO Larry Rossy has sold or transferred ~75% of his shares since the 2009 IPO. Bain Capital liquidated the last of its shares in 2011 at a split-adjusted price of $5 per share, 1/8th the current price. The current CFO owns no shares and regularly liquidates options.

  • Currency Hedge Supposedly A Pure Offset To CAD Depreciation, But Has Been A Material Profit Center: Dollarama claims to hedge currencies only to lock in consistent prices (in CAD) on which its customers can rely. However, in practice, the Company adjusts prices to match non-hedged competitors, leaving us to wonder why it hedges at all. Much of the recent hedge benefit appears to have reversed, but gross margins ex-hedges conveniently rose by just enough over the last two years to maintain steady profitability. If nothing else, we question whether Dollarama’s elevated margins are sustainable.

  • Tenant Allowances And Leasehold Improvements Are Amortized Over Very Different Periods: While accounting rules may give sufficient leeway to permit this difference, we question why lease term assumptions should differ for these two capital accounts. Earnings quality suffers notwithstanding.

  • Leverage Is Increasing: Dollarama makes long-term financing decisions using short-term debt, the cost of which has risen with recent debt issuances and is likely to continue to increase with rising interest rates – and as the Company’s credit profile grows riskier. We question management’s decision to increase leverage to support buybacks and dividends simply because the earnings yield is above the after-tax cost of debt. We also worry about the state of the balance sheet should the economic environment turn, or should the business decline more rapidly.

  • Depreciation Is Well Below Capex And Has Been For Years: Capital spending easily bests industry peers, both as a percentage of sales and vis-à-vis steadier D&A charges. The mismatch with D&A suggests poor quality of earnings at the very least. Meanwhile, management’s growth orientation has diverted capital spending away from store remodeling, giving stores a stale and dated feel despite rising price points.

  • Valuation Is Indefensible: DOL currently trades at a ~50% premium to peers and carries among the highest multiples of any global retailer. Higher only are the valuations of crème de la crème global fashion brands – Hermes, Prada, Ferragamo, etc. Such lofty multiples are inappropriate for a dollar store with serious near-to-medium-term business risks. Analyst estimates are not sufficiently skeptical of management’s targets in light of these concerns.

  • Even If Nothing Goes Wrong, The Stock Is Overvalued: Even if Dollarama executes its growth plan perfectly, maintains its world-leading margin, and retains a hefty valuation premium to its peers, the stock is at best fairly valued at ~$43.

  • Under More Reasonable Assumptions, DOL Stock Is Overvalued By 40% At Current Levels: Even assuming that Dollarama achieves full market penetration – with no negative impact on per-store revenues from competition or cannibalization – the stock is worth $28 under normalized margins and at a multiple closer to peer norms, down ~40% from current levels.


    Mercury Systems Inc. (Update)

    • Spruce Point finds evidence to suggest that Mercury Systems (Nasdaq: MRCY) could be one of the companies affected by the alleged Super Micro Computer, Inc. (Supermicro) hack, and can demonstrate recent actions taken by management to obscure the relationship. We believe the Street is structurally misunderstanding the magnitude of the revenue delays and cyber compliance costs that Mercury – a company presently without a Chief Information Security Officer (“CISO”) – will face going forward. Based on our expert calls, we expect that cybersecurity-related costs could mount to 10% of revenues. Given that management felt it necessary to hide its relationship with Supermicro, we believe that Mercury needs to disclose to investors the materiality of its exposure to Supermicro components, the financial impact of any product changes/recalls/replacements, and its plans to ensure the “security” of its mission-critical products on a go-forward basis.

    Exposure Emanating From “Technology Partner” Supermicro

    • On October 4th, Bloomberg published an in-depth article highlighting how China infiltrated 30 U.S. companies by inserting a tiny chip into Supermicro motherboards. Navy systems were mentioned specifically as an affected target. Mercury Systems and two of its recent acquisitions – Themis Computers ($175 million / Feb 2018) and Germane Systems ($45 million / July 2018) – each sells servers and other related IT equipment containing Supermicro motherboards to the Navy and other military branches.
    • Providing secure and resilient solutions to prime and government customers is the essence of Mercury’s business. Mercury mentions the words “secure” and “security” over 100 times in its annual report.
    • Mercury, Themis, and Germane all listed Supermicro as a “technology partner” on their respective websites until last week, when nearly all references to the relationship were abruptly and surreptitiously removed between October 8-9 without explanation.
    • The existence of Supermicro motherboards in Mercury’s rugged servers presents difficult-to-quantify tail risks, but could force product recalls and expensive supply chain adjustments, among other costly actions. As a precedent example, the Navy placed restrictions on IBM’s BladeCenter server line in 2015 over supply chain security concerns, less than a year after Chinese IT hardware manufacturer Lenovo acquired IBM’s server business. (USNI Article)
    • A recent GAO report entitled “DOD Just Beginning to Grapple with Scale of Vulnerabilities” highlighted how testers playing the role of adversary were able to take control of systems relatively easily and operate largely undetected. Based on conversations with industry experts, we believe that the requirements for winning government business will be (and are being) rewritten with an emphasis on cyber resilience and a much higher cybersecurity standard. We suspect that new contracts awards are likely to be delayed as a result
    • Based on our research, Mercury appears ill-prepared to address these new requirements given its relative shortage of cybersecurity personnel, and the fact that both its long-time CIO and long-time CISO recently departed in August 2018. We estimate that Mercury could have to spend up to 10% of revenue on cyber-related costs going forward, or otherwise make a costly acquisition to comply with these new customer expectations.
    • Mercury has quietly hinted at some of these concerns through subtle changes to its 10-K risk factors and safe harbor provisions, and through recent job postings in supply chain procurement and quality control.

    Henry Schein, Inc.

    • Spruce Point has a Strong Buy opinion on Henry Schein (HSIC) and sees 30% to 50% upside potential

    • We believe the upcoming spin-off of HSIC’s animal health distribution business will unlock substantial value for shareholders. Currently, investors are somewhat negative on HSIC’s dental business, and pricing and margin challenges are already widely known. HSIC currently has an 11% short interest that reflect this concern.

    • However, we believe investors are overlooking HSIC’s fast growing animal health business, that stands to benefit once it spins and merges with the privately held Vets First Choice (VFC).  HSIC brings strong relationships with vets worldwide, and VFC brings a high margin tech platform and pharmacy solution to help vets sell more to clients, while improving health outcomes for its client’s pets.

    • We have done unique due diligence on VFC, and believe it is growing materially faster than the numbers that were presented to Wall Street analysts/investors in April 2018. We’ve built an algorithm that runs US zip codes through VFC’s vet finder and believe they are on pace for on-boarding 9,000 vets vs. the 5,100 last disclosed à significant upside.  We have also conducted  ~100 surveys to determine customer satisfaction and revenue uplift potential from this synergistic merger. The feedback has been overwhelmingly positive.

    • The market env’t for animal health stocks is very strong: Eli Lilly just spun and IPO’ed Elanco last week, which was very well received. We believe that HSIC/VFC will be the fastest sales and EBITDA growth story in the industry, which should position it for significant multiple expansion. We like this situation because spin-offs tend to outperform the market once the new management team can have a greater alignment and incentive structure (we do believe that legacy VHC owners have a lot of skin in the game). VFC is run by the Shaw family which created billions of dollars of value at Idexx. We expect a significantly expanded shareholder base that can own VFC/HSIC and more analysts to assume coverage to say “buy” once the spin is completed. Our base case is ~30% upside to approximately $106 per share with up to 50% or $126 per share in a bull case scenario.


    Weis Markets Inc.

    • Poorly positioned regional supermarket in the hypercompetitive Northeast region that is a step behind in the megatrends pressuring the supermarket industry. Despite cutting prices, Weis is still not competitive across a basket of staple food products at price points 15% to 20% higher than peers
    • Credit card data and consumer insights from Earnest Research on 42,000 Weis customers shows that over the past three quarters, unique shoppers, average transactions per shopper and total transactions have declined YoY. Weis has mitigated these negative trends with an increase in average ticket price per shopper. However, in 2Q18 it posted the lowest YoY growth in recent quarters (3.5%). Tangible evidence that ultra low cost grocers, Aldi and Lidl, continue to gain Weis customers
    • Numerous violations by the Pennsylvania Bureau of Food Safety and the FDA for sanitary problems, including food contamination and pest control concerns
    • Recent financial results and stock performance being driven by aggressive accounting changes to cash flow, and a few one-time issues that made comparisons look easy in early 2018. These will become material headwinds in the coming quarters
    • Unreliable comparable store sales metrics as a result of vastly reduced disclosures, followed by three auditors since 2014. Recent Q2’18 metrics being qualified and bolstered by inclusion of estimated sales from July 4th. Underlying organic growth conservatively estimated to be down 2% and can no longer be masked by acquisitions from 2016
    • Negative unit store growth in 2018, including three undisclosed store closures. $101m capital spending plan announced in April 2018 necessary to drive maintenance and refurbishment to forestall market share loss and remain competitive
    • Poor governance and investor communications include no conference calls, deficient SEC disclosures in our opinion, no alignment of employees with shareholders, and beholden to the Weis family to act for the public shareholders’ best interest
    • Inflated valuation making Weis the most expensive supermarket in the United States for no obvious reason. Declining organic growth, gross margins, and poor returns on capital make Weis an unattractive target. It currently trades beyond any reasonable valuation multiple an acquirer would pay for the stock
    • Price target of $17.60 to $26.40, or 45% to 65% downside, on forecasted earnings of $1.47 per share, down 19% due to negative operating leverage, and a multiple range of 12x to 18x consistent with peer trading valuations and takeover multiples in the supermarket industry

    Maxar Technologies Ltd.

    Strained by the levered acquisition of Space Systems Loral in 2012 at the cycle peak, MacDonald Dettwiler’s (MDA) acquisition of DigitalGlobe (DGI) in 2017 was done out of necessity to cover-up growing accounting and financial strains. Rebranded Maxar Technologies (MAXR), the combined company has pulled one of the most aggressive accounting schemes Spruce Point has ever seen to inflate Non-IFRS earnings by 79%. However, with end markets weakening, and burdened by $3.7 billion of rising debt with almost no cash and free cash flow, Maxar must eliminate its dividend immediately, or risk wiping out equity holders. CEO Howard Lance is a former Group COO/President of NCR, a successful Spruce Point campaign that fell 40% after we highlighted numerous accounting concerns, and it failed to find a buyer after a strategic process. He was also the Chairman of the Board at Change Healthcare Holdings through 2017 and Harris Stratex (Nasdaq: HSTX, now called Aviat Networks (AVNW)). Both companies blindsided investors when informing them that the financial statements could not be relied upon, and material weaknesses of controls existed Engaging In A Massive M&A Accounting Scheme To Cover Past Problems: In Feb 2017, management said it didn’t identify any material inconsistencies in DigitalGlobe’s financials between GAAP and IFRS. It then backtracked and revised financials that artificially inflated revenues by 4-6% and EBITDA by double digits. However, this is only the tip of the iceberg. We previously illustrated our concern that MDA appeared to be overcapitalizing costs by inflating intangible asset purchases. Thus, it came as no surprise to us when Maxar used the DigitalGlobe acquisition to inflate intangible assets even further. However, the $1.1 billion inflation was an order of magnitude that shocked us. MDA made reference to DigitalGlobe’s “world leading (satellite) constellation” as a strategic rationale of the acquisition – yet it impaired the satellite assets at deal closing, and inflated its intangible asset accounts by a commensurate $1.1 billion Numerous One-Time Gains Being Used, Some In A Non-Transparent Manner: It appears Maxar has accelerated recognition of investment tax credits, and amended its post-retirement benefit plan to book one-time gains. In the case of the benefit plan gain, Maxar booked a $24.6m gain in Q4’17 (flattering EBITDA by 13.5%), which was not fully disclosed across its investor communications, nor do we believe analysts have adjusted their models to account for it. As a result, we believe Maxar will have a large headwind in Q4’18 and disappoint Deleveraging Plan Is A Fantasy And The Dividend Must Be Eliminated: Maxar is claiming it will deleverage and drive higher cash flow, but the numbers tell a different story: leverage is rising and it appears it is out of cash by reporting cash overdrafts! In addition to a large interest expense and capex burden (which we believe will remain at $300m+/yr as opposed to declining per management), Maxar is committed to a $68m/yr dividend and must pay down $25m/yr of its Term Loan B. These means it has no excess cash flow to accelerate debt reduction. Maxar is borrowing money to pay the dividend. Maxar should immediately cut or eliminate the dividend and direct capital towards debt reduction Up To 100% Long-Term Downside On Normalized Financials: Maxar trades at 10.5x and 43x on our normalized 2018E Adj. EBITDA and EPS for a business we estimate is declining organically 12.7%, and dangerously levered 5.8x. Valued on its free cash flow, expected to produce $0-$50m, Maxar could be viewed as worthless. Using below industry average P/E and EBITDA multiples to reflect Maxar’s distressed state and specious financial statements, we estimate an intermediate trading range of $20.00-$25.00 per share (45%-55% downside)

    2U, Inc.

    • 2U, Inc. is a money-losing education technology provider that partners with universities to market and manage online graduate degree and short course programs. Its one size fits all model is being disrupted by fee-for-service players with lower take-rates. Our Freedom of Information Act (“FOIA”) documents offer compelling evidence that 2U’s long term guidance will disappoint investors.
    • Significant Number of Programs Are Underperforming:  The Street is neglecting to understand the range of outcomes for both existing and future graduate programs.  We have assembled a proprietary historical revenue model that estimates revenues for each individual graduate program using a combination of FOIA requests, conversations with industry participants, company filings, transcripts, publicly available enrollment data, and tuition costs. This proprietary model reveals a wide range of outcomes between programs that are successful and those that we would classify as failures.  Most importantly, we have found that eight of the 14 programs launched between 2013 and 2015 are underperforming 2U’s steady state program expectations. Further, based on our findings, we believe that four of the top seven programs have peaked and/or seen enrollment declines.  Our FOIA request for new student enrollments for MBA@UNC reveals that the 2U enabled MBA@UNC is now in decline as the last four starts have all seen YoY declines.  We believe the Street is dangerously extrapolating 2U’s guided steady state program performance to model 2U’s new and future programs.
    • GetSmarter Acquisition Likely A Diversion For Slowing U.S. Growth: At Spruce Point, we’ve successfully shorted numerous companies where we spotted early underlying business challenges being deflected by acquisitions.  In the case of 2U, we find that it made its first acquisition of GetSmarter in May 2017, allowing it also to diversify internationally. We believe this validates our view that domestic growth is slowing. GetSmarter also exposes 2U to short courses, which is a lower quality business, with shorter duration revenue visibility, and fewer barriers to entry.
    • Recent Equity Raise of +$330m Raises Questions: Alongside the COO appointment, 2U did a secondary stock issuance and raised $330m at $90/share (a 5.8% discount to the closing price of $95.53). The language in its capital raise differs from its capital raise just eight months prior (September 2017).  The use of proceeds has now been expanded to include acquisitions, despite it having recently acquired GetSmarter, and not proven its ability to make good on its deal promises. Previous to this recent capital raise, 2U had $182m of cash on its balance sheet and has been talking to investors about its ability to become cash flow positive. Spruce Point believes 2U’s most likely motivation for issuing stock was to grab the money while investors aren’t attuned to its growing program failures and rising competitive threats. Otherwise, it is likely 2U is signaling a deferral of its time line to reach positive free cash flow.
    • A Terrible Risk/Reward Owning 2U With Analysts Seeing Just 6% Upside, We See 30% – 50% Downside Risk:Insiders have made out like bandits, selling $148m of stock, despite 2U burning $225m of negative free cash flow since 2011. Approximately 25% of sales have been the CEO, who just adopted a new 10b5-1 program in March 2018 ahead of its recent capital raise, and can start selling again next week post lock-up. Analysts have relentlessly said “Buy” but at the current time analysts have an average price target of $99/sh, which represents just 7% upside, a poor risk/reward. Analysts fail to appreciate the change in competitive dynamics, and extrapolate 2U’s current performance into the future without having done the exhaustive FOIA and program analysis we’ve undertaken.  Once reality sets in that 2U’s best days are behind it, and it begins disappointing unrealistic Street expectations, we expect significant valuation compression risk given its shares trade at 9.5x and 180x 2019E sales and Adj EBITDA, respectively.

    Momo, Inc.

    • Spruce Point and its China-based investigator has spent months doing primary forensic research into Momo, Inc. (Nasdaq: MOMO or “the Company”) and sees $23 to $32/sh, 30% to 50% downside risk. Momo’s investor base is compromised of two distinct cohorts, fundamental investors taking management’s word at face value and momentum/swing traders trying to play the stock’s trend.  Both of these groups are oblivious to the serious risks underpinning a Momo investment.
    • Momo’s current investor base is primarily comprised of U.S. retail investors and a select number of institutions, almost exclusively in small position sizes, looking to play the recently white hot China live streaming space through one of a handful of US listed companies
    • If Momo were simply a North American based company selling a new technology (e.g., VR, AI), investors could conduct significant English based market research, evaluate the product, understand the regulatory environment and make an educated assessment as to whether this is a fad or the next big thing.  However, given the newness of the product space and the evolving nature of the competitive landscape it would still remain a speculative investment
    • Additionally, if Momo were a North American based company, investors could take confidence in the fact its activities are likely to be transparently disclosed, fairly presented, legal and that management is acting in the best interest of shareholders.
    • Unfortunately, Momo isn’t a North American based company and this compounds the risk of an investment substantially.  Momo is a China based media company, offering a Mandarin based product to Chinese consumers and conducting business under the oversight of the MOC and SARFT.  In order to credibly understand trends in this foreign market, an investor must conduct the same level of company,  industry and regulatory diligence in Mandarin that one would conduct in English.  Anything short of this is simply a gamble
    • When making a Chinese based VIE investment, the emphasis placed on performing forensic research into governance, ownership, the legality of operations and related party transactions takes on much greater importance than a comparable North American investment given different corporate governance practices in China.  Spruce Point doesn’t believe that an appreciation for the risks of a Chinese VIE based investment can be achieved without thorough diligence of the VIE structure and its subsidiaries.

    Healthcare Trust of America, Inc.

    • HTA’s Chief Executive Officer Has A History of Failure And Non-Shareholder Friendly Outcomes: At Spruce Point, we like to follow executives who have destroyed shareholder value in the past as this pattern often repeats itself. HTA’s CEO and Chairman Scott Peters has been linked to multiple bankruptcies and liquidations (Grub & Ellis, NNN Realty Advisors, G REIT, T REIT, and Golf Trust of America).  Furthermore, we highlight a corporate and personal web of inter-relationships that links both HTA and CEO Peters to multiple bad players in the REIT industry, including Tony Thompson who was barred by FINRA and Nick Schorsch, Former Chairman of American Realty Capital Partners (ARCP, now VEREIT (NYSE: VER)), whose firm manipulated non-GAAP results and had its CFO convicted of fraud.
    • HTA’s Existence Began As A Non-Traded REIT Prior To A Direct Listing On The NYSE: Spruce Point has had many successes shorting companies that have taken back-door or non-traditional listing channels to come public, most notably the early China scams. Within real estate, the Non-traded REIT (NTR) industry is known to be a conflict-ridden business.  NTRs are sold to retail investors through broker-dealers who earn egregious commissions (upwards of 10%).  In general, for every $10 share purchase, about $1.50 is spent on up-front fees and acquisition expenses, leaving only $8.50 to be invested.  After Scott Peters (and his executive team) scraped fees from raising $2.2bn under the NTR umbrella, management listed the Company on the NYSE in 2012 without raising capital via a traditional IPO. In doing so, we believe public investors may not have received the benefits from a rigorous underwriting and due diligence IPO process.
    • In Our Opinion, HTA Is Likely Manipulating Its Quarterly Same-Property Cash Net Operating Income (SPNOI) Results: We have conducted a statistical analysis of quarterly SPNOI performance, and believe it is highly likely that this measure is being managed in a manner to show consistent results.  In our analysis, we compared HTA’s quarterly SPNOI results with its Medical Office Building (MOB) peers. HTA demonstrates the least volatility (i.e. lowest standard deviation) by a significant margin.  We point to potential accounting maneuvers and culprits of how the comparisons have remained so consistent throughout its public history, and share scary similarities of reported results with the Brixmor accounting scandal.
    • We Can’t Reconcile HTA’s Same-Property NOI Margin Profile: Same-property revenues have grown on avg. by 1.9% and same-property expenses are down by 1.1% since 2013, yet, there is no commensurate SPNOI margin expansion.  We provide an illustration of how we believe HTA’s margin profile should be expanding according to its reporting, and illustrate why the math doesn’t appear to work. HTA may be achieving its consistent SPNOI results though uneconomic means: e.g. entering into expensive long-term fixed-price contracts, and/or selling properties at unattractive prices.
    • Serious Concerns With The CFO And Accounting Function: Despite CFO Robert A. Milligan claiming to have worked for Bank of America/ML from July 2007 – Jan 2012 as a VP in corporate banking advisory, there is no FINRA record to evidence his employment. Milligan’s public profile also says he is CFO/Treasurer/Secretary, yet he also signs HTA’s SEC filings as Principal Accounting Officer (he is an MBA, not a CPA). HTA has a named Chief Accounting Officer, David Gershenson, as part of its executive team. SEC rules state that the Chief Accounting Officer must sign the 10-K filing; why hasn’t he done so? HTA’s accounting function appears in disarray with a majority of the staff sitting in South Carolina, two thousand miles away from its executive office in Scottsdale, Arizona. Our analysis shows that a majority of HTA’s accounting team has been in place less than one year, suggesting significant internal turnover and an inexperienced team overseeing the numbers.Download the report to read more…

    U.S. Concrete Inc.

    • Previous Failure: U.S. Concrete filed for bankruptcy after the financial crisis: The industry is difficult given the commodity nature of the products, intense competition, and need to be close to the customer because shipping costs are material
    • Becoming More Dependent on Shady Acquisitions: USCR has acquired over 20 companies since 2012. It recently outbid industrial giant Vulcan Materials for Canadian small cap Polaris Materials and also purchased firms with alleged historical ties to organized crime
    • GAAP vs. Non-GAAP Strains: In 2017 there were a record number of adjustments to results, and yet Adjusted EPS grew by just 4%
    • USCR Claims Mid To High Single Digit Organic Growth: Evidence suggests organic growth is overstated, and mostly a function of pass through commodity price increases. We note realized prices by USCR hit a 5yr low in 2017, and have continued lower in Q1’18
    • USCR Makes Organic Growth Difficult To Calculate: USCR selectively discloses figures in periods when good, not bad. The Company has generally done a poor job of breaking out acquisition contributions in SEC filings
    • CEO Concerns and Rapid CFO Turnover: A routine background check of the CEO reveals an undisclosed DWI arrest for reckless driving, calling into question his judgement. USCR is on its fourth CFO since 2012. Recent CFO John Tusa, Jr. resigned after serving a little more than one year
    • Two Ways To Value USCR Point To 60% – 90% Downside Risk: Given our analysis that shows distortions in USCR’s Non-GAAP figures, we believe the best way to value the Company is on Free Cash Flow. We expect further deterioration which began three years ago, and apply a 20x – 25x multiple to reflect a discount to the peer average for its above average exposure to ready-mix, poor roll-up economics, and growing liquidity risk. Secondly, we adjust USCR’s book value for an estimated $60 – $85 million of overcapitalized costs to its vehicle property accounts and apply a 1.0x – 1.5x multiple range. These valuation perspectives indicate 60% to 90% downside or approximately $6.00 to $25.00 per share

    Kratos Defense & Security Solutions, Inc. Update

    1. Adjusted for a change in revenue accounting principle, Kratos Q1 revenues missed expectations by 6% 2. Kratos operating income performance was aided by unexplained decline in depreciation (notably in its promoted Unmanned Systems (drone) segment), despite a material ramp in capex 3. Kratos Q2’2018 revenue guidance of $140 to $150m also fell short of expectations for $154 million 4. In a potentially deceptive manner, Kratos reduced its normalized free cash flow guidance for 2018 by 36% to 58% 5. New anomalies in Kratos financials call into question the accuracy of Its cash balances 6. Kratos trades at an irrational 160x 2018 free cash flow despite revenue disappointments, a new high in DSO, and evidence that suggests management is using deceptive free cash flow forecasts 7. Kratos would be worthless if given an industry free cash flow multiple. Giving them the benefit of the doubt, it is very easy to justify 45% to 75% downside risk ($3.15 to $6.30/sh)

    Mercury Systems Inc.

    Mercury Systems Inc. (NASDAQ: MRCY) provides sensor and safety critical mission processing subsystems for various defense and intelligence programs in the United States. Mercury appears to be caught in the perfect storm of slowing growth, rising costs and debt. There are multiple material adverse changes currently facing Mercury which suggest 50% to 85% downside risk ($7 to $23 per share).
    • Mercury’s Adj. EBITDA margins of 23.4% are extremely high for a government subcontractor, and have grown 450bps in the last three fiscal years, allowing Adj. EBITDA to balloon 112% while its free cash flow grew zero over the same period. Free cash flow is now trending down over the last 12 months. Days inventory and its cash collection cycle are near all-time highs; accounts receivables recently started to exceed sales
    • Historically, radar systems is Mercury’s largest business, but now appears to be declining, while “Other Revenues” is the fastest growing segment. Mercury changed its financial presentation to bolster gross margins, while guidance for gross margins has quietly been talked down. For the first time in Q2’18, Mercury missed its gross margin (and EPS) target
    • Mercury sells itself as growing revenues organically 9.5% (double its end markets), yet we find evidence these results are not sustainable and growth may slow to 6.5% in CY 2018. Mercury announced the purchase of Themis Computer on Dec 21, 2017 (four days ahead of Christmas). It paid a rich 13.7x EBITDA multiple, and borrowed $189m on its line of credit. In our opinion, the deal appears motivated to avoid missing Wall Street’s expectations. Consistent with prior practice, we expect Mercury to issue stock to pay down its line of credit, which at the current share price, amounts to 4m new shares
    • Mercury added one sentence to its latest 10-K to disclose it expects to lose its Small Business status in FY 2018, a factor that will cause a Material Adverse Effect by disqualifying it from certain business opportunities and increasing costs of compliance

    Globant SA

    Globant SA (NYSE / LUX: GLOB) is a poorly organized roll-up of digital IT outsourcing companies. GLOB receives the highest valuation in its sector by convincing investors it achieves consistent 20% p.a. organic sales growth. However, our forensic analysis disproves management’s bold claims, and suggests that its growth is in fact rapidly decelerating below target. Once investors realize GLOB uses aggressive accounting and financial presentation methods to paper over a cash degenerative business, while insiders quietly unload millions of dollars in stock, we expect shares to be materially re-rated lower by 40% to 50%. Cash Flow And Adjusted Earnings Metrics Reported By Globant Are Potentially Deceptive: We warn investors not to rely on Adjusted EBITDA as a cash flow proxy. Globant’s bulls will point to a growing upward trajectory in Adjusted EPS and EBITDA. We caution investors to be skeptical, since Globant’s Adjusted EBITDA of $64.6m in 2016 translated into a paltry $7.4m of free cash flow. Globant does not even provide investors regular cash flow statement reporting. Globant does not appear to generate recurring cash flow from outsourcing technology services. Rather, it generates cash from trading investment securities. Globant regularly trades securities and its stellar track record has generated a cumulative $68m of cash flow in the period from 2011 to 2016. In regards to earnings, we have provided an adjusted income statement based on Globant’s core business of outsourcing IT and software solutions. We arrive at EPS results that are on average 36% lower since 2013 than the Adjusted EPS that Globant reports. Recent 2017 IFRS results declined 15% YoY, and didn’t grow at all based on our normalized Adjusted EPS calculations. Evidence of Accounting Games: Globant lacks consistency with adjustments and add-backs, and even tries to convince investors to ignore depreciation and amortization expense when presenting its adjusted results. We have found instances where the same category of expenses are not treated uniformly in its reconciliation of Adjusted Net Income; Globant makes the adjustment when it is favorable to add back the one-time item and ignores the adjustment when it is unfavorable. There is also a pattern where Globant continuously revises IFRS or adjusted numbers.   The 2016 financials have been published three times (4Q16 press release, FY16 20F, and the 4Q17 press release) and we identify changes in each subsequent release. We also found potential evidence of manipulation in quarterly earnings to meet consensus expectations. Globant’s 4Q16 Adjusted EPS was originally reported within its guidance and matched consensus expectations of $0.31   When 4Q17 was reported on 2/15/18, we found that its 4Q16 Adjusted EPS was subsequently revised to $0.27 which would have represented a $0.04 miss versus consensus. Insiders Selling Is Staggering:  Insiders have sold (or transferred) over 70% (+$80m) of shares since Globant’s IPO in July of 2014.  We think investors may be unaware of the magnitude of selling by Globant’s founders and other insiders.  Globant’s status as a foreign private issuer allows it an exemption from reporting the customary insider disclosure via Form 4s to the SEC.  Globant chooses to file paper forms with the SEC via Form 144s.  Ironically, since the Luxembourg dual listing in August of 2016, Globant now files insider selling transactions electronically with the Luxembourg stock exchange.   We find it peculiar that Globant now files insider selling transactions electronically with the Luxembourg exchange and does not follow that same protocol with the SEC.  Further, the four founders all set up both revocable and irrevocable trusts.  All four founders in aggregate transferred over 3.0m shares (~$40m and ~10.4% of total share count) to irrevocable trusts at some point between August 2014 and January 2015.  We believe that this transfer was done quietly with the potential motivation to allow for further insider selling Corporate Strategy Initiatives Are Not Showing Signs of Progress:  In 2016, Globant introduced a new company wide model called 50-Squared.  The main goal of 50-squared is to focus Globant’s team on the top 50 highest potential accounts that have the capacity to grow exponentially over time.  We took a close look at its top 5 clients.  Four of its top clients (excluding its top client, Disney) only grew by an average of 2% in 2017.  We don’t see evidence that this strategy is gaining acceptance with its most important clients.

    Kratos Defense & Security Solutions, Inc.

    Terrible Business Through Multiple Reinventions Now Hyping Drones: Originally a dotcom darling named Wireless Facilities that IPO’ed in 1999 with hopes of being the leading provider of outsourced services for wireless networks, the Company collapsed and later took a large accounting restatement when material weaknesses were revealed. Under new management, a name change to Kratos in 2007, and a divestment of businesses, the Company started focusing its efforts on products and solutions related to Command, Control, Communications, Computing, Combat Systems, Intelligence, Surveillance and Reconnaissance (“C5ISR”). After failing to execute on these opportunities, Kratos is now promoting its billion dollar opportunities in unmanned systems (drones) in the hopes of finally turning the corner to sustain profits and free cash flow, both of which have been forever illusive for shareholders Warning About Management History Associated With Past Scandal: Kratos is led by Eric DeMarco (CEO) and Deanna Lund (CFO) since 2003-2004. These executives joined from Titan Corp, where DeMarco was COO and Lund was Titan’s Controller. Titan was a tainted defense contractor that in 2005 paid the largest fine in history (at the time) to settle criminal and civil charges that it violated the Foreign Corrupt Practices Act. Lockheed Martin aborted a takeover of Titan Corp after conducting its due diligence on this matter. According to shareholder lawsuit documents, Titan engaged in a scheme to inflate revenues and book fictitious receivables. Titan used “middlemen” and “private consulting companies” with ties to foreign government officials to secure business. The litigation says confidential witnesses claim DeMarco knew about the corruption and DeMarco was responsible for transferring funds to Benin, the African country involved. DeMarco was also allegedly the source of the “percentage of completion accounting techniques learned from the ‘Andersen school of accounting’ that allowed Titan to either overstate or prematurely state revenues at the company.Beware History of Failure To Meet Expectations, Cash Flow Struggles More Evident: Bulls are buying into Kratos story that it can reach $800m of revenues (pre PSS divestiture) at 10% EBITDA margin, while generating positive free cash flow. Our analysis of its ability to hit its financial targets (especially free cash flow) suggests investors should brace for disappointment. In addition to recent executive turnover in key positions (chief accountant, drone president, and CIO), Kratos quietly started disclosing a large loss accrual on contracts, rising 500% between 2015 and 2016. Its business mix has deteriorated (declining backlog and highest % of fixed-price, high risk contracts in its history). Its historical backlog definition is very aggressive, so take it with a grain of salt. However, most alarming in Q3’17 Kratos materially increased its cash burn estimate, cut drone capex in Q4’17, has DSOs rising to multi-year highs, and unexpectedly sold its PSS segment at a depressed value to raise cash Analysts See +29% Upside, A Terrible Risk/Reward Considering We See 40%-70% Downside: Kratos has among the highest valuation in the aerospace and defense sector (20x and 70x 2018E EBITDA and P/E), despite having weak margins, poor management that cannot prevent activities that run afoul of laws, suspect accounting that doesn’t depreciate corporate segment assets, and a history of failure. Its valuation is at a multiyear high, based on the hope that this time is different. Analysts are bullish, and some arbitrarily pencil in a few dollars per share for “future potential drone opportunities.” Many long-term fundamental Kratos holders have ditched the stock, leaving rules-based indices to buy. Valuing Kratos at a discount to peers on EBITDA, free cash flow, and book value we estimate 40%-70% downside ($3.15-$6.30/sh)

    Realty Income Corp.

    The Allure of Rising Magic Dividends: Realty Income (“O Realty” or “the Company”) promotes itself as “The Monthly Dividend Company®” and preaches“The Magic of Rising Dividends” – it even goes so far as to market itself differently to retail investors vs. sophisticated institutional investors. The Company is very dependent on issuing stock at inflated prices to fund its acquisitive growth strategy, keep its cost of capital low, and consistently raise its dividend. The model has worked well for years when times were good, but we believe this magic cycle is about to break down as investors reassess O Realty’s growth profile amidst  deteriorating tenant quality, rising interest rates, and a more volatile and discerning capital market backdrop. Deceptive Same Store Property Reporting:  Our forensic accounting work indicates that the true underlying economic performance of O Realty’s properties, as measured by Same Store Rents (SSR) are declining vs. the company’s promotion that it is growing.  The Company disclosed its SSR growth rate of 1.2% in 2016.  Our industry normalized definition of same store property performance suggests that that SSR declined by 0.8% in that period – an astounding 2.0% overstatement.  Once investors come to grips with our irrefutable conclusion, we expect a major revaluation in O Realty’s share price. There are ample case studies to show 40%-50% share price declines when investors revalue a REIT’s declining performance. For example, Wall Street has penalized a few REITs (DDR, BRX, KIM) that own retail properties where the same store growth profile has swung from positive to negative growth. We believe that O Realty is the next REIT that is going to be penalized for a deteriorating growth profile by investors. Investors Should Be Concerned By Background of Management and Audit Committee Oversight By Board: We find that O Realty’s executive management team is comprised almost entirely of ex-investment bankers, trained in the art of financial engineering. It should, therefore, come as no surprise that O Realty could use financial magic to embellish its performance. We have little faith in the Company’s audit committee raising any objections or concerns about management’s practices. We find that the audit committee is comprised of a PGA golf professional, and former executives from Wells Fargo and KPMG, two of the most scandal-ridden financial and accounting organizations in recent history. Given all the factors we have noted, it makes sense that insider ownership trends are at all-time lows, and lowest amongst its REIT peers. Tenant Quality Deteriorating As Retail Landscape Changes:  We conducted a deep dive into the tenant quality and find that O Realty has outsized risk exposure to drug stores, grocery stores and movie theaters — three retail subsectors facing disintermediation.  Drug stores (O’s largest sector exposure) are consolidating their retail footprint (i.e. Walgreens purchase of +2,000 Rite Aid stores), while SSS performance at the store front is down. Even worse, headlines such as Amazon teaming up with Berkshire Hathaway and JPMorgan to disrupt the healthcare business present a now tangible long-term risk that the traditional drug delivery value chain through a retail footprint could move increasing online.

    Ballard Power Systems

    Ballard’s stock had a tremendous run in 2017 (+167%) based on strong revenue growth, margin improvement and a perception that the commercialization of fuel cells is on the horizon (i.e., “hype”).  This improvement occurred despite Ballard’s portfolio largely consisting of businesses in run off (e.g., backup power, materials handling), experiencing uncertainty (portable power) or in very early stages of development (e.g., drones).  The primary force underpinning recent growth and future expectations has been Ballard’s China partnership efforts with Synergy Ballard JV (customer/partner) and Broad Ocean (customer/distributor).  At current valuations an investment in Ballard with an intermediate time horizon is essentially a bet on China Heavy-Duty Motive (“HDM”) success. We have conducted on the ground due diligence in China and believe that Ballard’s Chinese growth ambitions are likely to fail from weak partnerships with Broad Ocean and Synergy, and a market that is not developed enough to support fuel cell vehicle growth; Déjà vu, Ballard’s last China deal with Azure resulted in a contract breach and revising guidance lower in early 2015; investors should brace for similar disappoints this time around too China Industry Challenges Unfortunately, the Chinese hydrogen fuel cell market is still in very nascent stages of development.  We believe there are currently only 36 licensed fuel cell vehicles on the road in China, only six refueling stations (one is public), and limited planning being devoted to hydrogen sourcing and transportation.  In Spruce Point’s view, the lack of refueling infrastructure, confusion around refueling subsidies and abysmal refueling station economics pose the greatest threat to fuel cell vehicle (“FCV”) commercialization.  Not surprisingly, there are only two scale auto manufacturers of hydrogen fuel cell vehicles today and we expect this number to grow to only six by the end of 2018.  At this point, it still remains highly uncertain if China will develop the fuel cell vehicle market beyond an experimental phase As it pertains to Membrane Electrode Assemblies (“MEA”)/Stack/Engine production in China, the focus area for Ballard, there are actually two (rarely discussed) competing “value chains”.  We believe that Ballard’s partners, Yunfu City Government (Synergy) and Broad Ocean, are relatively weak given their lack of network into the central ministries of China and their limited success to date in partnering with the State-Owned Enterprise’s (“SOE”) that are the primary agents for delivering on policy Ballard Partner Specific Challenges It wasn’t long ago that Broad Ocean was a humble manufacturer of electric motors for appliances (e.g., air conditioners).  As the US property cycle peaked, Broad Ocean decided to diversify itself with the purchases of Prestolite (auto electronics) and Shanghai Edrive (electric vehicle power trains) in 2014 and 2015, respectively.  When Broad Ocean announced the Ballard deal in 2016, it had no prior hydrogen fuel cell experience, but likely hoped to leverage the company’s local connections with automakers in the electric vehicle space.  Unfortunately, Broad Ocean has failed to deliver partnership opportunities to Ballard with the likes of BAIC (Shanghai Edrive’s largest customer) and Yutong (leader in Chinese bus production), both of whom have chosen Sinohytec despite relying heavily on Shanghai Edrive for electric vehicles

    Matthews International Corp.

    Matthews Int’l (Nasdaq: MATW) is comprised of three unrelated businesses in the death care (“Memorialization”), branding and packaging services (“SGK Brand Solutions”), and Industrial Technologies. In our view, each business is mediocre and struggling from a variety of issues, resulting in organic sales to decline in aggregate. Serious Financial Control Issues and Governance Concerns:We have little reason to trust MATW’s ability to maintain financial order. Setting aside the fact that Schawk had previously restated financials, reported material weaknesses, and received a Wells Notice from the SEC, in July 2015 MATW revealed a material weakness of financial controls when it disclosed theft from a long-time employee of nearly $15m, making MATW the subject of Western Pennsylvania’s largest corporate embezzlement in history. This event came after another MATW employee was sentenced to jail in Jan 2015 for running a fake invoicing scheme. By Nov 2015, MATW declared its Material Weakness had been solved, and changed auditors from PwC to E&Y in December 2017. Spruce Point believes that investors should be extremely cautious in light of our own findings that MATW: 1) incorrectly accounts for dividends and share issuance in its equity accounts, 2) has taken frequent and large charges that don’t reconcile between its SEC filings and investor presentations, and have not resulted in meaningful cash flow gains, and 3) management’s compensation has risen at a 30% CAGR during this same period of mediocre performance Mounting Evidence of Dubious Financial Results:MATW has taken classic measures to obscure its problems such as realigning segment reporting and promoting highly “adjusted” figures. MATW has reported $176.8m of pre-tax charges since 2012 (with ~$165m related to acquisitions and strategic cost reductions). Charges have totaled a whopping 16% of its deal costs. When put into context of other successful calls Spruce Point has made identifying companies struggling to integrate targets (eg. NCR, ACM, ECHO, CECE, GEF), MATW is the worst we’ve ever seen! When we look closer at its operational footprint, we find little evidence that it has accomplished anything. SG&A margin is rising as are other fixed cost of operations. Not surprisingly, management is now touting “adjusted free cash flow” metrics, which we think overstates 3yr cumulative cash flow by nearly 30%. With sales slowing, and accounts receivables ballooning, Matthews quietly initiated an accounts receivable securitization facility in April 2017;  in our view, a tacit admission by the Company its cash flow isn’t as robust as it appears Sum-of-Parts Valuation Gets Us To 55%-65% Downside: We believe MATW should fire management and split up the Company. However, we believe this would expose MATW’s extreme overvaluation. Shares might “look” cheap at 1.6x, 10x, and 14x 2018E Sales, EBITDA, and P/E but it’s because Street estimates take management’s highly adjusted results at face value, and pencil in low single digit growth. Even management doesn’t seem confident in its outlook, and only says adjusted earnings will grow at a rate consistent with FY2017, without further elaboration. Yet, the analysts covering MATW see 48% upside to nearly $78/sh – a major disconnect! Given our evidence that adjusted financial results appear dubious, we base our valuation on GAAP results, assume no growth, and apply peer trading multiples at a slight discount to reflect MATW’s mediocre businesses and below average margins and growth. Our sum-of-the parts valuation implies $18.50 – $24.50 or approximately 55% – 65% downside

    Echo Global Logistics (Update)

    Echo Global Logistics (“ECHO” or “the Company”) was founded in 2005 to roll-up the transportation logistics / brokerage sector.

    Our Initial Concerns About ECHO From September 2016 Proved Prescient: In our initial report entitled “Logistical Nightmare”, we warned about ECHO’s terrible management, failed roll-up strategy in the transportation logistics sector, aggressive use of Non-GAAP results, and its inability to maintain its competitive position in an increasingly technology-centric environment, would all lead to severe disappointment. ECHO’s analysts were calling for a $29 price target at the time, but with shares at $27, we argued the risk/reward was skewed towards 50% – 60% downside. With successive earnings disappointments, and mounting evidence that ECHO’s acquisition of Command Transportation in 2015 was a bust, ECHO suspended long-term guidance and its acquisition strategy in July 2017. ECHO’s share price reached a low of $13.00, hitting our long-term price target range. Command Deal Increasingly Looks Like A Bust:  Our initial report warned that ECHO significantly overpaid for Command Transportation, and encumbered its assets with $230m of debt for a people-intensive asset light business. ECHO hyped $200 – $300m of revenue synergies, and an integrated technology platform that would provide significant earnings leverage. After millions spent on integration costs, capital expenditures and even a fancy new headquarters,  ECHO has failed to come even close to its revenue synergy target.

    AeroVironment Inc.

    AeroVironment (Nasdaq: AVAV) is a defense contractor that sells small unmanned aircraft systems (“UAS”) –colloquially known as drones –to the US and allied governments (~90% of its business) and also operates an unrelated business tied to electric-vehicle charging (“EES” ~10% of business). Our fundamental and forensic research suggests looming disappointment and 30% -50% downside ($24 -$34 per share). AVAV Nearly Identical To Our iRobot Short, Another Over-Hyped Play On A Laggard In Its Industry:Spruce Point conducted an extensive evaluation of AVAV, and find it to be a nearly identical stock promotion to iRobot. AVAV is being hyped as a play on drones, but its products are stagnant and being out-innovated by peers. Like iRobot, we find: 1) Foolish stock promoters, including a former one tied to a notorious Ponzi scheme, 2) Poor governance + unjust insider enrichment, 3) Continuous insider selling,4) Poor capital allocation, 4) Frequent accounting errors + warranty revisions, and 5) Nonsensical and distorted valuation AVAV’s Drones Fail In Real-World Conditions; Its Technology And R&D Have Fallen Behind:While hope springs eternal that AVAV will one day broaden its horizons by selling its drones to businesses and not militaries, the market has overlooked the evidence that its drones work poorly even for military uses. An internal Department of Defense document released via FOIA request shows that one of AVAV’s key products “did not meet key performance parameters,” calling into question its usefulness in actual combat. Problems included poor landing accuracy (with a 44% failure rate), an inability to cope with high winds (a feature that was supposed to be designed into the product), and an unexpectedly heavy and fragile carrying case. Military test operators used words like “chintzy,” “cumbersome,” and “horrible” to describe AVAV’s drones. Stock Promotion Runs Deep At AVAV, Valuation Can Correct 30%-50% As Disappointment Looms Large:Insiders have consistently sold shares (47% post IPO to 11% ownership currently), while a laundry list of rogue brokers have relentless pumped AVAV since its IPO (remember Stanford Financial or Jesup & Lamont?). Also don’t be Fooled when Mr. Motley says “buy” -recall they have also relentlessly promoted iRobot. True to form, AVAV has exhibited terrible FCF generationand margins, high management turnover, unwillingness to engage activist investors, and limited long-term share price upside until recent ETF buying. Even typically optimistic sell-side analysts don’t currently recommend AVAV, with zero buy ratings and an average price target of $40 (implying 17% downside). AVAV’s valuation current peak valuation of approximately 3x and 30x 2018E Sales and EBITDA will eventually normalize with defense industry peers and with its own historic valuation. As a result, we see 30%-50% downside in its share price, or $24 to $34 per share, representing a terrible risk/reward.

    Tootsie Roll Industries

    Tootsie Roll Industries (NYSE: TR) is a producer and marketer of candies and lollipops under the brands Tootsie Roll, Blow Pops, Junior Mints, Andes Candies and others. For years, the bull case has assumed Tootsie’s brands were iconic and “hope” that its  founders would eventually sell the Company at a rich premium. Based on extensive fundamental and forensic research, Spruce Point sees flaws with this thesis and 25% – 50% downside once investors evaluate our compelling research. Tootsie dates back to the early 1900s and its brands are withering along with its core customers. Sales haven’t grown in 6yrs and we estimate it is losing market share in North America. Our channel checks reveal it uniformly receives the worst product placement on the shelves (esp. during key Halloween selling season). Tootsie’s products fail to address consumer demand for healthier products, and it has resisted industry self-regulatory movements to limit marketing to children. Early adoption of new FDA labeling requirements show Tootsie has shrunk its serving size, an implicit acknowledgement consumers are eating less candy. Enhanced sugar disclosure requirements now show significant added sugar content to its products. Families and kids take notice: we estimate a box of Junior Mints, a popular Tootsie product, contains 185% of daily added sugar needs. Tootsie is notoriously secretive about its financials: it doesn’t hold investor conference calls, invite analyst coverage, and has a minimalistic IR website. Its SEC filings omit significant information material to investors’ understanding of its business including: 1) product mix and pricing trends, 2) commodity cost impact to margins, 3) R&D expenditures. Tootsie also inflates its gross margins in a material way by excluding shipping, warehousing, and freight costs. This leads to an 800bps gross margin overstatement. Compare Tootsie’s adjusted gross margin of 31% with peers Hershey and Mondelez at 46% and 39%, respectively, and it’s easy to see that Tootsie is running an inferior candy operation. Even worse, we believe Tootsie has inflated operating cash flow by ~$50m since 2012 though early termination of its split dollar life insurance policy. In essence, Tootsie lent money to these policies for the benefit of its executives, and is now tapping the cookie jar to reclaim funds and boost cash flow. In our opinion, Tootsie is run for the benefit of insiders, while taking advantage of common shareholders through lavish compensation and excessive perks. Its dual class share structure allows Class B shares controlled by insiders to limit common stock voting control, while the Board is stacked with the CEO’s allies, none of which have experience in the food industry. Insiders have rigged the bonus structure in a way that virtually guarantees the maximum bonus every year, while allowing the top 6 executives to extract ~19% of adjusted SG&A in annual compensation (and grow comp more than 3x the rate of sales). Tootsie offers none of its employees equity or stock options, which virtually guarantees that no one will care about maximizing the share price Download the report to read more.

    Envirostar Inc.

    Envirostar (NYSE/MKT: EVI), formerly known as DRYCLEAN USA, is a distributor of commercial and industrial laundry and dry cleaning equipment.  With its shares up >600% since 2016, it has become one of the most overvalued microcaps in the stock market as index funds blindly pile in. Investors are ascribing nonsensical multiples to its recent acquisitions, and failing to exercise caution. Spruce Point has been a dogged proponent against investing in roll-up strategies, which are often just financially engineered plays designed to game index funds into overpaying for stocks, with little focus or incentive for management to create organic growth or value creation through operational improvement. We made early and successful calls identifying problematic roll-ups across many industrial sectors, AMETEK (test equipment), Greif (packaging), CECO Env’t (pollution control) and Echo Global (logistics). We view Envirostar as one of the worst + most speculative roll-up stories we’ve seen; already three quarters post closing its biggest deal of Western and EVI’s margins, profits, and cash flow are contracting Envirostar is the most expensive and financially weakest roll-up stories we’ve ever evaluated. Be careful: Envirostar has paid an average of 0.5x sales for recent deals, yet public investors are overpaying now by 5x. At the current enterprise value of $320m, the market is ascribing a value of 2.2x, 32x, 61x to our estimates for CY2018 sale/EBITDA/EPS results. Blue chip industrial distribution peers with significantly higher margins trade at 1x, 11x and 21x, respectively. Download the report to read more.

    iROBOT CORP (Update 3)

    • Shark entered the robotic vacuum market as we predicted in June, a major negative!
    • We believe SharkNinja strives to be the #1 or #2 leader in markets it enters. Based on its track record in traditional vacuums and blenders, we believe SharkNinja is a credible threat to iRobot
    • SharkNinja’s displacement of Dyson in vacuums was a result of a laser-like focus on the consumer, and its ability to engineer a superior product at a value price point.  As an organization, Linkedin data shows that SharkNinja employs more engineers than sales or marketing people
    • We believe Dyson failed to gain traction with its robotic vacuum because its price point of >$1,000 was simply too high, and it did not deliver meaningful performance advantage to the customer. Simply stated, Dyson could not offer a compelling value proposition while SharkNinja appears well positioned to do so
    • Given SharkNinja’s marketing prowess stated to be $130m annually (2014 figures), we wouldn’t be surprised to see it spend at least 10% or more of this annual budget to ensure the success of its debut robotic vacuum series
    Download the report to read more.

    TSO3 Inc.

    Spruce Point is pleased to release its report on TSO3 Inc. (TSX: TOS and OTC: TSTIF)

    TSO3 Is Just Another Canadian Healthcare Promotion:  The Canadian markets are littered with recent examples of healthcare stocks in need of urgent medical attention, wounded from over-promotion, questionable practices, and poor performance. Short sellers made early warning calls on many names down >80%: Valeant, Concordia, Nobilis, CRH Medical Disclosure Issues & Obfuscating Its Actual End Market Sales: TSO3 is not disclosing its installed base and the reason is obvious – if it did, investors might see just how poor its product’s end market acceptance actually is. In Q3’16, TSO3 suggested it would provide clarity on its installed base in early 2017 – investors are still waiting…. TSO3 even stopped disclosing consumables sales in Q2’16. It currently recognizes as revenues shipments to Getinge, its 3rd party distributor (183 units since Q1’16).  However, our math and field checks suggest at best 10 units are actually installed at end customers (95% difference to shipments). TSO3 Using the “Partnership” Playbook To Hype Its Potential: Déjà vu, TSO3 is repeating a twice failed playbook.  Recently from 2009-2013, alongside of 3M: TSO3’s single product cycle ended with no material sales, termination of their partnership, and a legal settlement in favor of 3M.  TSO3’s prior two generations of this product also failed (the current 3rd generation VP4 appears eerily similar to the 2nd generation – not surprising given the low R&D spend). TSO3 Overstating Its Total Addressable Market (TAM):  All good promotions involve baiting investors with big addressable market opportunities. TSO3 appears to have overstated its true market potential by >30% units and C$170m. We provide evidence of the Company playing fast and loose with its numbers. Download the report to read more.

    iROBOT CORP (Update 2)

    Spruce Point is pleased to release its updated report on iRobot Corp (Nasdaq: IRBT)

    New research into iRobot’s recent distributor acquisitions further calls into question the reliability and accuracy of the Company’s financial guidance. If iRobot cannot give further clarity, we believe its guidance should be suspended. Distributor acquisitions need to be heavily scrutinized given the related-party nature of the transactions. Its Japanese and European distributors act as exclusive agents for iRobot with nearly 100% of revenues from iRobot products. •The 2017E sales implied from Robopolis from iRobot’s incremental margin contribution forecast doesn’t make sense Further evidence of issues with the Japanese distributor acquisition emerge from our research. Download the report to read more.

    Dorman Products Inc.

    Dorman Products (Nasdaq: DORM) is an aftermarket auto parts distributor stuck between a rock and a hard place as it sells both through Amazon, which is seeking to grow further into online auto parts distribution, and through the biggest brick and mortar retailers (Adv. Auto Parts / O’Reilly / AutoZone), which account for a majority of its sales, and are struggling with slower growth and margin pressure.  Spruce Point has conducted a deep fundamental and forensic accounting review of DORM and believe its opaque disclosures, aggressive accounting, and precarious industry positioning do not warrant its significant share price outperformance and premium valuation relative to peers. As a result, we see above average risk of continued earnings disappointment and meaningful share price correction. Revenue growth has slowed from a 13% CAGR (2009 to 2015) to less then 6% in 2016 (adjusted for extra week).  Furthermore, if you look under the hood, DORM’s net revenues are an estimate and therefore subject to significant manipulation.  Our adjusted gross sales estimate (we define as total product places on the shelves of customers) slowed to an abysmal 1.5% in 2016. Analysts expect DORM to continue growing top-line sales at 7% which we believe to be difficult given its largest customers are growing low single digits. We believe DORM’s earnings leverage is waning. Revenue and gross profit from active accounts slowed to low single digits in 2016. The weakening of the Chinese Yuan has been a hidden tailwind to gross margins in the last three years since DORM sources products heavily from China/Taiwan.  We estimate that DORM’s gross margins benefited by ~350bps cumulatively from 2014-2016. DORM doesn’t discuss any of these FX benefits in its MD&A, and now the Yuan is on a strengthening cycle.  DORM also embarked on an ERP implementation which was 163% over budget, and allowed it to capitalize $38m of costs from 2011-14. DORM has not amortized any of these costs, thereby inflating its earnings per share by $0.07c by our estimate DORM portrays itself as debt-free, but is heavily dependent on factoring receivables, which we believe should be evaluated as debt. The % of revenues that are factored annually has risen from 21% in 2009 to 65% in 2016 and exposes DORM to the increasing interest rate env’t.  DORM’s working capital to sales ratio is at a multi-year high, while operating cash flow in 2016 abnormally increased from inventory declining – suggesting it liquidated or deferred new purchases to generate cash. DORM is also shifting its business strategy to invest in many undisclosed JV/minority investments, while opaque related-party purchases are increasing Download the report to read more.

    Gentex Corp.

    Gentex (Nasdaq: GNTX) is a supplier of dimmable mirrors for the auto and airline industry. Its products are commoditized and require nothing more than plastic moldings, mirrors, chemicals, printed circuit boards, and other inputs such as compasses. Its financials suggest it to be a wildly profitable company, yet our forensic analysis uncovers numerous red flags to suggest otherwise.

    Gentex’s IPO in the early 1980s is littered with red flags. Its dimmable mirror was a carrot to bail out its struggling smoke detector business, and its management put no capital at risk. Gentex’s success has defied all the odds: it now commands a $5bn market cap and claims >90% market share. Its lead IPO underwriter and banker, OTC Net founded by Juan Carlos Schidlowski, was a notorious penny stock promoter who was later charged by the SEC and fled the country. Gentex’s 40% gross margins are vastly superior to all global auto suppliers and are likely overstated by 2x. We believe it’s aggressively leaving costs in inventory (inventory growth is 3x revenue growth) while inflating capex through nonsensical projects (e.g. its North Riley Campus is 90% over initial budget). We commissioned a product tear down by IHS, an automotive expert, to examine its components. In our view, Gentex’s rhetoric pertaining to its mirror’s level of proprietary components and vertical integration is likely exaggerated. We also have documented proof of capex misstatement. Despite margins and profitably that dwarfs auto supply peers, Gentex policies that are touted as shareholder friendly are not what they appear. Its dividend growth has been well below the rate of its reported free cash flow growth, which is likely overstated, and its share repurchases are mostly to offset dilution. Gentex has amassed an abnormal amount of cash on its balance sheet, and has irregular Level I and II classifications. We believe Gentex has shunned M&A to avoid outside scrutiny. The only acquisition of note in its history was of HomeLink, a related-party deal where we find issues. Download the report to read more.

    iROBOT CORP (Update)

    Spruce Point is pleased to release its updated report on iRobot Corp (Nasdaq: IRBT)

    With iRobot’s share price up 300% since 2016, investors are cheering the re-acceleration of sales and earnings growth following years of disappointment, and ascribing a peak valuation to plateauing earnings. Spruce Point believes the financial improvement reflects temporary factors and may not be sustainable. We expect new competition to storm the market, and challenge iRobot’s US market share dominance. iRobot’s recent financial performance reflects restocking of its supply chain after years of false starts, the removal of the struggling military business, and the acquisition boost from its Japanese distributor. We believe these factors will create very difficult comparisons for iRobot to lap in the future, and create headwinds for future share price appreciation. Furthermore, we believe recent gains are a result of lowering the price of its Roomba to move down market, which we believe is a long-term negative on margins for a technology hardware company with a narrow product focus Investors are overlooking financial control issues tied to iRobot’s recent acquisition of its Japanese distributor. The Company suspiciously retracted certain statements made about Japanese sales growth (reversing big gains to declines), and made revenue and earnings revisions which don’t add up. Spruce Point has previously pointed out early warning signs at Sabre and Caesarstone, both which made related-party distributor acquisitions ahead of extreme financial revisions. Market observers will note that Valeant’s attempt to buy Philidor was another canary in the coal mine. Download the report to read more.

    Radiant Logistics Inc.

    RADIANT LOGISTICS INC. (“RLGT” or “the Company”) is a company that specializes in transporting unique or difficult shipments.

    Radiant’s CEO Bohn Crain and first General Counsel Cohen were executives at Stonepath Group (AMEX: SRG / OTCBB SGRZ), whichcrumbled when it admitted financial and accounting irregularities tied to revenue overstatement / expense understatement. An SEC inquiry commenced, allegations of fraud were made, and Stonepath was delisted, and faded to the pink sheets and insolvency

    The SEC has already questioned Radiant’s accounting, and it has made the scary disclosure that its margin method, “Generally results in recognition of revenues and purchased transportation costs earlier than the preferred methods under GAAP which does not recognize revenue until a proof of delivery is received or which recognizes revenue as progress on the transit is made.”

    Don’t expect Radiant’s minor league auditor named Peterson Sullivan to spot problems, Radiant pays them minuscule audit fees and three Peterson employees (2 partners) have been cited in less than two years for professional misconduct by the PCAOB and SEC Ltd. (Nasdaq: WIX or “the Company) is an Israeli based technology service provider offering a free website solution that depends on upselling customers on additional features. With WIX’s share price up approximately 300% in the last twelve months, we believe investors are overlooking many issues that could cause a substantial price correction: WIX’s “unicorn” model appears too good to be true and there are emerging cracks beginning to appear in its financial statements including subtle revenue and tax restatements, and anomalies in its cost structure. WIX portrays itself as a well oiled machine with world record gross margins at 85% and that it will have spent ~$30m on capex from 2010 – 2017 to accumulate >100m registered users, engineer a negative churn business that produces $400m of revenues, $1.4 billion of collections, and is worthy of a $4bn market cap. Based on our analysis, these results merit scrutiny (e.g. try finding another negative churn business or capex efficient model). The SEC recently issued comment letters to WIX questioning its aggressive Adj. EBITDA presentation and its pace of revenue recognition and expense deferral. After two EBITDA revisions already, investors should be suspicious, but we believe more revisions may come. WIX is dropping subtle hints in its 20-F that because it is no longer an “emerging growth company” under Section 404 of Sarbanes Oxley, it will face stricter financial control. WIX insiders have incentives to heavily promote its shares and left clues to suggest it intends to dilute with 2-3 million new shares We estimate its two founders are sitting on $225m of option gains needing to be monetized. Options under the 2013 plan start becoming fully vested in 2017. Early venture backers (Benchmark, Insight, Bessemer) have exited and only one initial backer remains. None of WIX’s top shareholders are Israeli funds. WIX has lured in retail investors and US funds through repeated Cramer Mad Money episodes. Now that WIX Is claiming it has reached a cash flow positive inflection point, and has ample cash on the balance sheet, we find evidence of pending dilution. READ MORE…

    PTC Inc.

    PTC’s Conversion Story From Perpetual Licenses To Subscription Model Is Late To The Game, And An Excuse For Management To Explain Away Poor Results And Deteriorating Economics. Its Conversion Uses Gimmicks And A Questionable Value Proposition To Compel Users To Subscribe. Investors Are Ignoring PTC’s Weak Financial Results In Favor of Dubious Metrics Such As “Bookings”, “ACV” and “Unbilled Deferred Revenue” – Read The Fine Print, They Have No Correlation To Future Revenues. We Even Spoke With PTC’s Former EVP of Sales To Ask His Opinion What These Metrics Mean, And He Couldn’t Explain Them. We Can’t Even Find Evidence That PTC’s $20M Mega Deal With The Air Force (It Booked And Said Closed In Q4’16) Even Exists With PTC As The Prime. PTC’s 5 Yr. Recurring Restructuring Odyssey Appears To Be An Elaborate Accounting Scheme To Sell Investors On Meaningless Non-GAAP Figures. We’ve Done A Deep Dive Analysis And Are Shocked By PTC’s Overstatement Of Office Locations, And Irreconcilable Employee Headcounts. Are They Just Firing And Re-Hiring People To Expunge Expenses? We Believe Its Restructuring Directly Violates SEC Guidelines Given Its Inability To Make Reliable Estimate. PTC’s CFO Was Chief Accounting Officer At Autodesk During A Period It Had an SEC Investigation And Said Its Financials Could No Longer Be Relied Upon. While All Analysts Say “Buy” Six Insiders Have Stock Sale Programs, And They Only Own 1% Of The Company. Analysts’ See Upside To $60 (+12%), But We See 50% – 60% Downside As Our Long-Run View. This Represents A Terrible Risk/Reward For Owning PTC’s Shares. PTC Is Trading At Peak Valuation With Little Covenant Cushion; Careful Investing To All… READ MORE…

    CECO Environmental Corp.

    Spruce Point is short CECO Environmental (Nasdaq: CECE, “CECO” or “the Company”), a poorly constructed roll-up serving the environmental, energy, fluid handling and filtration industrial segments. Based on our forensic financial analysis, insider behavior, and anticipated changes in the regulatory environment driving its business, we believe CECO is at high risk of a covenant breach in 2017. CECO has been touting to investors that it has been successful in delevering its balance sheet post-PMFG acquisition, and that its current Net Debt to EBITDA ratio is down from 3.6x to 1.6x as of 9/30/16. On the surface, this appears impressive, but the picture is not so simple. CECO should be pointing investors to is “Leverage Ratio” covenant per its credit agreement which looks at gross leverage (not net of cash) and includes significantly more debt obligations beyond just its term loan… READ MORE…

    MGP Ingredients, Inc.

    MGP Ingredients (“MGPI” or “the Company”) Is A Commodity Ingredient and Alcohol Producer Now Being Spun As A Sexy Transformation Story Into A Premium Producer of Branded Whiskey and Bourbon. MGPI is a simple story to understand. It operates two businesses: an ingredients business run from Kansas and an alcohol distillery in Indiana. Both of these facilities are old assets and prone to substantial operational hazards. Most recently, MGPI has experienced fires, work outages, and chemical disasters requiring the hospitalization of innocent people. MGPI’s shares have appreciated 1,000% since 2014  as investors have cheered the Company’s decision to hire new management, reprioritize its businesses away from commodity ingredients, and focus on “higher margin” premium alcohol beverages. MGPI has also recently benefited from a temporary, yet unsustainable, increase in earnings from its 30% joint venture with Seacor (NYSE: CKH) called Illinois Corn Processing (ICP). On the surface, the Company’s transformation strategy appears wildly successful. Its EPS has risen from a loss of ($0.29) in 2013 to positive earnings of $1.50 per share in the LTM 9/30/16 period. Over the same period, sales have essentially been flat, but gross margins have expanded from 6.4% to 18.1% Spruce Point Believes Investors Should Be Cautioned Not To Extrapolate Recent Earnings Performance. We Believe There Are Numerous Business Risks And Cracks In The Growth Story That Are Not Being Adequately Discounted…   READ MORE…

    The Ultimate Software Group, Inc.

    Our interest in Ultimate Software (“ULTI” or “the Company”) was initially peaked when a little-known firm called Soapbox Research published a skeptical report highlighting aggressive software development cost capitalization, potential revenue exaggeration, bloated stock compensation expense, and corporate governance concerns. One of our most successful shorts in the past few years was Caesarstone (“CSTE”), an Israeli quartz counter top manufacturer. We noted that its margins were suspiciously higher than its peers, and raised concerns about the potential for cost capitalization related to its U.S. plant expansion. We also worried about the governance structure, and influence of the Kibbutz (a communal / family-like structure). To support our short thesis, we conducted deep fundamental analysis and received the Company’s quartz supply contract (through a Freedom of Information request) to illustrate why we believed its margins were unsustainable. The parallels between Caesarstone and Ultimate Software are striking:

    Burlington Stores, Inc.

    Burlington (“BURL” or “the Company”) Is An Old School Retailer Now Being Spun As A Sexy New Growth Story Amidst An Intensifying and Ultra Competitive Retailing Environment. Burlington Stores (formerly Burlington Coat Factory) is an “off-price” discount retailer based in Burlington, NJ that sells men’s and women’s clothing, home furnishings, and accessories. It competes with the likes of TJX Companies (T.J. Maxx, Marshalls), Ross Stores, and countless other retailers offering shoppers a discount to the M.S.R.P. Burlington Has Been Touting impressive Comparable Store Sales (“CSS”), Gross Margin, and EPS Gains, While Shrinking Same Store Inventory. We Don’t Think It Can Last. Spruce Point Has Identified Numerous Financial Presentation, Accounting, And Business Issues That Could Be Signaling A Slowdown In Future Financial Results.

    Echo Global Logistics

    Echo Global Logistics (“ECHO” or “the Company”) was founded in 2005 to roll-up the transportation logistics / brokerage sector. Founded by the same people behind Groupon, and another public company noted originally by Barron’s in 2007, Echo has yet to be fully exposed until now.  Led by Eric Lefkofsky and his partner Brad Keywell, these inter-related, yet distinct publicly traded businesses share the same founders, business address, auditors, and same modus operandi of hyping “proprietary” and “disruptive” technologies capable of earning “massive” profits in large, fragmented markets. In our opinion, time and results have shown these predictions have failed to live up to initial expectations, and have lead to large shareholder losses to post IPO investors, but enriched its founders and early backers who quickly dumped stock.


    AECOM (“ACM” or “the Company”) is a global engineering and construction firm based in Los Angeles, and is an enormous roll-up that came public in 2007. Bowing to pressure from an activist to maximize shareholder value, URS Corp (URS) sold itself in October 2014 to AECOM (for approx. $5bn –a cash/stock deal which included the assumption of $1bn in URS debt). The URS deal is the largest in AECOM’s history. 

    The URS deal was touted as giving AECOM “heft” in the oil and gas market, at exactly the wrong time! As shown by the investor presentation, URS also added exposure to the mining and industrial sectors –other areas that have shown persistent weakness since 2014.

    Spruce Point has been following AECOM, and has generally viewed its post-deal financial results with skepticism. Our view was fortified when on Aug 10, 2016 after reporting Q3’16 results, AECOM filed an amended 10-K/A.

    Sabre Corp.

    Sabre Corp. (Nasdaq: SABR) is a travel tech company with a core business of operating a Global Distribution System (“GDS”), a platform that facilitates travel by bringing together content such as inventory, prices, and availability from a broad array of travel suppliers for a range of travel buyers such as online/physical travel agents and corporate travel departments. As a middleman between buyers and suppliers, Sabre’s biggest risk is disintermediation, whereby its consumers bypass its network, through emerging threats from Google, or even worse, suppliers imposing fees to customers for using it (e.g. Lufthansa). As a result of underlying business pressures, we believe insiders were likely aware that revenue and earnings estimates would not be met in 2015… Download our report to learn more.

    Planet Fitness, Inc.

    Questionable Business Strategy with Unachievable Revenue Goals: The fitness industry is intensely competitive, subjecting Planet to the whim of changing consumer preferences (yoga, boot camp, barre burn, adventure courses), potential technology disruption from wearables, and rife with examples of chains that over-expanded and failed (e.g. Bally Total Fitness, Curves, Town Sports). Planet Fitness (“Planet” or “PLNT”) tries to differentiate itself with a “no judgment” model for the casual fitness user that doesn’t want to be “gymtimidated,” at no-commitment, and a low entry price of $10/month (plus initiation fees). On average, its clubs have 6,500 members, and it needs both densely populated markets and members who won’t use its gyms to make its financial model work! Furthermore, we believe Planet’s revenue targets and growth rate are unrealistic and likely to disappoint current expectations. Download our research report to learn more…

    Tower Semiconductor Ltd.

    In our opinion, Tower is a collection of old semi foundries cobbled together from acquisitions, which produce significantly below industry average GAAP gross margins (from 2012-2014 Tower 9% vs. 23% peer average). Having gone through numerous financial restructurings in the past, Tower promotes large revenue goals reaching $1bn, and a large Non-GAAP EPS headline of questionable merit, but has amassed ($695m) of negative cumulative free cash flow since 2004! Not having the capital support or free cash flows to fund the large capex requirements to compete in the semiconductor manufacturing industry, Tower spends just 15% of sales on capex vs. peers at 40% of sales. Download our research report to learn more…

    The Intertain Group Ltd.

    Formed from Canadian shell companies, Intertain has completed four acquisitions, each of which has gotten larger and fed Intertain’s ‘growth at any cost’ mentality which is likely to end in disaster. Intertain’s initial transaction was with Amaya Inc (a 2.7% owner), whom is currently being investigated (by FINRA) for insider trading (the largest investigation ever in Canadian history). Intertain acquired Amaya’s InterCasino brands for C$70m. Amaya acquired these assets through its acquisition of Cryptologic (where Intertain’s CEO was General Counsel). Our diligence suggests Cryptologic paid a ‘nominal amount’ for the Malta’s InterCasino gaming license. Our research closely explores Intertain’s acquisitions and finds significant issues for a majority of the deals, notably the Gamesys acquisition.

    IRSA – Inversiones y Representaciones S.A.

    Spruce Point is pleased to release its latest report on IRSA Inversiones y Representaciones S.A.(NYSE: IRS), Cresud S.A.C.I.F. y A. (Nasdaq: CRESY), and IDB Development (Tel Aviv: IDBD). IRSA is a Latin American real estate company. IRSA recently invested $300m+ in IDB Development Corp. (TLV: IDBD), an Israeli holding company with interests in real estate, communications, agricultural products, insurance and technology. IDBD is burdened with $6.7 billion of net debt, going through a restructuring process, and has a “going concern” warning from its auditor. It is dependent on further capital injection commitments from IRSA of approximately $185m through 2016…


    Since Spruce Point’s initial report on Caesarstone (Nasdaq: CSTE or “the Company”), which highlighted many fundamental issues facing the Company, along with potential accounting irregularities. In our opinion, many of the open questions remain inadequately addressed, or completely ignored, by the Company and its group of supporting analysts. Spruce Point’s follow-up report reiterates open questions and delves deeper into the issues we believe are facing Caesarstone.

    This report will highlight additional potential accounting issues which are related to capital expenditures.


    Spruce Point is pleased to release its latest report on CAESARSTONE SDOT-YAM LTD. (NASDAQ: CSTE). Caesarstone’s (CSTE) price recently corrected after Q2’15 earnings beat Wall St. estimates, but it cut its sales guidance from $515-$525m to $495-$505m, while maintaining its EBITDA guidance. We believe this is the canary in the coal mine, and CSTE is at continued risk of missing its goals in light of flat import tonnage growth and rising competition. CSTE trades at 3.4x and 13.5x 2015 Sales and EBITDA, respectively, a substantial premium to building products peers at 1.3x and 12.0x on the premise it can maintain share and grow sales 15% p.a. We believe CSTE should trade at a discount to peers of 8x – 10x EBITDA given our concerns about product and earnings quality, its shares would be worth $11 – $29 (~40% – 75% downside) on a normalized 10-20% EBITDA margin range. Since its 2012 IPO, its controlling shareholder has reduced its ownership from 79.0% down to 32.6%; we expect continued stock liquidations by its majority owner


    Spruce Point is pleased to an updated report on NCR Corp.(NYSE: NCR). In our follow-up report, we will profile a blatant example of poor judgment and capital allocation to support our opinion that NCR’s shareholders should demand immediate change at the executive level. But first, let’s review NCR’s recent quarter and further dispel any notion that value enhancing alternatives are imminent and that NCR had a stellar quarter where it “Beat” street estimates.


    Spruce Point is pleased to release its latest report on GREIF INC (NYSE: GEF/GEF.B). Greif (GEF) is in the business of industrial packaging products and services. Its businesses appear largely commoditized, are capex intensive, and under severe pressure from FX headwinds ( Venezuela, Brazil, Russia, Europe) and slackening demand tied to pressures in various end markets ( e.g. energy ). Overall, the company is experiencing deflationary-like pricing power and very low single digit / declining volumes.


    Spruce Point is pleased to release its latest report on AMETEK Corp (NYSE: AME). With Limited Organic Growth, Ametek is Under Pressure as its Strategy Appears to be Hitting a Brick Wall. It Underinvests in R&D and Buys What it Cannot Develop. This Strategy Inherently Benefits its Margins and EPS, Which We Have Evidence that Suggests Are Overstated By Up to 600bps.



    Spruce Point is pleased to release its latest report on iRobot Corp (Nasdaq: IRBT). Media Hype of a Robotics Revolution (Similar To 3D Printing Craze) Is Overblown. IRBT Is Hyping Its IP Portfolio, But Lacks A Monetization Strategy. The Hype Is To Divert Attention From Its Core Problems


    Prescience Point is pleased to release its latest report on LKQ Corp (Nasdaq: LKQ). The 122 page report outlines extensive research into the companies financial reports and we believe the following: LKQ is an ineffective roll-up, they are caught in a massive margin squeeze, problems with their new growth story, dramatic overvaluation, and previous fraud and failures.


    We believe shares of Fleetmatics Group PLC (“the company”, or “FLTX”) are grossly overvalued, reflecting few, if any, of the serious risks that warrant questioning the credibility of the company’s financial statements.


    Just Energy (NYSE: JE / TSX: JE) is a company that U.S. consumers and investors are quickly realizing has become toxic to their wallets through deceptive energy marketing practices, and harmful to their brokerage accounts.


    Prescience Point believes shares of InnerWorkings, Inc. (Nasdaq: INWK or “IW”) are grossly overvalued and poised to collapse by as much as 55%. We believe the company is inflating its revenues in violation of GAAP principles by misapplying gross revenue accounting, placing it in violation of its credit agreement.


    Prescience Point follow-up report on Boulder Brands’ (Nasdaq: BDBD), consisting of a deep-dive look at the company’s Q4’2012 results and management’s 2013 guidance. In short, the story does not add up and we expose the red flag components of its missing pieces.


    Amidst a storm of investor distaste for U.S.-listed Chinese equities, and with its shares trading at a fresh 5-year low earlier this year, AsiaInfo-Linkage, Inc. (ASIA) followed the precedent of numerous other Chinese companies in announcing it had received a “Go-Private” proposal on January 20, 2012.


    In this report, we explore United States Antimony Corp (Amex: UAMY) which made its graduation from the bulletin board to the AMEX on May 21st at approximately $4.00 share, giving the company a $275 million valuation.


    On February 23rd, Bazaarvoice (Nasdaq: BV) raised $114 million at its initial public offering by selling 9.5 million shares at $12 per share. The expected pricing range was $8.00 – $10.00 per share, and the shares ultimately closed at $16.50 on the first day of trading. At today’s price of $17.00, the company’s fully diluted enterprise value is approximately $1.1 billion.


    LQMT is a highly promoted penny stock with a market cap that exceeds $125 million, and highly speculative business prospects. However, a little due diligence reveals a company with a troubled past, as highlighted in an earlier article written by StreetSweeper in 2010, a convoluted capital structure, and a virtually insolvent business.


    Global Sources Ltd. (Nasdaq: GSOL) is perhaps the original and oldest existing China RTO Company in the US stock market. In March 2000, Global Sources exchanged 100% of its shares for a 95% stake in Fairchild (Bermuda) Ltd., a subsidiary spun‐off from the now bankrupt Fairchild Corp. Through this deal, Global Sources obtained a public listing on the Nasdaq in order to provide liquidity to shareholders and a venue for raising additional source of funds for expansion.


    A closer look into Camelot Information Systems (“CIS”) and their position in the Chinese Information Technology industry reveals numerous question marks investors should consider.


    All around the world, biodiesel is a challenging business with high capital costs, cyclical gross margins and returns on capital. There are limited barriers to entry as production processes to make biodiesel are well understood and can be accomplished by specialty chemical plants of all sizes.


    ZST Digital Networks (OTCPK:ZSTN) came public in October 2009 and raised $25 million by offering 3.1m shares at $8 per share. The offering was led by Rodman & Renshaw and Westpark Capital, two ubiquitous underwriters in the market for bringing Chinese companies public in the U.S. through reverse takeovers (RTOs).