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.

  • READ MORE…

    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.

  • READ MORE…

    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

    Wix.com Ltd.

    WIX.com (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 DOWNLOAD REPORT

    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… DOWNLOAD REPORT  

    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… DOWNLOAD REPORT  

    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… DOWNLOAD REPORT  

    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

    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…

    CSTE LTD.

    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.

    CSTE LTD.

    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

    NCR CORP.

    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.

    GREIF INC.

    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.

    AMETEK INC.

    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.

    irobot

    iROBOT CORP

    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

    LKQ CORP

    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.

    FLEETMATICS, INC.

    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

    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.

    INNERWORKINGS, INC.

    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.

    BOULDER BRANDS

    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.

    ASIAINFO-LINKAGE, INC.

    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.

    UNITED STATES ANTIMONY CORP

    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.

    BAZAARVOICE

    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.

    LIQUIDMETALS

    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

    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.

    CAMELOT INFORMATION SYSTEMS

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

    CHINA INTEGRATED ENERGY

    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

    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).