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Athenex – Big trouble in little Chongqing

Not only is the factory in the wrong place, it’s not built yet

REPORT DOWNLOAD LINK

November 20, 2019 – On the ground investigation of Athenex’s Chongqing factory show that the Athenex’s new API plant is not located in the Chongqing International Bio-City, and is still heavily under construction. This deception extends to Chinese press releases.

The site visits were conducted on the week ending November 15, 2019, several months after the announcement of its “completion” by Athenex.

  • The factory is not located in the Chongqing International Bio-City development, but some 25 miles away near Maliuzui toll station.
  • The building has no sealed road access nor car parking facilities; we were unable to ascertain whether basic utilities had been connected but this seems unlikely.
  • Everyone within the facility is still wearing hardhats, and the site is still full of heavy machinery, including cranes. Equipment has yet to be installed – company statements about validation testing in Q4 2019 are false.

ATNX site

The announcement by Athenex on September 23, 2019 claiming the facility to be complete and in the midst of a validation batch paints a pretty picture, which is completely false.

To be clear: there is no completed API Facility. This fraud mirrors the various sham businesses Athenex’s directors have orchestrated in the past.

On November 19, 2019 Athenex announced the title of their presentation at the San Antonio Breast Cancer Symposium. This is a blatant strategy to pump the price of their stock by changing the title of the presentation which has had no change in content to the one announced on September 23, 2019 (ironically, the same date Athenex’s Chongqing plant was allegedly “completed”), which was submitted in June 2019.

In summary:

  1. Abstracts were due by July 8, 2019.
  2. Athenex’s abstract title was announced on September 23, 2019
  3. Athenex changed their abstract title on November 19, 2019
  4. Athenex is not presenting in the Ongoing Clinical Trials category, and therefore cannot have had new information since July 8, 2019.

Athenex’s SABCS presentation is the same as the one announced on September 23. RBC analyst Kennen MacKay’s reiteration of an outperform on a “SABCS win” sounds ridiculous considering that this is the same data that prompted such an unremarkable title 2 months earlier caused the collapse of the stock.

Of course, when Athenex originally announced the presentation, the issues we highlighted in our reports had not yet been brought to light.

We continue to believe investors are being duped by Athenex management through virtually identical charades orchestrated at their previous failed ventures, such as Sino Forest.

We have annexed an extended summary of all of Viceroy’s findings, and all of our pictures of Athenex’s actual, unfinished, API plant.

Featured

Athenex – Independent Oraxol Review

Independent biotech consultants commissioned to report on Oraxol clinical data of belief Athenex will not receive New Drug Application from FDA.

REPORT DOWNLOAD LINK

November 13, 2019 – Viceroy commissioned a report from a highly reputable, independent biotech consulting firm into the prospective New Drug Application (NDA) approval for Oraxol. We have appended the report in its entirety for our readers.

  • Consistent with previous expert opinions we have received in relation to Oraxol, this report concludes that “Oraxol will likely not secure approval following Athenex NDA submission in 1Q 2020.”
  • Experts refute management claims in Q3 earnings call that “FDA previously provided positive feedback to Athenex that it would accept the results of this one pivotal trial for license application in the U.S. if the primary endpoint is met”, noting that there must also be an acceptable benefit/risk profile.
  • Our Experts note that the treatment regiment for the IV Paclitaxel control group is a high-dose, three week regiment. This regimen has tested as inferior to the low-dose, weekly treatment. This would have created a much higher threshold for Oraxol’s primary endpoint.
    • It’s noteworthy that oral paclitaxel competitors, such as Daewa Pharmaceutical Co., have not shied away from this low-dose, weekly regimen as a higher threshold control.
  • Differing outcomes in safety profile of Oraxol, when compared to IV paclitaxel, “is likely due to the delivery mechanism and formulation which includes the novel, unapproved PGP inhibitor HM30181A”. Our consultants believe this may prompt further studies into the Oraxol delivery method, consistent with our prior reporting about adverse effects.
  • The report also highlights issues in relation to the rarity of the FDA approving drugs with no USA clinical patient data. This presents a greater question mark for Athenex, who have already announced plans to commercialize this in the USA.
  • Experts have noted Athenex’s absence in providing any detail relating to Oraxol’s adverse effects, in particular those effects which are inconsistent with IV paclitaxel, such as GI complications.
  • Viceroy elected to file all our findings to the SEC, FDA and New York Governor due to the highly irregular corporate governance and business practices committed by the company. We note the company have failed to address or deny one issue, despite repeated requests to identify one single falsity.

We await Athenex’s San Antonio presentation, which we believe will provide more granular detail.

Viceroy remain short Athenex and maintain our price target of $2.83.
Athenex management continue to ignore our reports or address any of the issues we have highlighted.

Featured

Athenex – 2019 Q3 Financials Brief

Falling revenues, stalled operations, flat R&D.

DOWNLOAD BRIEF

November 7, 2019 – This report is a brief on Athenex’s Q3 results announcement. Viceroy will provide a further, more in depth update upon the release of Athenex’s 10-Q.

  • Athenex revenues continue to fall Q/Q, and has guided to do so in Q4, despite Athenex’s raised guidance. This is primarily due to higher than anticipated sales in Q1 & Q2 for Vasopressin, which has been pulled due to FDA ruling brought about by a lawsuit against Athenex by its largest customer, AmerisourceBergen.
  • Athenex COO, Jeffrey Yordon, states stated the FDA’s decision regarding Vasopressin “did not come unexpected”. Either this is a lie, or the Athenex had been consciously illegally selling as much Vasopressin as possible before the FDA undoubtedly came knocking.
  • Address of financials persists on using YOY figures to hide the fact that the company has suffered declining revenue in the last two quarters.
  • Q3 Update confirms API production is still suspended.
  • Cost of sales have conversely slightly increased Q/Q.
  • R&D expenditure is flat YOY, excluding one-time-costs, despite an increase in drugs in development. This suggests to us that Athenex have curbed spending.
  • As previously reported, Athenex have not only committed >US$1.5b expenditure at their Dunkirk site across the next ten years but are also on the hook for excess development costs for the facility, whose floorplan has expanded by 28% on-the-fly and falling significantly behind schedule. We are curious to see the cash burn in relation to this facility in Athenex’s 10-Q.
  • Athenex’s new China-funded plant must also generate unrealistic revenues of almost US$1b within 5 years of opening, despite turning over only $160m across the last 5 years combined.
  • There has been no change to Athenex’s massive cash burn this year, with losses accelerating to $102m in the 9 months leading to Q3, 2019. To manage its cash burning commitments to major facilities and R&D, Athenex has issued dilutive equity, and incredulously borrowed US$50m from major investor, Perceptive, at a punitive rate of 11%.

Athenex management “stand behind the integrity of its management team and board” and will refuse to address us, according to Mr. Lau on this morning’s conference call. This is laughable considering half the board has evaporated billions in prior frauds.

We have already highlighted management’s involvement in Sino Forest, GCL Silicon/Poly, Suntech, Chelsea Therapeutics, the world’s largest illegal taxol smuggling operation, LyphoMed, Gensia and Sagent. It is mind blowing that Athenex investors would continue to associate with any one of these farces, let alone a collection such as this.

Considering the quantum of issues Viceroy have highlighted, it is alarming to shareholders that Athenex have not addressed a single point of our work. Opting instead to simply state we have published “inaccurate information”. Other commentators have begun to back-test our work[1].
Where are the inaccuracies, Athenex?

 

We will provide a more updated brief upon the release of Athenex’s 10-Q.

Report 1: https://viceroyresearch.org/2019/10/22/athenex-too-little-too-late/

Report 2: https://viceroyresearch.org/2019/10/23/athenex-where-theres-smoke/

Report 3: https://viceroyresearch.org/2019/10/24/athenex-no-integrity/

Report 4: https://viceroyresearch.org/2019/10/25/athenex-bonus-round/

Report 5: https://viceroyresearch.org/2019/10/28/athenex-rehash/

Report 6: https://viceroyresearch.org/2019/10/29/athenex-unpopular-operating-officer/

Report 7: https://viceroyresearch.org/2019/11/04/athenex-financial-situation/

Other Coverage: https://seekingalpha.com/instablog/38002746-denniskneale/5369151-cancer-conflicts-interest

[1] Blog entry-Dennis Kneale:https://seekingalpha.com/instablog/38002746-denniskneale/5369151-cancer-conflicts-interest

Featured

Athenex – Financial Situation

Ahead of this week’s earnings, Viceroy provide an insight of what’s to come.

REPORT DOWNLOAD LINK

Athenex Inc. v. Azar – Summary

November 4, 2019 – This report provides a deep dive on Athenex’s significant revenue declines and capital over-commitment that investors can expect in the coming months. We believe revenues from the second half of 2019 will fall ~40% against the first half of 2019.

  • Athenex best seller, Vasopressin, has been pulled due to FDA ruling brought about by a lawsuit against Athenex by its largest customer, AmerisourceBergen.
  • COO Jeffrey Yordon is on record as stating the Vasopressin ban “did not come unexpected”.
  • Almirall licensing payments in 2018 were non-recurring, and 2019 milestones appear to have been delayed as Almirall redefine Athenex deliverables.
  • Per management’s guidance, we expect product sales revenue to fall approximately 40% in the second half of 2019 against the first half of 2019.
  • Athenex have not only committed >US$1.5b expenditure at their Dunkirk site across the next ten years but are also on the hook for excess development costs for the facility, whose floorplan has expanded by 28% on-the-fly and falling significantly behind schedule.
  • Athenex’s new China-funded plant must also generate unrealistic revenues of almost US$1b within 5 years of opening, despite turning over only $160m across the last 5 years combined.
  • Athenex must also pay RMB 10b in taxes over 10 years at its China Site, according to project commitments. Strangely, Athenex’s own tax projections do not meet the required sum from these commitments by over 30%.
  • To manage its cash burning commitments to major facilities and accelerated R&D, Athenex has issued dilutive equity, and incredulously borrowed US$50m from major investor, Perceptive, at a punitive rate of 11%.

Considering the quantum of issues Viceroy have highlighted, it is alarming to shareholders that Athenex have not addressed a single point of our work. Opting instead to simply state we have published “inaccurate information”. Other commentators have begun to back-test our work[1].
Where are the inaccuracies, Athenex?

We have already highlighted management’s involvement in Sino Forest, GCL Silicon/Poly, Suntech, Chelsea Therapeutics, the world’s largest illegal taxol smuggling operation, and now LyphoMed, Gensia and Sagent. It is mind blowing that Athenex investors would continue to associate with any one of these farces, let alone a collection such as this.

Viceroy reiterate our view that Oraxol is obsolete in the modern medicine, and that Athenex will be effectively bankrupt by mid-2020 with no profitable operations given management’s overenthusiastic spending habits.

Viceroy remain short Athenex, and are in the process of obtaining a compiled, detailed report by industry specialists pertaining to Oraxol and its inability to be commercialized.

In considering the above, Viceroy estimate that Athenex’s risks of a highly discounted and dilutive capital raise is all but guaranteed.

Featured

Athenex – Unpopular Operating Officer

While his resume appears impressive, Athenex Chief Operating Officer Jeffrey Yordon has always been in the proximity of disaster, including two class action lawsuits.

REPORT DOWNLOAD LINK

October 29, 2019 – As we move into the sixth installment of our coverage on Athenex, Viceroy reiterate our view that Oraxol is obsolete in the modern medicine, and that Athenex will be effectively bankrupt by mid-2020 with no profitable operations given management’s overenthusiastic spending habits.

This report further exposes management’s ties to impropriety and provides a broader summary of Athenex’s management & director teams.

  • Yordon’s executive career started as President of LyphoMed, who’s CEO was sued by acquiring entity, Fujisawa Pharmaceutical.
    • Fujisawa claimed LyphoMed filed false information with the FDA in connection with thirty five ANDAs. Information was either misrepresented, destroyed or was not recorded where it concerned adverse test results.
    • LyphoMed’s CEO was none other than John Kapoor of Insys Therapeutics fame.
  • Yordon claims to have founded Gensia Pharmaceuticals, when the business was in fact acquired from Kedall Co. while Yordon was employed at Gensia’s topco.
    • Gensia’s share price collapsed upon flagship heart medication showing no statistical benefits.
  • While employed at American Pharmaceutical Partners, Yordon and other senior management were sued for making misleading statements about the prospects of an anti-cancer drug.
  • While director of Sagent, shareholders sued the company alleging that the board and its advisors failed to negotiate a fair deal for the company’s shareholders in a sale; agreeing to certain terms which only benefitted management.
    • Yordon was CEO at the time of the engagement of the company’s investment bankers and establishment of the board’s “strategic committee” to evaluate such decisions.

We have already highlighted management’s involvement in Sino Forest, GCL Silicon/Poly, Suntech, Chelsea Therapeutics, the world’s largest illegal taxol smuggling operation, and now LyphoMed, Gensia and Sagent. It is mind blowing that Athenex would continue to associate with any one  of these farces, let alone a collection such as this.

In light of all of the issues and questions Viceroy have highlighted, it is also alarming to shareholders that Athenex have not addressed a single point, opting instead to simply state we have published “inaccurate information”.

Where are the inaccuracies, Athenex?

Viceroy remain short Athenex.

A link to Viceroy’s previous reports are as follows:

Report 1: https://viceroyresearch.org/2019/10/22/athenex-too-little-too-late/

Report 2: https://viceroyresearch.org/2019/10/23/athenex-where-theres-smoke/

Report 3: https://viceroyresearch.org/2019/10/24/athenex-no-integrity/

Report 4: https://viceroyresearch.org/2019/10/25/athenex-bonus-round/

Report 5: https://viceroyresearch.org/2019/10/28/athenex-rehash/

Featured

Athenex – Rehash

Athenex recycle press releases to pump investors. Viceroy release details of further conflicts with Athenex CROs.

REPORT DOWNLOAD LINK

October 28, 2019 – This report will continue to touch on major Athenex conflict of interest issues.

  • In another slap to the face for invetors, Athenex, instead of addressing any of the major issues Viceroy have put forward, have chosen to instead re-publish a press release from March 4, 2019, marketing the results of topical medication with their project partner, Almirall.
  • In case the connections to fraud were not already apparent, Almirall has recently settled a $3.5m Department of Justice and $3.1m California Department of Insurance claims relating to kickbacks and bribery of physicians for the promotion of their product. Athenex aim to use Almirall for their vast sales network.
  • Viceroy today release data showing PharmaEssentia, Athenex CRO, is also a related party. To recap, all three major Athenex CROs have an interest in the approval and ongoing success of the products they are conducting the trials for, as we have previously reported on CIDAL and ZenRx.
  • Athenex CEO Johnson Yiu Nam Lau is a busy man, moonlighting at yet another anti-cancer company, Taiwanese comapny Taivex Therapeutics. Investors should be asking what Athenex’s Chief Executive Officer is doing at another anti-cancer biotechnology company, especially if he finds the time to be credited in numerous academic papers sponsored by that company, and what possible conflicts of interest may have arisen.

 

We conclude that Athenex exists to abuse capital markets and enrich its management through related party transactions and licensing deals, rather than bring revolutionary drugs into the market.

Viceroy value ATNX stock at US$2.83 – a 71% downside –the sum of its tangible book value and 1x valuation on its licensing & consulting revenue streams, for the year ending June 30, 2019. With ATNX’s questionable license acquisitions and management’s precedent for overstated top line figures in previous ventures: this is optimistic.

 

Viceroy remain short Athenex.

Featured

Athenex – Bonus Round

Buffalo Soldiers vs the system, and a  summary of Viceroy’s reports this week.

REPORT DOWNLOAD LINK

October 25, 2019 – This report serves as a summary to Viceroy’s work over this week, alongside data we have collated on Athenex’s dealing with the NY State Government

The Buffalo Billion is a commitment to the Buffalo, NY area to create jobs, spur investment and promote economic activity. The ambitious plan was committed to by New York governor Andrew Cuomo and first announced in the 2012 “State of the State” address.

The company’s response to Viceroy’s research is a further slap in the face to investors: the company has failed to address a single issue highlighted in any of our reports:

  • Where are the purported inaccuracies” in Viceroy’s reports?
  • Did managements/directors transactions, netting Directors millions of dollars of shareholder capital, not occur?
  • Were Athenex’s management team not involved in Sino Forest, Suntech, GCL Silicon/Poly, China Lumena?
  • Are Athenex’s Oraxol clinical studies using the current USA standard of care for its control base? If not, how can this ever be commercial?

Athenex has called out Viceroy as inaccurate, but have failed to identify a signgle inaccuracy in any of our reports.Viceroy remains short Athenex with high conviction. The number of red flags uncovered within the business and management team surpass any other company we have previously analyzed purely within data sourced from the public domain.

We reiterate our target price of US$2.83, now representing a 75% downside, and will continue to keep investors informed through further reporting.

We conclude that Athenex exists to abuse capital markets and enrich its management through related party transactions and licensing deals rather than bring revolutionary drugs into the market. This activity is carried out through overpromising the prospects of its flagship drug Oraxol and its purported “supply-chain” businesses like Polymed.

Athenex is a perfect storm of investor deception, insider enrichment and clinical trial risks. Investors should demand a full investigation of the issues discussed within this report: we are confident there is more to this story given how much was available purely through the public domain.

In light of the data Viceroy have presented, shareholders must question managements’ corporate governance and protect their rights through independent investigations.

Report 1:

https://viceroyresearch.org/2019/10/22/athenex-too-little-too-late/

Report 2:

https://viceroyresearch.org/2019/10/23/athenex-where-theres-smoke/

Report 3:

https://viceroyresearch.org/2019/10/24/athenex-no-integrity/

[1] https://buffalobillion.ny.gov/about-buffalo-billion

Featured

Athenex – No Integrity

Athenex management’s proliferation for fraud precedes them.

REPORT DOWNLOAD LINK

October 24, 2019 – Viceroy expose more managerial ties to established frauds, and address Athenex’s response to our previous work, which addresses absolutely nothing. Management’s response underestimates how many improprieties are recorded in the public domain – we have yet to scratch the tip of the iceberg.

  • The company’s response to Viceroy’s research is a further slap in the face to investors: the company has failed to address a single issue highlighted in any of our reports.
    • Athenex’s two-paragraph rebuttal to Viceroy’s reports indicates management refuse to address any improprieties we have uncovered…to date. We believe Athenex will have a tough time explaining to shareholders why their flagship drug is commercially unviable, justifying abusive related party transactions, and explaining why facility pictures are blatantly photoshopped.
  • Athenex’s rebuttal state that management “take pride” in its integrity. This is hilarious given management’s track record of overseeing blatant frauds.
  • In case Sino Forest and Suntech weren’t enough, Viceroy now reveals direct ties between Athenex directors and more established frauds, responsible for evaporating billions of dollars of shareholder capital: GCL Poly/Silicon, China Lumena.
  • Several individuals involved with Zhang’s previous shady ventures are now embedded in the Athenex organization including the Audit committee.
    • Viceroy reveal Athenex Audit Committee member, John Koh, was also a director of Mandra, alongside Songyi Zhang, with direct fiduciary obligation to oversee Sino Forest.
  • Zhang was previously a director of China Lumena, which was found to have significantly fabricated its revenues. In addition to this, a subsidiary that had fabricated ~90% of its revenues was sold to China Lumena by Zhang through several of his investment vehicles.
  • Zhang was also previously at GCL Silicon where he effectively front-ran an acquisition of that company by GCL-Poly Energy in concert with Zuo Gongshan, the CEO of the latter. This netted Zhang a share in US$200m cash, US$350m in secured notes and a 5% stake in GCL-Poly.
  • SinoPhyto solutions, the side-hustle of Athenex Chief Medical Officer Rudolf Min-Fun Kwan and CEO/Chairman Johnson Lau purports to be a seller of traditional Chinese medicines. However, the company’s New Jersey certificate indicates it is an investment company. SinoPhyto has only received one shipment. We question the true purpose of this entity.
Featured

Athenex – Where there’s smoke…

Athenex’s revenue generating business is a house of cards, muddled with further ties to large scale frauds, fabricated management credentials, and photoshopped offices.

REPORT DOWNLOAD LINK

October 23, 2019 – This follow up report focuses specifically on Athenex’s Polymed subsidiary, which accounts for a large portion of Athenex’s revenues and capital expenditure:

  • Our investigations have found ties between Polymed and its management team’s ties to the largest taxol smuggling ring in history Hande Yunnan, resulting in 50 arrests and 32 imprisonments. Major perpetrators and shareholders of this scheme now work for Athenex.
  • Polymed appears to continue sourcing its taxol from Hande Yunnan, despite the fact that our investigations show Hande Yunnan no longer produce taxol.
  • Further inspection of Polymed’s management show inconsistencies in prior executive roles, specifically of William Zuo. Zuo was also the US liaison of bringing smuggled taxol to the USA.
  • A deep dive into Chinese regulatory notes from the Ministry of Emergency Management, coupled with Polymed’s history of objectionable site inspections by Chinese regulators and the FDA, lead us to believe that Polymed’s manufacturing facility suspension was anything but voluntary. In any event, Athenex’s manufacturing facility does not manufacture anything.
  • Viceroy dismantles photoshopped Polymed advertisements for its facilities and expose chemical manufacturing facilities we believe are non-existent or outsourced.

Viceroy remains short Athenex with high conviction. The quantum of red flags uncovered within the business and management team surpass any other company we have previously analyzed purely within data sourced from the public domain.

We reiterate our target price of $2.83, now representing a 75% downside, and will continue to keep investors informed through further reporting.

We conclude that Athenex exists to abuse capital markets and enrich its management through related party transactions and licensing deals, rather than bring revolutionary drugs into the market. This activity is masqueraded through overpromise in both its flagship drug, Oraxol, and its purported “supply-chain” businesses, such as Polymed.

Athenex is a perfect storm of investor deception, insider enrichment and clinical trial risks. Investors should demand a full investigation of the issues discussed within this report: we are confident there is more to this story given how much was available purely through the public domain.

Athenex’s operational and R&D cash-burn rate is over US$100m a year – the company would be lucky to survive until HY 2020 without needing a further cash injection from investors. Even if Athenex scrapped its R&D completely, the company’s revenue streams operate at a substantial loss.

Accordingly, we believe our valuation of $2.83 is optimistic, and will be realized in the short term. We do not see a future for the company in its current state. Viceroy’s preliminary report on Athenex can be found in the below link:

https://viceroyresearch.org/2019/10/22/athenex-too-little-too-late/

Featured

Athenex – Too little, too late

Poorly designed clinical study for flagship drug outdated since 2005. Meanwhile, Directors siphon large amounts of cash from shareholders.

REPORT DOWNLOAD LINK

October 22, 2019 – Viceroy Research is short Athenex, Inc. (NASDAQ: ATNX). Our research has found significant causes for concern in the company’s operations, management and clinical trial design. Our research, paired with discussions with industry specialists, leads us to believe Oraxol is obsolete in modern world medicine. We conclude that Athenex exists to abuse capital markets and enrich its management through related party transactions and licensing deals, rather than bring revolutionary drugs into the market.

Viceroy value ATNX stock at US$2.83 – a 71% downside –the sum of its tangible book value and 1x valuation on its licensing & consulting revenue streams, for the year ending June 30, 2019. With ATNX’s questionable license acquisitions and management’s precedent for overstated top line figures in previous ventures: this is optimistic.

Management – A Company of Rogues

  • Several members of Athenex’s management team have a history of what appears to be either gross incompetence in fiduciary duties or clever mismanagement in infamous frauds internationally, collectively resulting in billions of dollars of write-offs including Sino Forest and Suntech.
  • ATNX directors have also acted as sellers and drop-shippers to rip off Athenex shareholders with margin-stealing exercises through their investment entity: Avalon Global. Cash has consistently exited the business via similar related party deals.
  • Breaches in corporate governance principles: Athenex directors screwed investors by purchasing CDE for themselves and flipping it to Athenex for a 262% profit in 6 weeks. The company failed to report the circumstances of the transaction in any meaningful way.
  • In a separate instance, Directors pocketed a 3,300% profitby flipping an “anti-cancer mechanism” license to Athenex for US$5m, for which they paid just US$150,000 just 6 months earlier.
  • Directors award themselves millions of dollars’ worth of stock at no cost through the issuance of promissory notes that are cancelled on a time-vested basis.
  • Athenex directorshave an uncanny ability to avoid any disclosure or reference to their involvement in historical fraud or related party deals. It’s Viceroy’s view that if investors were aware, they would not have bought $ATNX in the first place. 
  • Athenex’s CFO J. Nick Riehle left unexpectedly for a “planned” retirement, just 10 months after joining the company but is now seeking work as a consultant.

Oraxol – Flagship or Shipwreck?

Athenex has been reliant on the marketed prospect of Oraxol in order to obtain access to capital, having received going concern qualifications from Deloitte since 2016 and current yearly cash-burn rates of ~$100m. The company has raised ~US$360m in equity and US$80m in debt since 2017. Even if R&D costs are removed from the equation, Athenex’s licensing and consulting segments are operationally loss-making.

  • After consultation with industry specialists and oncologists, Viceroy believes Athenex’s flagship paclitaxel drug, Oraxol, cannot compete with the current standard of care available in the USA.
  • Oraxol’s clinical trial’s control dosing regimen of IV paclitaxel as monotherapy is an outdated treatment schedule dating from the 1990’s.
  • Oraxol’s marketed quality of life improvements are redundant. Patients will still require IV /treatment post-treatment, alongside complications from oral treatment.
  • Oraxol’s side effects appear more severe than those of the current US standard of care, Abraxane, and may require hospitalization due to their life-threatening nature. Reported adverse effects grade 4 neutropenia, grade 3 vomiting and unspecified GI complications were more severe than IV paclitaxel intake.
  • None of Oraxol’s clinical trials have included a US patient component. While the FDA does allow data overseas trials, these results are treated with much higher scrutiny. Viceroy believe ATNX studies are being conducted in South America due to a lower local standard of care: US patients could not be enticed to trial a drug against an outdated active control regimen.
  • Athenex’s Orascovery program – key to its marketed value proposition – was purchased for just US$7.5m upfront in 2011 after its previous owner experienced decade-long development delays with little headway into development. The Orascovery platform is busted.
  • Through consultation with experts, we believe Athenex’s pursuit of the 505b(2) pathway for Oraxol will be hampered by the fact that its paclitaxel delivery mechanism, HM30181A, has never been approved by the FDA. The FDA may require Athenex to pursue a further NDA for HM30181A.
  • Viceroy have identified what we believe to be Intellectual Property Theft from UK company Immunocore. XLifeSc’s flagship technology (in which ATNX put $35m upfront) may already be owned by GSK and further along the development pipeline: GSK’s solution is currently undergoing phase 2 trials in the US.

 

Athenex’s operational and R&D cash-burn rate is over US$100m a year – the company would be lucky to survive until HY 2020 without needing a further cash injection from investors. Even if Athenex scrapped its R&D completely, the company’s revenue streams operate at a substantial loss.

Accordingly, we believe our valuation of $2.83 is optimistic, and will be realized in the short term. We do not see a future for the company in its current state.

Featured

Pareteum – The Hal Turner Options Appreciation Club

July 17, 2019 – We ask investors today to consider what Viceroy believes is an excessive enrichment by Pareteum’s Executive Chairman and Principal Executive Officer’s share ownership and compensation:

  • Reflect a low level of confidence in the company given Hal’s immediate offering of 2,000,000 shares as part of the 2018 Long-Term Incentive Plan
  • Show the acquisition of Artilium helped Turner vest and sell shares in Pareteum at an accelerated rate, despite no clear reason for this vesting, save for an convenient amendment in the terms.

Report Download Link

Featured

Ebix – FOIA response confirms enforcement investigation

July 1, 2019 – SEC withholds FOIA documentation as it could reasonably be expected to interfere with enforcement activities, and disclose identities of confidential sources and whistleblowers.

Report Download Link

On December 11, 2018, Viceroy released our preliminary report on Ebix Inc. (NASDAQ:EBIX), within which we reported on numerous historical and potential ongoing regulatory investigations into the Company and its conduct internationally. You can find our report here:

https://viceroyresearch.org/category/ebix-nasdaqebix/

On June 20, 2019, the SEC responded to a Freedom of Information Act document request, within which the SEC has withheld requests pursuant to 5 U.S.C. § 552 (b) (3), (6), (7)(A), (7)(C) and/or (7)(D).

This document mirrors responses from the SEC’s Office of FOIA Services relating to MiMedx. Upon our dissemination of this report, the Company subsequently admitted to investigations by the SEC, DOJ and VA, amongst potentially numerous other acronyms.

Featured

Pareteum – The Sound of Silence

June 27, 2019 – Viceroy issues response to Pareteum’s statement on “Short Seller Attacks”

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Pareteum can continue to categorically deny “short seller attacks”. This will not bring substance to contracts, magically collect skyrocketing receivables, or explain related party transactions.

Viceroy stands by our research.

Featured

Pareteum – Executive Overview

June 27, 2019 – This report unveils troubling data Viceroy Research has encountered while conducting background checks on Pareteum’s management team.

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“David Hess and David John join Pareteum as we are rocketing towards our growth goals as a global technology” company…Hiring talent to expand our North America presence and connect into Latin America is the obvious step in acquiring new customers and new revenue that will ensure we exceed our targets”
– Hal Turner, CEO

David John, Vice-President Pareteum, was hired by Hal Turner with apparent pride in October 2018, and cited as Managing Director, CALA for Pareteum Corp.

Viceroy have double checked multiple sources to confirm David John’s full name is, in fact, David John Fondots.

There appears to be a very good reason why Mr Fondots has omitted his last name from his public-facing corporate profile

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Pareteum – The Wild West of Telecoms

June 25, 2019 – Pareteum (NASDAQ:TEUM) provides services to Mobile Virtual Network Operators (MVNOs), who sell data/minutes to users and purchase data/minutes from telecom network operators. Recently Pareteum has been subject to criticism from other short sellers. Given the discourse, Viceroy believe it is prudent that we also share our findings.

Report Download Link

  • Further to recent research reports, Pareteum has a history of promotional press releases of customer wins. A deeper investigation into these customers show much larger number are insignificant, and the companies behind them appear in no way capable of fulfilling the contract values advertised by Pareteum.
  • Two of Pareteum’s customer wins appear to be undisclosed related parties tied to Pareteum consultant Dinesh “Danny” Patel.
  • One of Pareteum’s announced customer wins is a company under a historic investigation and charged with significant VAT evasion fraud. Information on this is easily available, leading us to believe that Pareteum was aware of the company’s issues while announcing the customer win.
  • Pareteum appears to be in breach of US sanctions against Iran through its provision of services to Iranian MVNO Amin SMC. Amin SMC appears to be chaired by Hamid Reza Amirinia, an individual suspected of breaching sanctions with an Iranian government mandate to launder money for the regime.
  • Several entities on the pareteum.cloud domain are small companies or have no web presence whatsoever, leading us to believe that they are Pareteum customers who are unable to pay or have no operations.
  • Pareteum’s 36-month contractual backlog measurement is not an accurate predictor of future profits. An analysis of the company’s backlog and management comments shows it should have reported 73.10% more revenue in Q1 2019 than it did. Management appears to be inflating this figure to hype up the share price and reassure investors.
  • Pareteum’s management has a history of dishonest reporting. Notably, CFO Ted O’Donnell who was sued by former employer AudioEye for fabricating US$8.1m worth of revenue over 3 quarters which was found to have no supporting documentation. This was an overstatement of revenues in the period of more than 3,000%.
  • Pareteum’s rapid-fire announcement of customer wins mirrors its announcements regarding cryptocurrency in 2017, which were put to an abrupt halt when a response to an SEC letter revealed TEUM had made no revenue, nor planned to do so, from cryptocurrency.
  • Pareteum has made an US$3.7m loan to Yonder Media Mobile, an early stage MVNO operated by serial failure entrepreneur Adam Kidron. Kidron has burned at least US$100m in his enterprises, having already cratered the Yonder brand with a music streaming service which collapsed in 2017.
  • A breakdown of Pareteum’s revenues, cash flows and receivables show the majority of its revenue from sources other than Vodafone and acquired businesses iPass and Artilium appears to be uncollectable. Accordingly, we believe total revenue is overstated by 42%, corroborating our findings regarding Pareteum’s customers.

We are as yet unable to quantify the impact of the company’s apparent breach of sanctions against Iran and have not assigned a discount. We have reported this apparent breach to the relevant federal authorities.

A token valuation on an EV/Revenue basis presents a 44% – 76% downside for Pareteum’s share price (State Current Price), with the more severe scenario more probable. However, based on the numerous subjective issues highlighted in this report and the dependence of the valuation on our already-conservative revenue adjustment, we cannot fully quantify the downside, which we believe to be significant.

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Pretium – Pretium’s Predictable Predicament

JANUARY 10, 2019 – Pretium released the Brucejack Mine’s Q4 2018 production update yesterday after-market, and market reaction shows it fell short of expectations. Pretium’s ore grade has predictably fallen since Q2 2018 by >22%, leading to a miss of Pretium’s H2 low-end gold production guidance of 200,000 ounces. At 11.5g/t, Pretium’s head grade is now 30% below feasibility study sampling.

Report Download Link

Per our previous reports, Viceroy believe Pretium’s grades will continue to fall as Pretium appear to be at the tail end of extracting high-grade deposits found along the Cleopatra Vein. As a reminder to our readers, we have appended this section of our thesis to this note.

Pretium have attributed their production and grade shortfall on their grade control system, which they state will be refined. We believe this is an unnerving excuse, and have provided substantial evidence to support our thesis that Pretium is overmining or selectively mining its deposits.

Production capacity increases of Pretium’s mill will not fix this problem.

Viceroy was astonished at the >10% PVG stock decline on massive volume on January 8, 2019, prior to any announcement by Pretium. This is likely related to earlier bullish sentiment disseminated by The Globe and Mail, who reported Barrick was ‘eyeing’ Pretium.

We find it highly unlikely that Barrick would consider Pretium as an acquisition given it’s performance and grades have fallen well below expectation, and would likely not meet internal IRR criteria.

Pretium has failed to address in any depth the issues raised in our report including:

  • The involvement of SEC-sanctioned fraudster Sima Muroff in the bulk sample program’s milling operations
  • The narrowing of drill core spacings as part of the grade control program, the results of which show no continuity within the VOK deposit
  • Accelerated mine development
  • Resignation of key consultants
  • Blown-out costs

We maintain that Pretium is fundamentally overvalued, and see limited value in its current form.

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Ebix – Ebix’s 2019 ‘Not-So-Good Business Acumen’ nomination

JANUARY 7, 2019 – Ebix has characteristically ramped its press-release flow since the publication of Viceroy’s initial report and continued its acquisition spree. This report concerns management’s disregard for corporate governance, lack of transparency and due diligence.

Report Download Link

Ebix Inc (NASDAQ: EBIX) have come out with multiple acquisitions and service “deals” since our multiple publications on the Company. On further investigation, we found that one of Ebix’s announced contracts had not yet been finalized. Ebix retracted its press release about a Dubai Forex Services contract: investors were misled on the status of the contract.

This is a major red flag, and exaggerates what we believe is an already extremely high risk investment strategy at Ebix.

Investors will note that Ebix have avoided commenting on the audit committee’s recommendation for Ebix to retain the services of Top 4 Auditor for regulatory reasons. We can only assume the Top 4 preferred to give ad hoc accountancy advice rather than full audit responsibilities.

This report will also dive into Ebix’s near-miss attempted acquisition of now-insolvent Patriot National, which the company was looking to acquire just before its spectacular collapse.

Ebix have so far decided to have fireside chats with investors while referring to our work as an old short thesis. Ebix have refused to account for Robin Raina’s poison pill bonus, the treatment of goodwill and the accounting irregularities.

Our research into Ebix is ongoing however we believe the information puts into context Ebix’s recent announcements. We will shortly publish further data pertaining to the Ebix group’s internal cash movements.

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Ebix – Diving into the Robin Raina Foundation

Publicly available financials suggest the Robin Raina Foundation shares similar financial discrepancy issues and poor disclosure practices as Ebix.

Report Download Link

One of the Ebix’s CEO’s biggest self-promotion points is his commitment to charity. Kudos.

As part of our due-diligence process, Viceroy has conducted background checks into Ebix’s directors and their ventures. When diving into the Robin Raina foundation, we  found inconsistencies between Robin Raina’s self-promotion of the Robin Raina Foundation (RRF) and the financial accounts of the foundation and its affiliates, and licensing issues across the US and India.

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Ebix – The Taxman Cometh

DECEMBER 13, 2018 – Ebix’s Mumbai office was “searched” by Indian tax authorities in Q3 2018. In other news, CEO Robin Raina claims Ebix has never “been on the wrong side of any regulatory or tax authority”.

The Taxman Cometh – Report Download Link

Viceroy released its preliminary report on Ebix – titled Goodwill Hunting – on 11 December 2017, the contents of which we also discussed at the Kase Learning conference in New York on December 3, 2018.

This report will address the totally inadequate response Ebix issued on December 12, 2018, which was substantially an attempt at authority bias by CEO Robin Raina. Accordingly, we will also shine a light on the statements Raina decided to include in this press release, which we believe to be extremely misleading.

  • Ebix acknowledged our report via a press release on December 12, 2018, however CEO Raina would rather issue a hollow press release than address the issues Viceroy have raised in our preceding report.
  • Robin Raina claims Ebix has “never been on the wrong side of any regulatory or tax authority”. This is inconsistent with:
    • Ebix’s Mumbai office being subject to an undisclosed “search” by Indian Tax Authorities for suspicion of tax evasion in late August 2018;
    • Ebix currently subject to a tax audit by the Australian Taxation office since at least 2016;
    • Ebix historically settling an IRS dispute for >$20m;
    • Ebix being subjected to a prolonged SEC investigation;
    • Ebix being subject to a possible ongoing DOJ investigation;
  • Contrary to Raina’s claims, it appears his conduct was subject to regulatory scrutiny even prior to his rise to CEO. Ebix’s former auditor, Arthur Anderson, was charged by the SEC for improper conduct and fraud relating to the audit of Ebix’s revenue recognition practices at a time where Raina was VP of Sales and Marketing and COO.
  • Robin Raina claims Ebix has had “no differences with any statutory or consolidated auditors across the world in the last two decades”. This is objectively, and verifiably false, as we have already reported.
  • Ebix detracts attention to concerns raised through reinforcement of its commitment to stock buybacks, of which it has announced US$330m since 2015 and only fulfilled US$187.169m.
  • Viceroy is writing to the relevant debt providers shortly with these and other material concerns.

Viceroy’s original report can be found here:

https://viceroyresearch.org/2018/12/11/ebix-goodwill-hunting-2/

Ebix’s press release on December 12, 2018 can be found here:

https://www.ebix.com/press-release/ebix-ceo-decides-to-take-salary-in-ebix-stock-instead-of-cash-the-company-commencing-purchase-of-ebix-stock-under-100-million-usd-repurchase-commitment-over-the-next-6-to-12-months-period

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Ebix – Goodwill Hunting

Accounting irregularities, undisclosed tax investigations, auditor shuffling, poison pill to protect short sellers: welcome to Ebix.

DECEMBER 11, 2018 – Following on from our presentation of the same title, Viceroy are releasing our preliminary report on Ebix, Inc (NASDAQ:EBIX). Our investigation has uncovered accounting discrepancies dating as far back as 2008 to present day as well as several other red flags.

Report Download Link

Filings.zip – Download Link

  • Numerous accounting discrepancies in years 2013 to 2018 regarding the recognition of goodwill and acquisitions within the Ebix group. These discrepancies have largely gone unnoticed due to the delay in local filings being signed off and the multi-jurisdictional nature of these transactions.
  • Over the course of our investigation we uncovered evidence of what we believe is a scheme to incorrectly book revenue and earnings. We believe this is done through the shuffling of assets from one subsidiary to another while improperly booking internal revenues, and contingent consideration “cookie jar” accounting.
  • We are limited by the recency of the available subsidiary filings. We believe this behavior continues to take place. Ebix’s acquisition spree in India further muddies the waters.
  • Ebix announced a change in auditor to T.R. Chadha from Cherry Bekaert (of MiMedx fame) after reporting material weaknesses regarding purchase and income tax accounting, pursuant to appointing a big four accounting firm in Q1 2019.
  • T.R. Chadha has never audited a US-listed entity and was auditor of several Indian Ebix subsidiaries in which there appear to be several accounting discrepancies.
  • Cherry Bekaert was subject to a scathing PCAOB inspection just weeks before its replacement.
  • Ebix’s subsidiary structure is excessively convoluted and opaque. The subsidiary structure includes holding companies in geographies where obtaining financials is near impossible. Many subsidiaries are held under a UK entity, Ebix International Holdings, which has only ever filed locally as a dormant company and recently received a warning of compulsory dissolution for failing to file accounts.
  • Ebix’s joint venture with Vayam Technologies, Ebix Vayam, accounts for 25% of Ebix’s receivables and only customers are Vayam Technologies themselves. Vayam appears never to have settled its receivables and the entire JV is funded by Ebix at an 8% interest rate, payable in receivables. This appears to be a scheme through which cash is injected in to make paper gains of margin plus 8%.
  • Ebix CEO Robin Raina is entitled to a massive payout in the event of an acquisition at the expense of shareholders. This poison pill protects short-sellers from takeovers by attaching an unreasonable premium to the company. This arrangement and its predecessor are currently subject of ongoing shareholder litigation.
  • The company’s debt-fueled acquisition binge in India was originally intended to create and list an Indian payments entity. This appears to have turned into an unfocused roll-up, with more and more scattered businesses being added to the Ebix stable. Despite these additions, Ebix does not break out its revenues from these disparate income streams.
  • Ebix’s has been subject to an undisclosed tax audit by the Australian Taxation Office since 2016, we believe due to the transfer of Telstra eBusiness Exchange assets to Ebix Singapore, and non-arm’s length transactions.

Due to the delay in availability of subsidiary accounts, and the rapidly expanding nature of the company’s operations we are unable to quantify a base downside. We believe it is highly likely given the progress of the shareholder litigation that regulatory authorities including the SEC open or reopen their investigations into the company. Accordingly, we believe that Ebix carries a high investment risk.

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NEPI Rockcastle – Mucking Out the Stable

On November 28th, 2018 Viceroy Research released a report regarding NEPI Rockcastle (JSE: NRP) detailing what we believed to be over-inflated profits in the company’s Romanian operations. NEPI issued a response to our research and hosted a call for concerned investors.

NEPI Response 2018.12.06 – Download Link

NEPI Dutch Filings – Download Link

Unusually NEPI provided some clarity in terms of their accounting treatments. We maintain our belief that NEPI is fundamentally overvalued with reservations regarding the sustainability of distributable income, the tax treatment in foreign jurisdictions and the status of the overall company. This we will update on.

  • NEPI Rockcastle have not sought to deliver any scope of investigation in response to a request by investors in August 2018, and claim it is the prerogative of investors to identify the exact issues they want investigated. It seems clear what issues 10 of South Africa’s largest financial firms sought clarity on: potential trading of associated companies, suspicious capital raising activity and property transactions.
  • Per our original report, we were of the opinion that transfer pricing is not an adequate explanation as to why statutory losses are incurred in Romania. This is due to transfer pricing legislation in Romania and the EU. On further investigation, these hard currency, unsecured, intra-group loans are disclosed in NEPI’s Dutch subsidiary at rate of 8%-12%, compared to the Romanian mortgage rate of 4.5-5% and safe harbor limit of 4%. This is a stark contrast to the CFO’s description, in which she did not provide the figures, but guided the rate was between 4% to 8%.
  • Having obtained the filings of Dutch subsidiary, NE Property Cooperatief UA, we find it untenable how a local CFO or Financial Controller locally can advocate a “fair” and arm’s length transfer pricing interest rate on unsecured loans of 8%, formerly 12%. Essentially, the equity holders at the local level are being punished for an excessive and non-arm’s length priced loan. We make this assumption based on local Euro borrowing costs within Romania with an LTV of circa 28% as disclosed by NEPI.
  • NEPI uses the entirety of its funds earmarked for deferred tax payments to inflate its distributable earnings figure. In effect, the company is likely improving their dividend figures at the expense of future disbursements.
  • New anti-abuse legislation will materially hamper NEPI’s transfer pricing model going forward in Romania, Netherlands, and across the EU. Given the extent of transfer pricing, this will impact NEPI’s distributable earnings.
  • Taking a step back, it is delayed outgoings, not earnings, that substantiate ~20% of distributable earnings. The Romania tax channeling is in fact one of many adjustments that allow this unsustainable dividend practice. Other items that deserve scrutiny include the dividend contribution of stocks, the antecedent dividend add back and the sale of financial investments.
  • At a property yield of 6.77%; after accounting for cash costs, interest costs, taxes, and the stock trading at a premium to NAV, we fail to see how NEPI can justify a 7.5% dividend unless holders choose to take their dividend as scrip, which is dilutive and makes future dividends even harder to justify. Accordingly, we maintain our view that the stock is fundamentally overvalued.
  • Of concern is that large money managers, including retirement money managers PIC, have continuously chosen to take dividends as scrip.
  • SENS trading data shows entities associated with the Resilient stable associate Roque Hafner traded large amounts of NEPI shares at least for the period between May 2016 and May 2018. Hafner was implicated in the media as being involved in the Resilient insider trading scandal and several Hafner entities used to trade Resilient shares also traded NEPI shares.

We reiterate our belief that NEPI Rockcastle’s shares carry a high investment risk and are fundamentally overvalued, which will become increasingly unattractive over time given what we believe are unsustainable distribution practices.

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Ebix – Goodwill Hunting

The Alchemy of Creating Profits

Ebix Presentation – Download Link

Viceroy’s presented Ebix at the Kase Learning Conference on December 3, 2018. We will shortly release a full report into our findings.

Summary red flags:

  • Change in business model (IT providers to insurance v. finance sector) without visible synergies or management experience.
  • Accounting discrepancies suggests EBIX is booking external revenues on transactions between its subsidiaries: this occurred in 2014, 2015, 2016, 2017 across multiple geographies (UK, Singapore, India, Dubai, Mauritius).
  • The company has a growing unbilled receivables balance:
  • 50% from by EBIX’s India JV (Ebix Vayam Technologies) whose only customer is the JV partner (Vayam): it appears to have no other customers, and 446 days of receivables.
  • Rapid change of company auditors, most recently the replacement of Cherry Bekaert with T.R. Chadha, an Indian auditor with no history of auditing a major US-listed entity.
  • Unnecessarily intricate and opaque subsidiary structure, with very little insight provided to investors. Many assets are being held in opaque geographies and have been transferred with no disclosure or justification.
  • The CEO has financially engineered an >US$825m “poison pill” to prevent any takeover by mandating a large payout to himself in the case of such a takeover.

 

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NEPI Rockcastle – Response to statement by NEPI Rockcastle

November 28, 2018 – Viceroy published its report on NEPI Rockcastle on November 28, 2018. NEPI Rockcastle have subsequently issued a preliminary response to our report.

Viceroy Response 28 Nov 2018 – Download Link

We note that our data was sourced directly from NEPI’s filings, government records, and court records. Where we have conducted calculations, our analysis and workings have been show in full. Investors have the ability to determine the veracity of our analysis and conduct their own due diligence.

We are not of the opinion that NEPI has consistently proven transparency towards shareholders, the latest example of which is the outright refusal to engage an independent party to investigate potential trading of associated companies, suspicious capital raising activity and property transactions, at the request of 10 of South Africa’s largest financial institutions (including Government fund managers).

In stark contrast to any “reasons” NEPI provides for accounting discrepancies, investors should also note with extreme caution that the Company failed to provide details of outgoings, arrears, management matters, negotiations, rent reviews, to its valuers, Cushman & Wakefield. This was not an issue for all its other geographies.

Further to this, analysis of NEPI’s Romanian portfolio accounts show the company has, on average, 80 days of accounts receivable. This is indicative of substantial rent arrears, and fails the company’s claim of a 99.9% collection rate. These issues are independent of where earnings have been recognized, if this should indeed be NEPI’s response, and would not account for discrepancies in taxes paid in foreign jurisdictions.

We look forward to NEPI’s comprehensive response to our report.

 

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NEPI Rockcastle – Horsing around in the Stable

Irreconcilable international earnings, enriching management through M&A, hoodwinking investors through misleading analysis via rejection of independent investigation.

Report – Download Link

Letter to Auditor – Download Link

Romanian Subsidiary Filings – Download Link

NEPI Rockcastle (JSE:NRP) is a JSE-listed entity holding one of the largest real-estate investment portfolios in Eastern Europe. Viceroy’s investigations have uncovered numerous inconsistencies within NEPI Rockcastle’s financial reporting and major links to an established financial fraud:

  • Local filings for NEPI’s Romanian subsidiaries suggest company figures are massively overstated for at least the past 3 years. Romania is NEPI’s largest geographical income segment in which consolidated 2017 group accounts show net profit before tax of EUR 284.87m (2016: EUR 221.90m). Local income statements show these companies operate at losses of over >EUR 40m (2016: >EUR 50m) for the same period.
  • Viceroy believe corporate or tax-effective structure or transfer pricing does not adequately explain the substantial differences in Romanian earnings generation as NEPI’s reported income tax expenses in Romania also do not match local filings. Given the criminal implications of misrepresenting tax numbers to the Romanian tax office, we assume NEPI chose to instead mislead its shareholders.
  • NEPI’s recent acquisition of Rockcastle was immediately followed by a massive write-down of subsidiary loans reflecting uncollectable debt from SPVs. When taken together with the purchase premium for the business of almost 80%, it is clear that the only winners in the Rockcastle acquisition were Resilient Stable insiders.
  • NEPI’s former chairman Corneliu-Dan Pascariu was involved in Romanian real-estate venture CEEIF, funded by the Peregrine Financial fraud perpetrated by Russell Wasendorf Sr. NEPI purchased Romanian assets from CEEIF before the Peregrine Financial fraud came to light. Court filings establish that CEEIF and several subsidiary development & holding companies were utilized by Wasendorf Sr. to embezzle cash.
  • Despite having financial recourse for beneficial ownership of ~11% of CEEIF’s purported book value of >EUR 60m, Peregrine’s Receiver, Michael M. Eidelman, had no interest in pursuing these recoveries. Eidelman’s investigations alleged CEEIF was insolvent, did not discount asset values to CEEIF’s pro-rata minor stakes, hid assets and liabilities from its balance sheet, and had no audited financial statements. Given Pascariu’s involvement as a major shareholder and financier through Unicredit, at which he was chairman at the time, it would have to have been extremely neglectful to not detect this activity.
  • NEPI shareholders issued a written request on 8 August 2018 for an independent investigation into potential trading of associated companies, suspicious capital raising activity and property transactions. NEPI rejected demands for an independent investigation, instead establishing a subcommittee of its own members to investigate themselves, and their predecessors.
  • Even without considering the above points, NEPI is fundamentally overpriced when compared with peers.

Based on our analysis, we see a significant downside to NEPI’s share price driven by an unwarranted overvaluation and the likelihood of substantially lower-than-reported earnings. Were NEPI to trade in-line with peers we believe shareholders would face an 25% downside, however, given the suspected extent of financial misrepresentation, we believe the company’s shares are worth substantially less.

We believe stakeholders should reinforce their demands for an independent forensic investigation into the company’s operations and veracity of its financial consolidation and tax compliance. Until such time, Viceroy believe NEPI carries a high investment risk.

For more research into the Resilient Stable, readers should refer to the leaked internal memo by 36One Asset Management which we believe was published around the end of 2017. A Scibd link to this report is below. Viceroy have no business relationship with 36One Asset Management and have never discussed NEPI Rockcastle with them.

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MiMedx – Open Letter to MiMedx

OCTOBER 15, 2018 – Request for investigation into perceived/potential conflict of interest.

Viceroy – Open Letter to MiMedx

On July 2, 2018 MiMedx announced the resignation of MiMedx CEO and Founder, Parker H. Petit, and the appointment of Mr. David Coles, a Managing Director of Alvarez & Marsal, as the company’s interim CEO.

The appointment of Mr. Coles follows MiMedx’s engagement of KPMG and King & Spalding, who we understand have been tasked with, among other things, conducting an independent internal investigation into MiMedx sales practices .

Viceroy understands that a key element of these internal investigations concerns MiMedx’s conduct with the United States Department of Veteran’s Affairs (DVA); specifically, the allegations of channel stuffing and the subsequent indictment of DVA physicians utilizing MiMedx products. These physicians are in the process of cooperating with the US Attorney General’s case in relation to the charges alleged in the criminal filings including receiving bribes and inducements, and over-use of MiMedx product within the VA.

Viceroy Research has been made aware of links between other Alvarez & Marsal and a cohort of individuals allegedly exercising undue influence over the DVA, colloquially referred to as the “Mar-a-Lago Crowd”.

Given the depth of investigations occurring at MiMedx relating to the company’s conduct with the DVA, Viceroy believe the appointment of Alvarez & Marsal represents an irremediable conflict of interest to MiMedx’s ongoing internal investigations, and to the investigations we understand are ongoing within the DVA and other federal regulatory entities.

We have addressed a separate letter to the Department of Justice and the DVA’s ethics committee outlining what we believe is a serious conflict of interest and undue influence within the DVA of several parties.Further, we believe that it is irresponsible that this group, when exposed by journalists, was saved from a congressional hearing by longtime friend of former MiMedx CEO Petit, Senator Jonny Isakson, who has benefited greatly from donations from MiMedx and Petit.

Enclosed is a brief report detailing our investigation into this matter. A more comprehensive report will be published post VA OIG approval. The PCAOB and Investigators has stated that “When an auditor is confronted with multiple indicators of problematic revenue recognition … he or she must get to the bottom of the relevant issues, including digging into management’s representations.” We stand ready to assist in this effort and sincerely appreciate your attention to this extremely important matter.

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Pretium – Pretium Loses its General Manager

Viceroy detail Pretium’s unannounced departure of Brucejack’s General Manager just 12 days after our initial report (NYSE:PVG).

Download Link – Report

SEPTEMBER 18, 2018 – Viceroy continues its coverage on Pretium Resources Inc. This report will detail what appears to be an exodus of personnel from Pretium since the start of the operation at the Brucejack mine.

Notably, the General Manager of Pretium’s Brucejack mine, Kevin Torpy has just resigned from the company. This was not announced by Pretium, but instead by Torpy’s new employers: Titan Mining Corporation – a microcap zinc explorer – on 17 September 2018.

Yet again it is left to Viceroy to inform Pretium stakeholders of key developments.

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Pretium – Catch-22

Viceroy addresses Pretium’s revised ARR and presents new evidence supporting overmining thesis. (PVG:TSX / PVG:NYSE)

Download link – Pretium’s Catch 22

SEPTEMBER 11, 2018 – On 6 September, 2018, Viceroy research published its first report on Pretium Resources detailing what we believe is a scheme to distort the company’s mining results and inflate the projected reserves of the company’s Brucejack mine.

On September 10 Pretium issued a press release correcting its 2017 Annual Reclamation Report, the contents of which were used in Viceroy’s original report. We believe this is a badly thought-out attempt at damage control for the following reasons:

  • Pretium’s new ARR figures are internally inconsistent and imply that Pretium misreported the Brucejack mine underground void by the volume of 140 Olympic-size swimming pools.
  • The decrease in the change of underground void volume continues to present major discrepancies to Pretium’s feasibility study, particularly around expected and historical bulk density figures obtained from the Brucejack mine
  • If investors choose to accept that no overmining has occurred, a Pandora’s box of serious operational issues continues to plague Pretium. Specifically, it becomes inexplicable that Pretium’s COGS and Capex have blown totally out of proportion and why explosive has dramatically exceeded expectation.
  • Viceroy present new evidence of accelerated mine development from comments by Pretium management in last week’s Rodman Conference. Pretium appear to have accelerated stoping by 18-24 months, moving well into the VOK lower zone well ahead of schedule. If investors choose to accept no overmining has occurred, Pretium’s accelerated mine development and excess dore recoveries imply the company is selectively mining high grade deposits, and has already exhausted a large portion of these in the VOK-lower/upper zones.
  • Viceroy present new evidence of excess waste generated by Pretium throughout its development phase. Pretium sought indefinite extension of time to dispose of excess waste in extracted from its mines. Viceroy’s consultants confirm This is further evidence that the rate of mining and development at Brucejack mine far exceeds the design of the mine site, given that as far back as 2015 it was clear that Pretium lacked the correct equipment to dispose of waste ore.

Investors must seriously consider the implications of Pretium’s financial and operational figures should they choose to accept that no overmining has occurred. Further, they should question management as to their responses to our findings, instead of confining their responses to fireside chats with sell-side analysts.

Viceroy continue to believe that Pretium’s grades will fall significantly, operating metrics/analysis has been distorted, and assets will be seized by its secured creditors as collateral as the company is overburdened by debt.

Viceroy maintains its belief that Pretium’s equity is likely worthless.

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Pretium – Digging Up Dirt

Distorted grades, involvement of SEC sanctioned entities, and high turnover of mineral consultants – Pretium flies many red flags. (PVG:TSX / PVG:NYSE)

Download – Full Report

Download – Summary

SEPTEMBER 6, 2018 — Pretium Resources owns and operates the purportedly high-grade Brucejack gold mine in Northwest British Columbia in Canada. Viceroy is short Pretium Resources, as our research suggests its mining results have been distorted and the equity likely worthless as the overindebted company bleeds cash over the next 12 months:

  • Strathcona Mineral Services Limited (Strathcona), the mining consultancy that famously declared Bre-X to be a fraud, resigned from Pretium’s 2013 bulk sample program later stating, “…they will not have a mine producing 425,000 oz. a year for the next 20 years, as they have been advertising so far”. The entire Pretium investment thesis rests on the validity of the 2013 bulk sample program.
  • After Strathcona’s resignation, Pretium hired Strategic Minerals LLC (Strategic Minerals), an entity owned and managed by disgraced investment manager Serofim “Sima” Muroff to handle the testing of its bulk sample program. Muroff was charged by the SEC for securities fraud after misappropriating millions of dollars of investor funds and siphoning away millions more. Our research suggests that Muroff has knowingly assisted Pretium in overselling the quality of Brucejack Mine to investors.
  • The funds embezzled by Muroff were partially invested in numerous early-stage gold mining assets which to date have produced no gold. We believe Muroff’s entity was created to similarly distort gold grades for these gold mining assets. Muroff’s investors funds were also used to invest in equities and derivatives of other gold mining assets which we believe included Pretium.
  • The overwhelming majority of our research indicates Pretium manipulated the results of its bulk sample program through an over reliance on samples taken from the Cleopatra vein, thereby artificially inflating Pretium’s grades and reserve projections for the Brucejack Mine.
  • The manipulated bulk sampling test performed by Strategic Minerals was used by the courts in Wong v. Pretium Resources, 2017 as the basis of their decision that the Strathcona analysis was incorrect. This did not exempt the company from withholding Strathcona’s preliminary analysis from investors.
  • Government documents indicate Pretium is moving approximately double the tonnage from the underground mine than disclosed to investors. This suggests reported grades and reserves are significantly inflated, a much greater amount of waste is being dumped into local lakes, and more explosives are being utilized. Pretium’s operational plan has experienced dramatic changes in a short amount of time, leading us to believe that management is scrambling to find consistent, high-grade ore to maintain the charade that its debt and equity are viable.
  • Pretium founder and chairman, Robert Quartermain’s only mine operating experience at Pirquitas, an Argentinian silver mine owned by Silver Standard, resulted in a ~53% reserve cut and subsequent shutdown. A number of Quartermain’s management team left Silver Standard to operate Pretium.
  • As of Q2 2018, Pretium has ~US$700M of debt (excl. convertible notes) with an effective interest rate of ~15%. If Pretium can’t make or re-negotiate the payment, then Pretium may be unable to remain a going concern. We believe this deadline has provided an incentive for Pretium to inflate its results through the near-term depletion of the Cleopatra vein and take more rock out of the ground than disclosed and planned.

The implications of our findings on grade, tonnage and life of mine are damning and lead us to believe that Pretium’s equity is highly likely to be worthless in its current state, and its credit significantly impaired.

Viceroy believe Pretium bears striking resemblance to Rubicon Minerals, now operating as a shadow of its former self after revising mineral reserve estimates down ~90%.

We believe the most likely scenario is that Pretium’s assets are seized by its secured creditors as collateral.

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MiMedx – Filling In The Blanks

More ties to Forest Park, active breach of federal sales regulations, knockback of “independent” research and the dead-on-arrival of international expansion.

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The fraud at MiMedx continues to unravel as the company announced it would have to restate more than half a decade’s worth of financials, doctors receiving bribes from MiMedx and that its short selling commentary cannot be relied upon. Viceroy have identified further issues with the company including:

  • The announcement of MiMedx’s international expansion was a sad attempt at distracting investors from the Company’s compliance updates.
    • In the UK, the technology commentary from the National Health Service (NHS) appears very skeptical as to the efficiency and economic viability of MiMedx’s EpiFix product compared to existing solutions. EpiFix has been available in the UK for 2 years as of January 2018, and the product was only stocked in 1 NHS facility.
    • Viceroy Research have begun contacting international regulators to present evidence.
  • A major stumbling block to regulatory approval, as indicated by UK regulators, is the lack of independent research into MiMedx products’ efficacy and significant difference between company funded/sponsored reports and limited independent patient data.
  • Viceroy have uncovered an AmnioFix study conducted by Forest Park Medical Center employee, John Dulemba, and MiMedx consultant and former Matria healthcare Director of Clinical Research, Niki Istwan.
    • The study has no disclosures on compensation or relationships with MiMedx.
    • Istwan appears on multiple MiMedx studies sometimes as a MiMedx consultant and other times as an “independent”. We believe this obfuscation of relationships to the company is intentional and used by MiMedx to create an illusion of independence. MiMedx does not report payments to Doctors despite the legal requirements.
  • One of three individuals recently indicted for fraudulently accepting payments from MiMedx was also part of a clinical study into MiMedx products. The implication that MiMedx clinical research is directly influenced by the Company is likely to deter international approval altogether. More so for paying bribes to Doctors. MiMedx denied paying bribes or inducements in legal filings and illegal short selling commentary, but the Grand Jury disagrees.
  • MiMedx is in breach of federal procurement regulations (FAR/DFAR) due to the conditioning of settlement agreements and litigation settlements with former employees and whistleblowers on a requirement for withdrawal of complaints to, and prohibition of communication with, regulatory authorities. We have reported this to the relevant authorities and believe their findings will corroborate our own.

For further background on this issue, please refer to Viceroy’s MiMedx Greatest Hits report:

https://viceroyresearch.org/2018/05/11/viceroys-mimedx-greatest-hits/

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Capitec – 2018 Earnings Analysis

It is our belief that Capitec management have continued to mislead investors since our previous correspondence with the company.

End-of-financial-year announcements in 2018 are reflective deteriorating business conditions and corroborate the continuity of several intentionally misleading accounting practices we have reported in the past.

We have again entertained Capitec’s invitation to field questions regarding its business.

An open letter to Capitec’s Audit Committee can be downloaded below:

Viceroy Letter to Audit Committee – PDF Download

In this instance, we are addressing the audit committee with our concerns, as they relate to broader financial reporting transparency and flawed management analysis, corroborating our previous analysis of unsustainable business practices.

Our continued review of Capitec’s practices and financial results leads us to believe management’s delivery of analysis to stakeholders is extremely misleading, and not at all reflective of declining business fundamentals.

This report will follow issues we have raised in previous reports and correspondence with management. You can find all of these reports on our website:

https://viceroyresearch.org/category/capitec-jsecpi/

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MiMedx – Viceroy’s MiMedx Greatest Hits

Over the past eight months, Viceroy have conducted an investigation into MiMedx Group, Inc (NASDAQ:MDXG). We have presented our research over the course of 20+ reports which can be on our website.

In the interest of those who have only recently begun following the story, Viceroy have decided to consolidate the major aspects of all 20+ reports into one document, organized by topic.

PDF Download Link – Greatest Hits MDXG

This is still a lengthy document however readers should be conscious that it is a combination of over 20 separate reports, which collectively is still small sample of the hoard of data Viceroy have provided to regulators.

When we began our investigation into MiMedx we were shocked by the sheer volume, brazenness, extent and historic precedence of the fraud being perpetrated by the company. MiMedx management has yet to acknowledge any wrongdoing, remaining unrepentant despite the existence of several federal investigations into the company.

We reiterate our opinion that due to the overwhelming nature and amount of evidence against the company we believe MiMedx is a robust fraud, entirely uninvestable, and worth $0.00.

We encourage any persons with further evidence of fraud within MiMedx’s operations to lodge an anonymous report with regulators through the following channel.

https://www.sec.gov/whistleblower/submit-a-tip

Alternatively, Viceroy are happy to take the heat on publishing more evidence of malpractice at MiMedx, which we will treat with the utmost level of confidentiality. You can reach us at viceroyresearch@gmail.com.

Further reading on MiMedx’s criminal activity can also be found on:

www.petiteparkerthebarker.com

www.aureliusvalue.com

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AMD – AMD confirms CTS vulnerabilities, downplaying to avoid the financial implications

Discoveries by CTS Labs’ research into AMD flaws eliminate AMD’s competitive advantage in enterprise server segments and the company’s price competitiveness in retail aspects can no longer be justified.

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The company’s rhetoric is that this is a non-issue hinges on the non-argument that administrator access must be established in order to exploit the vulnerabilities identified by CTS. This is short-sighted as the surrounding statement that most hackers will not have the know-how to exploit these vulnerabilities.
CTS have recently released a video showing the exploitation of AMD’s vulnerabilities to completely circumvent Windows Credential Guard and obtain decrypted passwords. AMD management specifically highlighted Windows Credential Guard as a key obstacle to the execution of CTS Labs’ identified exploits.
The video can be viewed in full here: https://www.youtube.com/watch?v=8YQaWIWbzhI&feature=youtu.be
Viceroy believes the practice of giving AMD discretion as to when, if and how it reports its own vulnerabilities facilitates poor corporate disclosure and keeps stakeholders in the dark. This is not how free financial markets operate for a reason and is validated by the SEC’s most recent statement relating to cybersecurity flaws: we would similarly not give fraudulent companies the discretion as to if and when they inform their investors they are a fraud.

  • Ryzen and Epyc processors facilitate tremendous freedom of access to customer’s data –The identified vulnerabilities in AMD’s EPYC and Ryzen processors give hackers the ability to entrench malware at the hardware level, making them virtually undetectable and untouchable by security products. By abusing these vulnerabilities at the Secure Processor level, malware characteristics can give hackers unlimited control over entire networks. None of the vulnerabilities identified by CTS, both firmware and hardware, require physical access to computers to be exploited. The continued sale of these processors puts customers at significant risk.
  • The security protocols that AMD have been promoting put customers at unacceptable risk to vulnerabilities identified by CTS – We expect AMD cloud customers including Microsoft Azure, Baidu, DellEMC and TenCent will flee in the short term given the serious nature of chip flaws. AMD is unlikely to be trusted in this space again.
  • One Ryzen chip could endanger an entire enterprise network – Vulnerabilities identified in the Ryzen chip allow hackers to perform credential dumps on infected Ryzen workstations even if the latest security mitigations are employed. Malware can quickly spread to other workstations throughout enterprise networks, regardless of whether they use a Ryzen chip or Intel. No prudent CISO or CTO will risk their network or their security by buying a Ryzen chip over more secure competitors.

This report expands on the financial impact of the CTS Labs vulnerabilities, specifically the impact of future earnings and possible legal liabilities that Viceroy believes will arise against the company. Viceroy have appointed lawyers to assess the reliability of the security claims made by AMD considering the basic level flaws that have been identified.

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AMD – The Obituary

Viceroy analyze CTS Labs’ report exposing fatal security vulnerabilities across AMD products

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CTS Labs, a cyber-security research firm, released its findings on http://www.amdflaws.com. These findings demonstrate that AMD’s key products, and it basis for profitability and growth, the EPYC and Ryzen processors, contain severe and pervasive security flaws that put users and organizations at an unacceptable and damaging risk. We understand that these flaws are difficult, some practically impossible, to patch.
We believe that AMD was compelled to release products as quickly and cheaply as possible as it was falling behind its competitors. This has led to what appears to be complete oversight or negligence of security fundamentals of AMD’s products, which promote an evidently misguided competitive advantage – particularly with its Secure Processor (a.k.a. Platform Security Processor or PSP) – of providing “the greatest peace of mind on every AMD product.”. Nothing could be further from the truth.
Viceroy, in consultation with experts, have evaluated CTS’s report. We believe the issues identified by CTS are fatal to AMD on a commercial level, and outright dangerous at an international level.
In light of CTS’s discoveries, the meteoric rise of AMD’s stock price now appears to be totally unjustified and entirely unsustainable. We believe AMD is worth $0.00 and will have no choice but to file for Chapter 11 (Bankruptcy) in order to effectively deal with the repercussions of recent discoveries.

Date: 13 Mar 2018

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ProSieben – TV’s Real House of Cards

ProSieben’s (ETR:PSM) growth story is a lie: earnings manipulation, huge put liabilities.

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ProSiebensat.1 Media SE (ProSieben) is a European media company focused in the German-speaking TV and digital market. The company’s core business is advertising-financed free TV, supplemented by digital segments built by a diversification campaign over the last half-decade.

Diversification has proven a costly and ultimately unsuccessful strategy. Viceroy believes ProSieben is a highly leveraged entity with non-performing subsidiaries offering no synergies. ProSieben’s core business – which has carried ProSieben’s investment losses – appears to be in accelerating decline, with a potential death knell spurred by the EU’s implementation of its General Data Protection Regulation (GDPR).

  • ProSieben’s acquisition and expansion strategy has been catastrophic, unfocused, and expensive – the company is currently attempting to control the damage caused. Many expensive investments are loss-making, hidden through segment accounting gimmickry, and offer no synergies. It is unlikely that ProSieben will be able to offset losses through divestment. There is no clear rhyme or reason to their business and such disjointed segments have proven difficult to manage and integrate.
  • Viceroy believes ProSieben’s non-cash barter transactions have artificially boosted revenues by EUR210m in 2016: almost 50% of net income. Viceroy believe ProSieben’s media-for-equity and media-for-revenue transactions will never be realized in cash because investments have been pulled from the bottom of the barrel. Despite classifying these transactions as revenue items, ProSieben does not appear to adjust its operating cash flows to reflect this non-cash item, as equity/investments are inherently not a working-capital account.
  • ProSieben has subsidized a fabricated digital “growth story” using cash flows from its TV advertising business and idle TV advertising inventory. As its core business declines, ProSieben can no longer counterbalance its under-performing digital segments – the earnings structure is on the verge of collapse.
  • Significant unmet financing needs and dividend commitments far outweigh ProSieben’s cash flows. We believe shareholders will inevitably be subject to increasingly dilutive equity raises. Outstanding among these are ProSieben’s acquisition-related put liabilities which amounted to EUR366m as of EOFY 2016.
  • ProSieben’s unconditional put liabilities have the characteristics of former management “bonuses” which bypass the consolidated income statement and stagger the company’s cash outflows (despite being unconditional). This allows ProSieben to consolidate entities (through majority ownership) without full cash outlay and minimizing P&L effects.
  • ProSieben has lost at least 14 senior executives & board members in 2017 alone. It is very telling that almost the entire finance-related management team has left the company within that period. It seems the people most familiar with the true financial state of ProSieben have jumped ship. The collective Executive Board and Supervisory Board directly hold a mere 65,244 shares in ProSieben as of December 31, 2017. This is equivalent to 0.0% of the share capital.
  • ProSieben is locked-in to new “output deal” contracts with major US studios to the tune of EUR3,022m which it acknowledges does not meet the appetite of German viewers. Viceroy believe this will substantially increase costs in a declining market – a margin-trimming exercise.
  • The head of ProSieben’s M&A team who processed an acquisition was employed by the seller a short period after. Viceroy believe the transaction was extremely favorable to the sellers.
  • The Company’s dividend rates are fiscally irresponsible and unsustainable. Viceroy believes the capital raise in November 2016 which followed a large dividend payout was totally nonsensical.

Viceroy believes that ProSieben will be forced to issue another capital raise or cancel its dividend to zero to deal with these problems.

ProSieben displays all the signs of a business in an advanced state of decay in every operating segment. Viceroy believes that these issues have gone unattended for too long, and a correction is imminent as ProSieben’s market becomes stressed.

We value ProSieben at EUR 7.51 per share, representing a 75% downside on the closing price at March 5, 2018.

 

*Edit – 6 Mar 2018 – Correction on Figure 1.

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Capitec – Capitec’s inadequate response to Viceroy

A perfect example of why Viceroy don’t “engage with management” – they don’t answer our questions.

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Viceroy issued an open letter to Capitec’s board of directors on 20 February 2018, responding to their invitation to engage with management and field our questions.

A full copy of our letter can be found here:

www.viceroyresearch.files.wordpress.com/2018/02/letter-to-capitec-20-02-18.pdf

Capitec replied to our letter on 22 February, 2018 via email, however provided no straightforward responses to any of our questions. At best, Viceroy received numerous largely insignificant statistics and tangential statements.

Capitec’s full response to our letter is attached to this report as Annexure 1.

Viceroy has been criticized for not engaging with management prior to publication of our reports. Capitec’s response is a prime example of why we choose not to. We maintain our recommendation that Capitec should be subject to an external, independent regulatory investigation, which we believe will result in Capitec being placed in curatorship in order to protect its consumers.

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MiMedx – The curious case of Mad River Community Hospital

Viceroy present further evidence of MiMedx illegally selling on reimbursement, adding our already extensive evidence of pervasive fraud.

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Viceroy has obtained documents detailing a legal dispute between MiMedx and Mad River Community Hospital (“Mad River”). The documents clearly outline MiMedx’s fraudulent sales methods including misrepresenting reimbursement rates for products and “marketing the spread”.

This report details the serious misconduct and underhanded sales tactics of MiMedx personnel in California, which executive management were certainly aware of given the ensuing litigation. As we have demonstrated over 20+ reports, these types of improprieties are commonplace throughout the organization. Never before have our legal advisers or consultants come across such gross and serious misconduct.

The Mad River documents also show MiMedx engaged in “selling on reimbursement”, contrary to a several laws and regulations and some alleged MiMedx policies.

  • MiMedx sued Mad River for non-payment of invoices for EpiFix and AmnioFix products. Unfortunately for MiMedx this is where the story becomes compelling for law enforcement and regulators.
  • MiMedx misrepresented to Mad River the reimbursement rates for its EpiFix and AmnioFix products, as well as misrepresenting insurer’s attitudes towards these products. Several insurers considered MiMedx products “experimental and un-reimbursable”.
  • Following Mad River’s failure to pay, MiMedx sent “reimbursement” specialists to Mad River who upheld that MiMedx’s represented reimbursement rates were correct. Mad River believes that this was simply a manner of continuing the ruse while raising further invoices.

The Mad River filings portray (we believe accurately) MiMedx as third-rate con-artists.

Contrary to Parker H. Petite’s rhetoric of “Good Business Acumen” and persistent denials of “marketing the spread”, this report will unlawful practices that MiMedx, including “marketing the spread”. This is the very tip of the iceberg that law enforcement and regulators have been made aware of.

It is Viceroy’s intention to continue the dialogue with MiMedx’s auditors and regulators to bring about the prosecution of Parker H. Petit.

In the wake of mounting evidence of fraud, illegal revenue recognition systems, retaliation against whistleblowers and concealing evidence from investors, we immediately call for Parker H. Petit’s resignation.

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Capitec – Viceroy responds to Capitec

On January 30, 2018 Viceroy Research released our report on Capitec (JSE:CPI) citing a need for large impairments and regulatory intervention.

The issues expressed by Viceroy have been reflected in a letter from Benguela Global Fund Managers to Capitec also raising concerns about Capitec’s lending practices[1]. This report presents the results of Viceroy’s further investigation into Capitec and a rebuttal of Capitec’s responses to Viceroy and Benguela.

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  • Since the publication of our last report, Capitec has disclosed that an extraordinarily large portion of its subprime, highly indebted customers who miss payments on their loans are somehow able to find the money to “catch up” or “cure” their arrears. This is suspicious.
    • Numerous former Capitec staff and 5 prominent debt counselling firms with proprietary datasets on South African unsecured lending support our thesis that this “curing” method is how Capitec hides the disastrous underlying performance of its loan book. If a borrower in arrears is able to beg or borrow the funds from a secondary lender to pay down their arrears and make themselves “current”, Capitec immediately offers them a new, larger loan. The borrowers use this new, larger Capitec loan to pay off the secondary lender used to cover the arrears.
    • Analysis of tens of thousands of Capitec borrowers’ datasets within debt counselling firms show consumers were able to get new loans after paying down their arrears the day prior. Thus, we can state empirically that this practice is still occurring. We contrast this with the lending criteria of a Standard Bank or Absa where there is a “cooling off” period before a borrower formerly in arrears can seek a new loan – to prevent exactly this behavior. By offering upsized loans to people who have just cleared their arrears, Capitec management is able to say with a straight face that they do “not lend into arrears”. This is TRUE in fact – but not in substance.
    • While the borrower is getting more and more indebted and is still unable to pay their debts, lending to people who were immediately prior in allows Capitec to artificially generate “cures”, unsustainably increase its loan book, charge massive initiation fees and create a façade of quality within its consumer base.
    • Well over half (70% – 80%) of Capitec consumers in debt counselling were issued new loans prior to repaying their existing loans.
  • Viceroy have obtained communications from Capitec Head Office dated 8 February 2018 to local branches advising that it has amended the number of allowable loans per customer. Reading between the lines, Capitec appear to be tightening or relaxing lending rules in order to achieve the greatest possible return as opposed to the consumers ability to repay those loans.
  • Viceroy has obtained evidence of Capitec intentionally abusing the debit order system to ensure its debits take priority ahead of other lenders.
  • Following the publication of our last statement several media outlets have reported on CEO Gerrie Fourie’s purchase of ZAR 1.5m of Capitec shares on the open market, presenting this as a show of faith in the company. We believe this is intentionally narrow-minded when viewed in the context of the net market sale of ZAR 49m worth of Capitec shares by Fourie in 2017. Collectively, directors sold ZAR 406m Capitec shares on market in 2017 alone.
  • We respond systematically to Capitec’s poorly constructed rebuttal of our prior report.

Capitec’s behavior has led to material overstatement of the quality of the book and substantial under-provisioning. We note the South African Reserve Bank (SARB) described Capitec as being liquid and solvent on the basis “of the available information”. Evidence suggests the available information is being deliberately distorted by Capitec management and we believe that as a matter of prudential supervision the SARB must investigate the lending practices at Capitec. We are providing this data to SARB and the NCR.

Viceroy continues to believe that Capitec is fundamentally uninvestable and reiterate our recommendation that an investigation by an independent body is launched in the face of the evidence presented in our research.

[1] https://www.biznews.com/sa-investing/2018/01/31/capitec-benguela-viceroy/

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Capitec – Viceroy comments on SARB statement

Viceroy comments on information available to the South African Reserve Bank regarding Capitec:

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In response to Viceroy’s recent report on Capitec (JSE:CPI), the South African Reserve Bank (SARB) decided to vouch for Capitec. Indeed, it decided to stake its reputation on the accuracy of the company’s accounts. Below is their statement in full:

“The South African Reserve Bank (SARB) notes a report by a US based fund manager. As part of our mandate, we monitor the safety and soundness of all banks, including Capitec Bank Limited (Capitec). According to all the information available, Capitec is solvent, well capitalised and has adequate liquidity. The bank meets all prudential requirements.”

The South African Reserve Bank has a responsibility to determine whether the information provided to them – and on which they base their regulatory decisions is accurate. We do not think it is.

The SARB has, at this point, a responsibility to perform a full regulatory inspection of Capitec. Viceroy remains firm in its belief that this will result in SARB placing Capitec into curatorship.

Viceroy will shortly respond to Capitec’s press release in relation to our report.

 

 

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Capitec – A wolf in sheep’s clothing

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Based on our research and due diligence, we believe that Capitec is a loan shark with massively understated defaults masquerading as a community microfinance provider. We believe that the South African Reserve Bank & Minister of Finance should immediately place Capitec into curatorship.

Capitec Bank Holdings Limited (JSE: CPI) is a South Africa-focused microfinance provider to a majority low-income demographic, yet they out-earn all major commercial banks globally including competing high-risk lenders. We don’t buy this story. Viceroy believes this is indicative of predatory finance which we have corroborated with substantial on-the-ground discussions with Capitec ex-employees, former customers, and individuals familiar with the business.

Viceroy’s extensive due diligence and compiled evidence suggests that indicates Capitec must take significant impairments to its loans which will likely result in a net-liability position. We believe Capitec’s concealed problems largely resemble those seen at African Bank Investments (JSE: AXL) prior to its collapse in 2014.

We think that it’s only a matter of time before Capitec’s financials and business unravel, with macro headwinds creating an exponential risk of default and bankruptcy.

This report will provide underlying information and analysis we believe supports the following conclusions:

  • Reconciliation of loan book values, maturity profiles and cash outflows imply Capitec is either fabricating new loans and collections, or re-financing ~ZAR 2.5bn – 3bn (US$200m-$240m) in principal per year by issuing new loans to defaulting clients.
  • Legal documents obtained by Viceroy show Capitec advising and approving loans to delinquent customers in order to repay existing loans. These documents also show Capitec engaging in reckless lending practices as defined by South Africa’s National Credit Act. This corroborates Viceroy’s loan book analysis.
  • As a consequence of re-financing delinquent loans, Viceroy believes Capitec’s loan book is massively overstated. Viceroy’s analysis against competitors suggests an impairment/write-off impact of ZAR 11bn will more accurately represent the delinquencies and risk in Capitec’s portfolio.
  • Legal experts that we have spoken to believe that the outcome of an upcoming reckless and predatory lending test case in March 2018 will be used to trigger a multi-party litigation refund (class action). We believe that, at a minimum, Capitec will be required to refund predatory origination fees primarily related to multi-loan facilities; an estimated ZAR 12.7bn.
  • Viceroy’s investigations suggest that Capitec’s prohibited and discontinued multi-loan facility lives on, rebranded as a “Credit Facility”. Former Capitec employees have corroborated this. Despite its perception as an affordable lender, Capitec’s implied interest rates are significantly true of the maximum allowable rates in South Africa.
  • South Africa’s microfinancing sector has been the graveyard of numerous Capitec competitors who chased the same meteoric growth Capitec displays, largely due to low acceptance criteria and mass delinquencies. We see no operational difference between Capitec and its ill-fated predecessors, including African Bank.
  • Former employees consider the business to still be an outright loan-shark operation, where fees are key. Some former employees believe they were fired for not deceiving borrowers and failing to meet rescheduling targets on impaired/defaulting loans.
  • Jean Pierre Verster, chairman of Capitec’s audit committee, is/was indirectly short Capitec through Steinhoff. We believe this is an oversight, and understand Verster to be an excellent analyst on the short side. We encourage Verster to raise the concerns within this report to company auditors and recognize Capitec’s resemblance to his previous African Bank short.

Given what we believe is a massive overstatement of financial assets and income, together with opaque reporting of loan cash flow and reckless lending practices, we believe Capitec is simply uninvestable and accordingly have not assigned a target price.

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MiMedx – As promised: MiMedx’s concealed documents

This post highlights the incriminating testimonies from MiMedx employees, associated entities and attorneys, which have subsequently been sealed by the company to conceal evidence from stakeholders.

The order to seal these documents came only after Viceroy’s highlighted that AvKare “didn’t do anything”, according to Mike Carlton (MiMedx VP of Global Sales), but only served to facilitate MiMedx’s channel stuffing & other suspicious activities. Parker H. Petit, knew investors would quickly realize he was misleading them – the information was incriminating MiMedx if left unsealed.

Parker H. Petit & MiMedx continuously attempt to sweep criminal actions and contradictory statements under the rug – in this instance, they sealed incriminating deposition transcripts. Fortunately, Viceroy had already obtained these records prior to the motion to seal bring filed with the court.

We are disclosing the documents in the public interest:

43-main

43-1

43-2

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MiMedx – Viceroy activates “The Honeypot”: Parker H. Petit & MiMedx caught red-handed

New insights on MiMedx instructions to physicians on how to fraudulently increase compensation.

Following the release of our previous report titled “Viceroy release MiMedx EOB emails”, Viceroy Research have been contacted by physicians corroborating MiMedx’s role in distributing EOB to fraudulently increase Medicare reimbursement. This occurs through the reclassification of AmnioFix products as EpiFix products in order to obtain Medicare reimbursements.

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MiMedx’s recent nonsensical responses to our research have been evasive and does not acknowledge that at its core, the practice construes Medicare fraud. In order to demonstrate this, Viceroy set a Honeypot. MiMedx in their desperation to mislead investors, have taken our bait.

While the issue of reclassifying MiMedx product to exploit federal billing facilities was a major issue, there was another underlying element to the EOB.

Consider the following: in principle, Medicare reimbursements cover 80% of the cost of any treatment used as well as 80% of the Medicare application fee. Typically, this means a reduced payment for the patient, however by utilizing a larger graft than is necessary a physician can be reimbursed more than the cost of treatment.

Per the Rosenberger email, how can MiMedx justify physicians PROFITING from Medicare when system is intended to cover a PORTION of costs?

Viceroy yesterday showed MiMedx has zero credibility regarding their statements. Previously MiMedx had state to investors AvKare wasn’t an intermediary, controlled sales and it was all lies. MiMedx know full well what the implications of Mike Carlton’s deposition under oath means. There is no commentary, statements issued by MiMedx are purely intended to manipulate a situation where blind and naive analysts continue to promote the stock.

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MiMedx – MiMedx continue to consciously mislead investors, defame Viceroy and Marc Cohodes

AvKare just “made it easier” for former Advanced BioHealing agents to stuff federal customers with MiMedx product

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Viceroy present indisputable proof that Parker H. Petit has been misleading investors and defaming Marc Cohodes & Viceroy.

Mike Carlton, VP of Global Sales, was under oath giving a deposition about MiMedx’s relationship with Mid-South Biologics, who are suing MiMedx regarding contractual issues. Parker H. Petit and MiMedx attorneys would have known that during the deposition, Mike Carlton said this:

“AvKare didn’t sell the product. They didn’t do anything. They just made it easier to sell.”

Interestingly, when Viceroy and Marc Cohodes echoed this statement, we were met by a barrage of lies and a law suit from MiMedx who want to falsely asset our reports are factually inaccurate.

For the analysts that can find ‘no credible evidence of wrong-doing’, we recommend they review filings for all cases MiMedx are involved in.

Today’s focus is on case is Mid-South Biologics LLC (Pla) Vs. MiMedx Group Inc (Def) – Reference: Case 2:17-cv-02028-JTF-egb   Document 43-3   Filed 12/04/17. The deposition was taken on the 13th Day of October 2017.

Parker H. Petit and Mike Carlton are advised that we have forwarded this information to the SEC. Investors should be aware of the lengths MiMedx will go to mislead and misinform its shareholders

As a recap:

Analysts who can blindly find no credible evidence of wrong-doing should seriously review Viceroy’s reports and MiMedx’s own documentation showing channel-stuffing, fake revenue recognition, ‘free evaluation products’, breaches to anti-kickback statutes and many more violations.

As previously reported, MiMedx is being investigated by Regulators, it would be prudent for the sellside to conduct their own investigation instead of relying on a “binary outcome” in relation to allegations of fraud.

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MiMedx – Viceroy release MiMedx EOB emails

Viceroy has obtained emails instructing physicians how to falsify MiMedx Q-codes to fraudulently increase reimbursement.

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Viceroy have obtained printouts of emails sent from MiMedx employees specifically instructing physicians on how to fraudulently increase Medicare reimbursement.

An EOB document titled “EpiFix – Made Easy” has been sent to Viceroy, which appears to be advice from MiMedx to physicians on how to receive Medicare reimbursements for their product.

One problem: this advice was provided to surgical clients; whose products are ineligible for Medicare reimbursement.

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Steinhoff – Steinhoff’s skeletons: off-balance sheet entities inflating earnings, obscuring losses

Viceroy is pleased to release its research report on Steinhoff International Holdings NV.

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Steinhoff (SNH) has long been under scrutiny for seemingly inexplicable factors including:

  • A long string of acquisitions of stagnating or deteriorating businesses whose performance seems to miraculously improve post-acquisition, even if only on paper;
  • Cash flow trends that do not correspond to EBITDA;
  • Investigations into senior executives for tax-evasion, document forgery and fraud; and
  • Rampant and dilutive equity raising.

Viceroy’s investigation into Steinhoff has revealed several concerning activities surrounding a number of at least two off-balance sheet, undisclosed related party entities:

  • Campion Capital
  • Southern View Finance

While the existence of some of these entities has been reported by the media, their activities have not. Viceroy’s analysis suggests Steinhoff uses these off-balance sheet vehicles to artificially inflate earnings:

  • Steinhoff has issued expensive loans to, and booked interest revenue against, Campion subsidiaries for the purchase of loss-making Steinhoff subsidiaries. These revenues will never translate to cash.
  • Steinhoff has moved two loss-making and predatory consumer loan providers to off-balance sheet entities: JD Consumer Finance and Capfin.
  • Steinhoff negotiated the re-purchase of the only profitable portions of JD and Capfin (loan administration and debt collection facilities) while allowing losses to be incurred at off-balance sheet, related-party entities under Campion Capital.

Given these loss-making entities such as Southern View Finance UK, are being round tripped back to Steinhoff, Viceroy believe it is possible that Steinhoff are “repaying” Campion’s outlays through acquisition premiums (i.e. losses are being capitalized through round-trip transactions with related parties).

Viceroy believes that, based on the contents of this report, Steinhoff should consolidate Campion Capital and its subsidiaries given that Steinhoff bears full economic liability for these entities through loan arrangements and exert total control through overlapping management.

Viceroy believes the facts presented in this report will bring Steinhoff’s behavior to the attention of regulatory authorities.

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MiMedx – MiMedx now under investigation by DOJ enforcement & VA

Viceroy has received responses to two Freedom of Information Act (FOIA) requests lodged after the publication of our initial report, one from the Department of Veterans Affairs and the other to the Department of Justice.

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Both agencies withheld all requested documents under 5 U.S. Code § 552 5(b)(7)(A), which provides an exemption for agencies to make available public documents as it could “reasonably be expected to interfere with enforcement proceedings.”

Viceroy now believe MiMedx is under formal investigation by the Department of Justice, the Department of Veterans Affairs and the Securities and Exchanges Commission.