🐻The Bear Cave #13🐻

Problems at Smartsheet, New Activist Reports, Tweets of the Week & More

May 11, 2020

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Problems at Smartsheet? 🚩

I believe Smartsheet (NYSE: SMAR — $6.73 billion) may have serious accounting issues that are unnoticed by the market.

In the last 60 days, Smartsheet disclosed material weaknesses in financial reporting, dismissed its auditor, and announced that its CFO would retire. Despite these red flags, Smartsheet, which makes collaborative work management software, trades at all-time highs and currently sells for 25x revenue.

In Smartsheet’s 10-K, filed on March 31, PricewaterhouseCoopers (PwC) opined that the company “did not maintain effective internal controls” in part because,

“[Smartsheet] did not design and maintain effective controls related to the completeness, accuracy and occurrence of order entry and pricing during the billing and revenue processes.”

In addition, PwC wrote,

“A material weakness related to the Company’s billing and revenue processes existed as of January 31, 2020.”

The next day (April 1), Smartsheet announced its CFO would retire.

Then on April 29, Smartsheet’s audit committee dismissed PwC as its auditor, “effective immediately.” Smartsheet’s fiscal Q1 ended the next day, April 30. The new auditor is Deloitte.

This sequence of events should be a big red flag, but there is more.

According to PCAOB records, the PwC Engagement Partner responsible for Smartsheet was Christopher Seel. Mr. Seel was also responsible for auditing two other companies. One of the companies, Quantum Corp (QMCO), had to restate financials after an internal investigation found, “material misstatements” and “$35 million of prematurely recognized revenue.” In addition, Quantum paid $1 million to settle SEC charges that it recognized revenue “without meeting the necessary revenue recognition criteria under GAAP.”

Over the last three years, Smartsheet’s deferred revenue as a % of total revenue has grown from 51% to 58%. On a similar note, accounts receivable as a % of total revenue has grown from 13% to 21%. In addition, Smartsheet has done a series of acquisitions since going public.

According to InsiderScore, Smartsheet insiders have sold approximately $135 million of stock in the first three months of 2020, compared to $45 million in the first three months of 2019.

Some of these issues were first tweeted about by @CrowdedTradeCap

New Activist Reports

Culper Research published on Catasys (NASDAQ: CATS — $400 million) writing,

“Catasys is a $411 million stock promotion run by Chairman and CEO Terren Peizer, a long-time criminal associate and stock promoter.”

Culper Research also published a follow-up note on CytoDyn (OTC: CYDY — $1.41 billion), noting its connection to an “alleged ponzi artist.”

New activist Mariner Research published a critical report on gene therapy company, Homology Medicines (NASDAQ: FIXX — $574 million). Mariner wrote,

“Our note today highlights a data point the company would very much like you not to know – the only patient in FIXX’s high dose cohort posted her results on Facebook, and they show that HMI-102 is unlikely to reach trial endpoints even at a high dose.”

Insider Biotech published a skeptical Seeking Alpha blog post on Moderna (NASDAQ: MRNA — $19.5 billion). The stock is up over 200% YTD on hopes that it will develop a coronavirus vaccine.

What to Read

“Fundamental Global Investors Seeds the Field for Parasitic Investing” (FFJ)

“After five years of Fundamental Global Investors’ oversight, all three of these public companies have weakened financially and their share prices have collapsed.”

“How the paper trail went cold in KPMG’s special audit of Wirecard” (FT)

“While KPMG was unable to verify that the underlying customers were real, or the source of €1bn in payments to the escrow accounts, it did report that money moved in the opposite direction in the form of large loans to the partners.”

“SEC Ramps Up Whistleblower Awards” (WSJ)

“The Securities and Exchange Commission has stepped up the awards it pays to whistleblowers after years of complaints that it has been slow to compensate them for the risks they take to help spot fraud.”