Why Top Short-seller Nate Anderson thinks this stock is going to zero

Hindenburg Research started targeting Nextech Ar Solutions Corp (OTCMKTS: NEXCF) last month, and since then, its stock has been cut by more than half. The penny stock has fallen from about $2 per share in early February to about 80 cents per share today, but Nate Anderson of Hindenburg Research believes it’s heading to $0.

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q4 2019 hedge fund letters, conferences and more

Anderson has a solid track record when it comes to uncovering solid shorts. His firm has averaged a one-week return of 8.18% on its campaigns. The firm's average one-year return is 33.58%.

Seth Klarman: Investors Can No Longer Rely On Mean Reversion

Volatility"For most of the last century," Seth Klarman noted in his second-quarter letter to Baupost's investors, "a reasonable approach to assessing a company's future prospects was to expect mean reversion." He went on to explain that fluctuations in business performance were largely cyclical, and investors could profit from this buying low and selling high. Also Read More


NexTech AR in the crosshairs

NexTech AR markets itself as a leader in augmented reality, but in a report dated Feb. 10, Anderson alleged that the company has almost no "credible business prospects." Instead, he argues that the company has merely been promoting its own stock and is guilty of insider self-dealing.

Anderson noted that shares of NexTech AR spiked 900% since the company went public in a spin-off in the middle of 2018. He believes that spike is due to "promotion-driven excitement over its rapid revenue growth and aggressive projections."

He added that the company has issued 112 press releases over the last year and engaged in at least eight paid stock promotion sites to tout its stock. On average, NexTech AR has issued a new press release every 2.25 trading days over the last year. The press releases often announce new partnerships and contracts but don't offer any specifics on revenue metrics.

The most-touted partnership was an alleged deal with Budweiser. The headline of the press release stated that the company launched an app with the beer maker. It was an augmented reality contest to mark the 25th anniversary of the Bud Stage, a music venue in Toronto.

It encouraged social media users to post using the hashtag #BudAR on pictures of AR features superimposed on Budweiser cans. However, Anderson found only two social media posts using that hashtag, and both said the app didn't work. What's even worse about the supposed partnership is that Budweiser said it did it as a test, but it didn't perform, so it will not repeat the partnership.

Taking issue with financial numbers

He noted that one paid promoter of the stock described the company's most recent quarterly earnings report as having over $2.5 million in revenue, which is "44 times more than the same quarter last year." The company's CEO gave a presentation that was posted on another paid promotion site in which he mentioned 4,309% growth in revenue and more than three times revenue growth this year alone.

NexTech AR claims its product works very well, and the CEO said they see "nothing but blue skies" for e-commerce and that they have been "signing up customers at a very rapid rate." Supposedly, augmented reality causes up to 2,000% more engagement with products, improves add-to-cart rates by 400%, and results in 50% fewer returns than traditional e-commerce.

The company charges $79 per month for subscriptions to its augmented reality ad platform. Management claims they expect to reach breakeven cash flow very soon and that they have received "nothing but rave reviews" about the product.

However, Anderson said when they checked with more than a dozen of NexTech's customers and deal partners, many customers named in the company's press releases "were either entirely unaware they had a relationship with the company or had never actually implemented the product."

He also said the strong growth the company has been reporting has almost entirely been due to its acquisitions of company with pre-existing revenue. NexTech acquired two small e-commerce sites that sell pet supplements and vacuum cleaners. These two sites contributed nearly 100% of the company's revenue in the last quarter.

Insider self-dealing accusations

Anderson said they also identified a number of "sketchy related-party transactions. He said NexTech's chief executive and chief operating officer acquired the vacuum cleaner website in a new private entity before selling it to NexTech AR, "likely pocketing millions at the expense of shareholders for simply stepping in the middle."

The company also finished a new financing round at a 70% discount to market prices for the new shares. Including the value of warrants, the financing was basically a "'free money round' for the unnamed lucky beneficiaries," he said. The shares from that offering unlock next month, and he expects them to be "aggressively dumped onto unsuspecting investors."

"Overall, we think NexTech has been thoroughly pumped, and investors will soon experience the 'dump,'" Anderson wrote.

Anderson will be one of the presenters at ValueWalk's first virtual investment summit next month, which is being held in partnership with the Contrarian Investor Podcast.

Learn more here