Monday, 4 October 2021

My Reaction to the Grizzly Short Report On PKK

Link to the Grizzly short report here:

I've skimmed through this and won't provide feedback on every little detail. I'm just a shareholder. It's not my job to provide a rebuttal on all or any of this. That's management's job. But I will type out my initial thoughts. 

The first thing I can say is that I warned people - including management and other shareholders - that this would happen. PKK would get attacked as soon as its market cap became large enough to be of interest to short sellers. It was part of the reason why I sold what I sold, expecting volatility along with normal growth pains. Now it may be time to consider a buy once the dust settles. I prepared management on this for years and warned Johnson Joseph that the company needs to have rock solid financial control processes. He responded very well and appears to have a robust auditing process with Grant Thornton.

Who can you trust more? The person who has been in PKK for years and predicted stuff like this would happen to a tee? Has been through all the ups and downs and has been critical of past mistakes and complimentary of accomplishments? Or the entities behind this sloppily produced short report that have known PKK for maybe a few weeks or months? And believe me, it is pretty sloppy:


If you're going to insult someone's garage app, maybe make sure that very sentence is run through a second person for editing. It makes your statement of someone else's shoddy work very ironic.

Regarding the claims of overstated revenue, as I said, the company has a robust audit process in place. Grant Thornton looks over these numbers carefully. I look forward to management's response. I also mentioned in my most recent analysis and a few times before it that PKK's accounts receivable balance is something to keep an eye on as it is high and growing. Collection of this cash would go a long way towards diffusing such claims of inflated revenue. As someone who has also written bearish reports, a rising A/R balance is accounting101 level of a red flag. Though not out of line for a company quickly growing revenue like PKK.

As for the claims of fake subsidiaries and fake acquisitions, this was poorly done. They go through some SAIC data and the conclusions are more or less "we can't find it, therefore it must not be true". PKK's corporate breakdown is understandably confusing and was built that way so that the company can repatriate funds in the form of dividends. The company has discussed dividends for years. Now that it's cash flow positive, the easiest way to lay waste to these types of claims of enriching insiders is to start paying that dividend!

As for the claims of past failures such as Quickbale, the IT business or Gold River, this part is fair. The company has wandered the desert for several years, and I have said that many times. Welcome to the Canadian junior markets. How many companies have "pivoted" like PKK? How many companies have gone from gold mining to weed to blockchain in a series of RTO transactions and reverse splits? How many HIT Technologies to Carbeezas are out there? When a mining company strikes dust on one property, it tries its luck again on another. Guess what? Something like 90% of start up businesses fail, and Venture-listed companies aren't an exception to that rule. Every single small cap success story has a long history of failure, unless the management team and corporate shell got VERY lucky on the first try. Look at Terry Booth and Bruce Linton. The two biggest names in the business side of Canadian weed behind Marc Emery.  Look at the trail of tears left behind them from shareholders chasing their endeavours that didn't pan out. Developing a startup business isn't easy, and insulting someone's past over it is pure FUD. PKK stuck with its guns on developing a business in China, and after many years and several failures, it finally delivered. 

I got a good chuckle on the first page of the report when it referred to Liang “Golden” Qiu as a  mastermind and conman of criminal entities. I can tell you with high confidence after meeting the man several times, he is NOT a criminal mastermind in any way. Take that however way you wish. IF there IS a mastermind, it would be Johnson Joseph. He is clearly the brains, the boss, the one with the capital markets knowledge and the top decision maker of the PKK organization. Golden's skill set is more appropriate for COO type of work, or what PKK refers to as the subsidiary CEO. Building relationships, and overseeing the nuts and bolts operations in China. 

As for the reference to LongKey, after years of dealing with PKK - and this is my opinion only, I didn't get any confirmation from the company one way or another - LongKey was just a shell. You could view LongKey as the "proto-Cubeler". LongKey failed to develop into what the company needed in order to lay out its plan. As did Quickable. So they went back to the drawing board, got some competent developers and made Cubeler. They dropped the reference to LongKey right after that because between Cubeler which was in development, and Gold River which I guess could be called the "transition plan", LongKey was redundant. 

As for LongKey being an entity that has" Untrustworthy personel, severely breaking the law, abnormal operations", like I said, it was just a shell. Plus we are dealing with China and the Chinese government here. Part of the long, long wait on PKK's business model to develop was the company's need to navigate through a changing Chinese financial system as it cracked down on bad actors or actors it didn't like. Just because something is labelled as "breaking the law" in China doesn't mean that it is breaking the law or any moral code by Canadian standards. This would still be a red flag for PKK's operations having past ties to such a company that the Chinese government didn't like, except that PKK has since provided enough evidence that it is on the right side of the government's graces right now, especially at the local level.

Finally, Cubeler. I would have thought the shorts would have hammered this point down a lot harder than they did, given that the $100 million acquisition just resulted in $40 million worth of cash and PKK stock being sent to Golden and Johnson combined. But the report did mention the self-dealing in one page at the end. As a Cubeler shareholder myself, I have insight into both sides of this that most people don't. Back when I initially invested in Cubeler, I actually asked Johnson about merging the two companies. He sold me HARD on leaving Cubeler as a standalone entity. It was going to be the Robinhood of small business lending in North America (a free service meant to grow a user base quickly). I'll let people reading this take a guess on what the business model was supposed to be. The way that man described this business to me, he did not want to merge it with PKK. It was going to be its own seperate NASDAQ listing along with PKK. The licensing deal was always going to be in place but PKK was meant for China and the Cubeler business model meant for North America and elsewhere. 

Somewhere along the way, Johnson got convinced to turn his ~25% stake in Cubeler into $27 million worth of PKK shares and dilute his interest in Cubeler with PKK shareholders. This change of heart came totally out of the blue to me. It should be obvious to anyone that PKK needed to acquire Cubeler, but he had done such a job to convince me otherwise that I was actually shocked when it happened. This was not at all a matter of self-dealing or any intentions of it. If anything, Johnson was convinced by someone, likely a large PKK shareholder, to do it this way. Now the PKK and Cubeler business model can be one. Keep in mind Cubeler is a start up business. Just because I talk it up right now doesn't mean that it has 100% chance of success. We will see what happens in the future, but this report is mostly noise. What I look forward to is the company's response. I warned them about this and any shareholder should invite the opportunity to see how a management team responds in times it is being challenged. Not everybody in the media needs to be a suckup like on the Wall Street Reporter videos.

1 comment :