Monday, 8 May 2023

If Johnson Joseph is Permanently Removed from PKK, the Stock will Crash and Burn

As an outspoken shareholder of Tenet Fintech Group Inc. (PKK.CN) since 2014, I think I can provide valuable insight to the company and its current situation. It's my opinion that if Johnson Joseph isn't reinstated as the CEO of PKK, that it will crash and burn. I know better than most how frustrating things can get with Johnson at the helm. It's often two steps forward, one step back with this company and recently felt like it's been several steps back. But PKK would have gotten absolutely nowhere without him and there is no one more ideally suited to run this company right now.

I have sold most of my shares at much higher prices though I still have half of the shares I got in the Cubeler deal in DRS with no plans to sell anytime soon. So I have my own biases and agenda. I recently bought a very small number of shares near the lows, though I am taking a cautious approach to it as I believe things are going to get worse before they get better. But in the long term, things will get better as long as Johnson is reinstated as CEO. 

I have heard from people upset in the past that I sold based on some kind of "inside scoop" and reading this blog may stir up those sentiments again. Understand this, I didn't have any inside scoop. I had the correct amount of scoop required in order to make informed buy and sell decisions on a speculative startup and volatile stock. That was gathered through countless hours of research and otherwise thinking about PKK and the business model over the years, as well as getting to know and understand the strengths, weaknesses and personalities of the key players in charge. It's everyone else who may have had an insufficient amount of scoop to make an informed investment decision. Discord pumpers are not research. If you're not willing to put the amount of time and effort I put in to get familiar with PKK into your investing decisions, you shouldn't be investing in any penny stocks.

Why I sold over $10

My initial target on PKK for years ranged between $0.20 and $0.50, adjusted to $4.00 to $10.00 after the reverse splits. If you read this article I wrote back in 2015, you'll see that Johnson himself said that if the company wants to be valued like a large cap company, it has to act like one. There are certain things that PKK has done very well on this end. For instance, I think the multi-layered auditing process is excellent and exactly what a company like this needs. I warned Johnson about the short-seller firms that target Chinese operations and he responded in a prudent manner. Despite that short report from Grizzly being directionally correct, no one took that thing seriously. The "firm" tried to point fingers at fraud where there was none. When all that needed to be done was to question the company's guidance without throwing out any nonsense allegations and the report would have looked spot on.

While the auditing process has been put in place, there are certain things that the company has done that falls short of being deserving of large cap status. Namely the guidance. My blog here outlines the issues the company has had in announcing guidance then updating that guidance with numbers that fall well short of prior expectations. When Johnson has provided numbers in the past, going back to 2015 with LongKey then the "plastic bank" with Jiang Wang or Banlan, it was more like a market model or forecast or wishful thinking - if everything went to plan. I told him with more eyes on the company, he has to get more diligent with guidance. That did not occur. When PKK came out with very aggressive guidance, people were clamouring for me to upgrade my target. I preferred to take a wait and see approach while keeping my target price of $10. After years of seeing eye-popping three-year-out numbers that never pan out, I had learned what to expect here. Looking back, it was definitely the right move.

Johnson's personality traits that cause PKK harm

I've heard people say that Johnson is a scammer or a fraud or incompetent. He isn't any of that. What he is, is a dreamer. To a very high degree. As a bit of a political junkie, I followed the Trump saga in the U.S. closely. One term that popped up a lot with Trump that I think applies perfectly here is "toxic positivity". 

Toxic positivity is defined as "the belief that no matter how dire or difficult a situation is, people should maintain a positive mindset. While there are benefits to being optimistic and engaging in positive thinking, toxic positivity rejects all difficult emotions in favor of a cheerful and often falsely-positive fa├žade."

I think this term perfectly encapsulates Johnson's behaviour when it comes to running PKK. When Johnson speaks in those interviews that in retrospect seemed like pump pieces to some, I believe that he 100% believes every word that he is saying. The problem is those words aren't always grounded in reality. When Trump lost the 2020 election, it wasn't because he was racist or divisive or a liar or whatever negative trait his adversaries believe he has. He lost because of his shitty handling of COVID. If he took the disease seriously, didn't try to downplay it and was proactive in certain decisions instead of spreading toxic positivity all over it, he would have won that election. In good times, Trump was good for the economy. Same principle applies to Johnson. In good times, he managed to grow the company from nothing to $100 million in revenue. I can't stress enough how impressive of an accomplishment that is. Johnson has done more than 99% of all non-mining Venture/CSE listing CEOs. The problem is when things got tough, he went on a hiring and spending spree before accessing the needed capital, thinking PKK/Cubeler was somehow immune to the challenges of the broader market. And in particular, a junior international fintech and data analytics company like Tenet. It wasn't the AMF issue or his interviews that people think he sounds like a pumping buffoon that did him in. It was the lack of risk management and contingency planning as the funds were drying up. 

As for the AMF issue, I am not that concerned by it. Reading the transcripts, I have seen much worse from Venture CEOs than some CFL-like locker room pep talk towards a couple of guys who allegedly ended up pumping the stock for their own benefit then pissed off regulators on an unrelated listing to PKK. I don't think it will result in any sanctions for Johnson and I also don't think he was canned because of it.

While Johnson needs to take responsibility for the predicament PKK is in, he is not nearly as clueless as some people think he is. He actually had a very definitive, well-thought out and self-aware plan that I really thought would work. Somewhere along the way he strayed from it and it completely fell off the wagon.

The Cubeler transaction is where it all fell apart

Back a few years ago (2017 or 2018 I don't remember exactly when and I don't want to go through my old transactions just for this blog) I got access to invest in Cubeler in a private equity transaction. $20,000 at a $3 million valuation. At the time I believe there was less than 20 shareholders, with Johnson and Golden holding the majority stake. I'll digress a little here. How did I get access to this deal? I'm a writer on Seeking Alpha. I gave free bullish public coverage by writing about this stock. I gave the CEO free advice and built up a rapport over the years through numerous phone calls and emails and several face-to-face meetings. If you want access to these types of deals, get off your ass and prove yourself to be a valued shareholder to a company and you'll get them. There are two ways to succeed in capitalism. Nepotism, and proving your worth to people. Sitting at home and yapping on Discord or the stock message boards isn't going to get you anywhere. That passive investor mindset might work when it comes to investing in stocks like Apple or Royal Bank or ETFs, but it will not work in a junior market where literally everyone is going to have superior information and connections compared to you unless you make it a point to get that information and connections yourself. Anyways...

Back when I first bought into Cubeler, I was asking Johnson about the possibility to merge it into PKK, with me in favour of it at the time. He worked me over hard to convince me that this wasn't going to be the plan. You know how parents supposedly love all of their kids equally, but you can tell that some may have a favourite? Well, Johnson loved his PKK and Cubeler babies, but as much as he might have tried to hide it, you could very clearly tell that Cubeler was his favourite. Cubeler and the Tenoris3 business model were meant to be a standalone from PKK. The plan was to go directly to the NASDAQ as an IPO. And if you think about it, especially in retrospect, that really would have been the right move. 

There are reasons, both selfish and practical, in keeping them separate. First, PKK had a large float of around a billion shares before the splits and hundreds of shareholders. Keeping Cubeler separate meant all of the shares are in the hands of a few. Combining PKK with Cubeler meant that all of us Cubeler shareholders would now have to share the business model with the hundreds of PKK shareholders, massively diluting our interest in this very exciting speculative investment.  

Second, the business model of PKK was meant to be focused in China with the goal to attain and maintain cash flow positivity, transfer funds over from China and pay a dividend. Looking at PKK's numbers in 2020, it was closing in on being consistently cash flow positive. As soon as the merger took place, the operating cash needs exploded thanks to the hiring and aggressive expansion in Canada. PKK was now not only not able to pay a dividend, but back to being a company that needed significant capital injections again.

Third, IPO'ing Cubeler exclusively removes the Chinese element to the IPO, except that the company has a small royalty with PKK for the use of Cubeler in China. Had they remained separate, Cubeler would have remained a private company until its IPO. The IPO would likely have gotten approved faster and if for some reason it didn't, it would remain a private company in the hands of a few private equity shareholders who understand the risks and have the patience for this type of setback. As for PKK, had it consistently shown cash flow positive results and started paying a dividend, it would likely have earned an upgrade to the TSX by now. As for the NASDAQ, who cares as long as it's on the big board in Canada and paying a dividend. All the funding needs that is turning PKK's stock price into a death spiral would have been confined to Cubeler had it IPO'd as a separate entity.

Fourth, Cubeler is primarily a data company with the goal of becoming global. PKK is a fintech company in China. China is very protective of its data leaving the country. Leaving these entities as two separate listings keeps that image intact.

Fifth, Johnson was very well aware of the optics of a conflict of interest surrounding the deal as CEO of PKK and majority holder of Cubeler. No matter the price, it would have looked like the CEO was just trying to cash out on the backs of retail PKK shareholders. If I recall correctly, the initial valuation was going to be around $25 million. I was absolutely livid when I had heard that. All those years of being sold on Cubeler and Tenoris3 and how my $20,000 will turn into multi-millions once the IPO occurs and the end result is not even a 10-bagger? When the valuation was revamped to over $100 million mostly with PKK shares at $9, I wasn't ecstatic, but at least appeased. Especially since I had just dumped a bunch of shares above $10 and felt like that was an easy way to recoup some of my position at a lower price.

PKK shareholders and market outsiders took a look at the deal and thought "wow that's quite a hefty price". Especially in retrospect and the optics around the CEO getting so many shares out of it. On the flip side, you had Cubeler shareholders like myself thinking that $100 million was low, but at least tolerably acceptable. I've had to watch PKK write off a ton of the value of Cubeler, listen to so many people complain about Cubeler's lack of revenue and potentially being vaporware while biting my tongue on my own missed opportunity. Yes, Cubeler was still very high risk and had a good chance of going nowhere while the $100 million payout was cash and liquid stock in hand. But I was sold a dream well beyond that and that $20,000 was my lotto ticket to that dream. Everyone who was a private investor in Cubeler was willing to wait until that dream panned out. When it was diluted with PKK, it was prematurely exposed to a shareholder base and general market that didn't have that same amount of patience. If necessary or perceived to be beneficial, PKK and Cubeler could have merged years from now when both companies were on stable ground. But once that merger took place, it would be impossible to reverse course.

Johnson is treated as some kind of rube or scammer for this deal when he was initially absolutely adamant at keeping these two companies separate. His first instincts that held firm for years were 100% right but he won't get any credit for that. Someone, somewhere along the way coerced him into thinking that the only way of moving forward was if these two entities were one. I can only speculate over the amount of arm-twisting and the size of the check that caused him to do a complete 180 like this. My guess is that one of the major financings for PKK corrupted that long term plan and has resulted in the stock being where it is today. That would have been fine for $100 million or more raised but $50 million or so was not enough to cover what a data analytics company needs before it has a product to sell. The stock was definitely hyped during a broader small cap market bull run and the shutdowns in China hurt revenue growth. But to me, the point where it all fell apart was when Cubeler merged with PKK. Both the stock price and the financials went to hell after that.  

As Cubeler was the favoured child, that business model took precedence over the PKK one through toxic positivity and stubbornness. The company's name was changed to Tenet and is referred to now as primarily a data analytics company. I can understand why a board member witnessing all of this go down in real time may want to reign Johnson in and even think ousting him is the right way to go. Let me assure you, it's not. Because while Johnson should take his share of blame for shoving the Cubeler business model down PKK shareholder's throats even though the market sentiment wasn't there, there is a substantial amount for which he takes more than his fair share of the blame.

Johnson's relationship with Golden - more than just a typical friendship

Somebody might say that my rant about Johnson up to this point is all well and good, but what does any of this have to do with the thesis that this company will crash and burn if he is permanently removed from PKK? The key is his relationship with Golden. When I first posted on Facebook that I was planning to make this blog, one member made a long comment in favour of moving on from Johnson (at least as CEO, he could still be an advisor to the company) that was well thought out and received a lot of positive feedback. Then completely negated all of it by saying how valuable Golden was and hoped that he could move forward with the new board. People need to view Johnson and Golden as one entity. If you are upset at the performance of Johnson, you are also upset at the performance of Golden.

I've only met Golden and seen him interact with Johnson a handful of times so my impression in that limited sample size may be off. But this is not like a regular friendship. Johnson acts more like a mentor or big brother figure towards Golden, at least in terms of the capital markets and Canadian culture. I assume in China that Golden takes the alpha male role. But in terms of what investors actually see here in Canada, Johnson performs his duties as big brother, taking all of the heat when something goes awry. In reality, Johnson is highly dependant on Golden for the numbers that come out of China, particularly near term guidance. He is also very likely to take any input from Golden very seriously, sometimes maybe even against his better judgement. Now you can take my word for it, or you can use your common sense that someone with the title of "CEO, Tenet China" would have tremendous input on the numbers that came out of the country. When people point out Johnson's stuttering in an interview regarding 2022's $200 million revenue forecast that ended up coming in well short of that, they are thinking that he is lying or trying to cover something up. When I see him stuttering, I believe that he's thinking "I really hope Golden has those numbers right".

I compared Johnson to Trump above so I think it's only fair to say where the comparison ends. Where Trump would have hung Golden out to dry faster than Mike Pence on January 6, 2021, Johnson consistently covers for him and takes full public responsibility for the guidance. This is why Johnson is so hated and Golden still beloved. People think that Johnson is 100% at fault for the predicament PKK is in and zero percent Golden, while also giving Golden nearly full credit for the outstanding revenue growth in China. In reality, it should probably something more like 50-75% Johnson and 25-50% Golden shared blame with equally shared credit on the revenue side. Consider also that Johnson and Golden are co-founders of Cubeler, so any of the decisions made around that can't be 100% placed on Johnson. Perhaps a bonus 10% of blame should be given to whoever convinced these guys to roll Cubeler into PKK, completely against initial plans. 

Johnson should get fair share of the blame for vocalizing guidance that did not pan out. But if you are celebrating his ousting for that while at the same time hopeful that Golden continues with the company, you don't understand how this company is structured. Give credit to both Johnson and Golden for the good things PKK has accomplished to this point and blame them both for any issues that you think has caused the company to go in the wrong direction. But don't assign full blame to one and full credit to the other. I have a feeling some people are doing this as a coping mechanism. They are hopeful that PKK can turn it around without Johnson, but have to do mental gymnastics to land in a reality where Golden is perfectly fine with all of this despite his friend and business partner for 30 years and co-founder for basically everything to do with PKK being unceremonially jettisoned behind his back. Hope is not an investment decision.

What I predict will happen if Johnson is not reinstated as CEO

Ideally people see a fair and balanced take with this blog post. I have given credit to Johnson for getting PKK to a point that most CSE-listed companies can only dream of. I have blasted him for what I view to be weaknesses in his personality that have caused problems for the company. I have also defended him in instances where I think he gets an unfair amount of blame. His tenure has been far from perfect, but he's the best (realistic) shot of turning the ship back around. At least far better than whatever is coming from the attempted coup from the Board.

I totally get the reasons behind the BOD wanting to change things up.  My guess is that they want to stop Cubeler from bullying its sibling PKK and return the corporate entity to one that has a chance to pay out a dividend from existing operations rather than going down a dilution death spiral. Perfectly valid goal. And here's my prediction on how that's going to go down:

Let's say Golden does end up staying on at Tenet China CEO even without Johnson. The people in China - executives, employees and large clients - are going to be aware of the unexpected shakeup to the corporate structure. Anyone who has followed PKK for a while and understands how business works in China knows that connections are everything. Particularly to government officials and other people with influence. While Cubeler may be an effective service, in reality it's probably responsible for maybe 10% of  client satisfaction while the other 90% was the connections and trust that Golden and Johnson built over the years. China is just getting back its economic footing and things in the global economy are in flux. The last thing the company needed was a perception of instability in an already shaken economic setting.

The ousting of Johnson likely hurts revenues if it's not immediately rectified. And if something bad in China happens like lower revenue or poorer margins, who do you think the next scapegoat will be? It won't be Carol Penhale, the other board members or the newly hired CEO, if made by then. It would be Golden. And if he goes, the entire revenue stream collapses. It would be nearly impossible to raise capital at any decent valuation and the company's solvency would be put at risk.

Some shareholders have stated their disbelief that the company can be so reliant on Johnson. Well, that's just how it is. That's how most startup companies are. Those who support his removal really haven't thought it out. Ideally he is reinstated and this is a wake up call that he needs to improve his behaviour and decision making as CEO.

Shilling two other picks with a lot of eyes on this blog

I expect quite a few eyeballs on this blog. A lot of which will be down substantially on PKK and looking for ways to recover some money. So I figure I might as well take this opportunity to shill for a couple of my other stocks, because that's what I do. Visionstate Corp. (VIS.V) and Sparta Capital Ltd. (SAY.V). I took large profits on PKK, but unfortunately used those profits to buy large positions on these two stocks (and others) at much higher prices than today. That being said, I have spoken extensively with both management teams over the last several months and think that both of these stocks are finally ready to make their moves. I have bought more shares on both of them to average down and I'm pretty happy with my investments even if they are both deep in the red right now. I suggest that risk-loving investors check both of these stocks out, but keep in mind the two off-topic rants I made within this blog about what it takes to be a good penny stock investor. Do you own research, and that includes phone conversations with members of the management teams. 

 

Disclaimer:

This site is operated by Edward Vranic.

Any articles, tweets, stocktalks or any other form of dissemination in person or online are all the sole product of my personal opinion. I may hold positions in securities I mention and reserve the right to open, close, or modify positions at any time without notice. The information provided herein is strictly for informational purposes only and should not be construed as a recommendation to buy or sell, or as a solicitation of an offer to buy or sell any securities.  I am not a registered investment adviser nor I do not hold any licenses. Individuals are encouraged to consult with their personal financial adviser for financial advice.

There is no guarantee that any estimate, forecast or forward looking statement presented herein will materialize and actual results may vary. Investors are encouraged to do their own research and due diligence before making any investment decision with respect to any securities discussed herein, including, but not limited to, the suitability of any transaction to their risk tolerance and investment objectives.

You agree that by reading my material, you are acting at your own risk. In no event will I be liable for any direct or indirect trading losses caused by any information contained herein or in other dissemination methods. I make no representations, and specifically disclaim all warranties, express, implied, or statutory, regarding the accuracy, timeliness, or completeness of any material contained in this site. I do not guarantee that I am providing all of the information that may be available on any topic written. I recommend that you do your own due diligence and consult a registered financial adviser before buying or selling any security.

Trading in securities involves risk and volatility. Past results are not necessarily indicative of future performance. My conclusions are the result of my personal due diligence and have been wrong in the past and will be wrong again in the future.

No comments :

Post a Comment