Description

If you think Jimmy Caan (77 years old) is a great actor but might not be a great Board Member or Member of the Audit committee, you may be interested in shorting Net Element (NETE) which has him and more recently Jon Najarian from CNBC on its Board and audit committee.  Najarian’s joining the Board on March 8 has caused the stock to spike from $6 over $12 as retail investors get excited about yet another potential crypto play.  Little do the investors know about the other characters involved with this company.   

NETE is a payment processor that losses money (last quarter revenue was $15 million and they lost $1.5 million of EBIT).   The company hasn’t made money in ages.   The company is now trying to become a crypto play.  As per its latest financials (but not pro forma some recent pipe financings at below market prices) the company had cash of $1 million and debt of $7.5 million.  You shouldn’t be surprised by the “going concern” either.

I’m sure most everyone will agree the stock is overvalued, so the question is what is the catalyst to the stock collapsing and we believe the catalyst will be adverse publicity because the stock is an interesting story because of its association with:

1)      Jimmy Caan

2)      The CNBC guy…..bbbbbbbb ooooooo yaaaaa

3)      Known criminals

The “known criminals” are really family members of Michael Wachs (and we believe Michael directly) who you may remember from his firm CEOCast.  But before starting CEOcast, Wachs was criminally charged with embezzling $15 million from Chase in 1996, went to jail and was barred from the banking and brokerage industries.  (http://www.nytimes.com/1996/11/09/business/embezzling-charge-at-chase-manhattan.html )

He then started CEOCast which provided what we thought was highly promotional investor relations to some highly speculative companies.  Years ago Barrons wrote a few articles on Wachs and CEOCast.

In 2017, NETE was likely going bankrupt and on its way to getting delisted until it got a financing from two different entities, Esouosa Holdings(on December 29th...right before year end) and Cobblestone Capital (in July).  Both entities sound professional, I guess, but a closer look reveals they are both entities associated with Michael Wachs. 

Cobblestone Capital Partners LLC is Dahlia Harmon who appears to be Michael Wach’s  sister  http://www.legacy.com/obituaries/nytimes/obituary.aspx?n=bernice-wachs&pid=126333041  , http://www.nytimes.com/1996/05/19/style/weddings-dahlia-t-wachs-keith-a-harmon.html .

Since Dahlia and Rachel don’t use Wachs in their name, the association is Michael isn’t obvious….unless you research the family connection, check the number of the fax machines they are using, wonder how Dahlia and Rachel (whose backgrounds don’t suggest they have done a lot of investing) would find themselves investing in this company and in this structure, etc.   In our opinion, both of the financing were structured to be highly favorable to the investors.  

Also, the company’s auditing firm is Daszkal Bolton LLP (I’m guessing you haven’t heard of them either) who appears to have about 6 audit clients and has some issues servicing them:

https://pcaobus.org/Inspections/Reports/Documents/104-2017-071-Daszkal-Bolton.pdf

The company’s CEO , Oleg Firer (39), has had several legal problems which you can google.  The Chairman of the Board, Kenges Rakishev, (38) is a successful  businessman who has been criticized for some of his business dealings.  He is the son of  the prominent Kazakh statesman and public figure Khamit Rakishev, who, for many years was the Head of the Kazakhstan's Chamber of Commerce and Industry. He is also the son-in-law of Imangali Tasmagambetov, the current Minister of Defence of Kazakhstan.

There are many more red flags here but the borrow is becoming tight (and expensive) and if the above does not convince you that it is a good short,  I don’t think describing more red flags will.

Below is a description of the business:

Net Element is a global financial technology and value-added solutions group that supports companies in accepting electronic payments in an omni-channel environment that spans across point-of-sale (“POS”), e-commerce and mobile devices. The Company operates in three segments as a provider of North America Transaction Solutions, Mobile Payment Solutions and Online Payment Solutions.

We enable merchants of all sizes to accept and process over 100 different payment options in more than 40 currencies, including credit, debit and prepaid payments. We also provide merchants with value-added services and technologies including integrated payment technologies, POS solutions, security solutions, fraud management, information solutions and analytical tools.

We provide a range of solutions to our clients across the value chain of commerce-enabling services and technologies. We create our value-added solutions from a suite of proprietary technology products which includes cloud-based applications, processing services, security offerings, and customer support programs that we configure to meet our clients’ individual needs.

We provide additional services including:

We have operations and offices located within the United States (“U.S.”) (domestic) and outside of the U.S. (international) where sales, customer service and/or administrative personnel are based. Through U.S. based subsidiaries, we generate revenues from transactional services, valued-added payment services and technologies for SMBs. Through wholly owned subsidiaries, we operate internationally with a focus on transactional services, mobile payment transactions, online payment transactions, value-added payment services and technologies in selected international markets.

Our business is characterized by transaction related fees, multi-year contracts, and a diverse client base which allows us to grow alongside our clients. Our multi-year contracts allow us to achieve a high level of recurring revenues. While the contracts typically do not specify fixed revenues to be realized thereunder, they do provide a framework for revenues to be generated based on volume of services provided during the contract’s term.

Catalyst

adverse publicity