IMPORTANT – Please read this Disclaimer in its entirety before continuing to read our research opinion. The information set forth in this report does not constitute a recommendation to buy or sell any security. This report represents the opinion of the author as of the date of this report. This report contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This report is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. The author makes no representation as to the accuracy or completeness of the information set forth in this report and undertakes no duty to update its contents. The author encourages all readers to do their own due diligence.
You should assume that as of the publication date of his reports and research, Aurelius and possibly any companies affiliated with him and their members, partners, employees, consultants, clients and/or investors (the “Aurelius Affiliates”) have a short position in the stock (and/or options, swaps, and other derivatives related to the stock) and bonds of Pareteum. They therefore stand to realize significant gains in the event that the prices of either equity or debt securities of Pareteum decline. Aurelius and the Aurelius Affiliates intend to continue transactions in the securities of Pareteum for an indefinite period after his first report on a subject company at any time hereafter regardless of initial position and the views stated in Aurelius’ research. Aurelius will not update any report or information on this website to reflect such positions or changes in such positions.
Please note that Aurelius, the author of this report, and the “Aurelius Affiliates” are not in any way associated with Aurelius Capital Management, LP, a private investment firm based in New York, and any affiliates of or funds managed by the latter company.
You should assume that all persons and entities referenced in lawsuits, government actions, or criminal indictments have denied the allegations referenced herein.
We are short Pareteum (NASDAQ: TEUM). We see massive downside potential and believe the stock is completely uninvestible.
TEUM’s public claims simply don’t hold up to investigative scrutiny. For example, TEUM touted a contract with the South Africa based “Eyethu Mobile Network” as part of a group of deals, purportedly worth $50 million in aggregate, that TEUM says it signed in the last two weeks of August 2018. TEUM’s CEO & Chairman, Hal Turner, took to Twitter to promote Eyethu and declared that TEUM is “bringing change to South Africans with surprisingly unlimited cheapest data bundle”. Although Eyethu’s website is not functional, Eyethu’s CEO explained on Twitter in 2018; “guys in the midst of being unemployed, I started my own mobile network operator company, EMN Telecommunications trading as Eyethu Mobile”. Our investigators went to visit Eyethu/EMN’s headquarters but discovered only a dilapidated shack and crumbling structures near a rural African village (below).
Documents and detailed forensic evidence presented throughout this report shows that Eyethu is only the tip of the iceberg of small or defunct entities across the world that TEUM claims to have signed valuable contracts with.
Key findings include:
TEUM’s Management Has Extensive Ties to Previous Alleged Frauds and Failures.
The biographies for Turner and TEUM’s COO fail to disclose their leadership positions at Catcher Holdings, a now worthless stock that was owned by a group that included an entity controlled by Barry Honig, the notorious stock operator charged by the SEC last October with fraud for alleged pump and dump schemes. We see similarities between TEUM and the stock promotion at Catcher, where Turner repeatedly touted Catcher’s technology and growth prospects but investors ultimately were left with nothing. TEUM’s CFO was sued by investors for fraud after he allegedly “personally affected the fraudulent booking of revenues” as CFO of Audioeye, which later erased 92% of reported revenues over the relevant period in a restatement. TEUM’s former Audit Committee Chair, now a TEUM executive, was the CFO of TowerStream, another Honig-backed company that is now nearly worthless. TEUM’s longtime investor relations representative was previously sentenced to prison in 2015 and recently disappeared from press releases after being added to a list of prohibited service providers by OTC markets.
TEUM’s Purported $900 Million Backlog Appears Significantly Exaggerated or Fictitious.
The foundation of the Pareteum growth story is built on the company’s supposedly large and fast-growing 36-month backlog, which management now says exceeds $900 million. But our investigation identified a variety of purportedly valuable customers that appear wholly incapable of paying TEUM anywhere near the large contractual values that TEUM has touted. Examples include:
- A nearly-worthless penny-stock managed by a former AudioEye executive named alongside TEUM’s CFO in the fraud suit.
- African entities that show no signs of meaningful business activity.
- Contracts with crypto-companies including one that recently settled with the SEC and “agreed to return funds to harmed investors”.
- Closed or dissolved businesses.
- Websites that are inactive or offer limited contact information.
- Businesses that don’t answer the phones or report having minimal employees.
- European entities with tiny amounts of capital or revenue.
- Featured customers located in apartment buildings.
- Millions in loans to an entity bleeding cash.
- A purported $50 million contract with an entity in Thailand that reports having zero 2018 revenue, years of losses, and involvement with a crypto-coin that has lost 97% of its peak value.
We also found irregularities and embellishments involving a significant portion of the “notable partners and customers” that TEUM highlighted in a graphic at its recent analyst day, suggesting TEUM struggles to find enough legitimate new customers to even fill a simple slide.
TEUM’s Backlog Conversion and Receivables Signal Serious Potential Accounting Problems.
The accounting fraud that TEUM’s CFO allegedly perpetrated at AudioEye involved the booking of phantom revenues to artificially inflate the stock price. Bulls have taken comfort in management’s assurances that TEUM’s backlog has converted to revenue at over 100% of contractual rates thus far. But we find TEUM’s backlog conversion rate highly problematic considering that our research has flagged so many small or defunct customers. If exaggerated contractual values are now being recognized as revenue, then we believe TEUM will face serious accounting problems. TEUM’s receivables have already begun to balloon after growing at sequential rates far faster than revenues in each of the last four quarters. TEUM’s small California auditor, which was specifically cited by the PCAOB for audit deficiencies related to revenue, gives us no comfort.
TEUM Has Surrounded Itself with Veterans from Failed Stock Promotions.
We discovered a network of actors behind TEUM whose mere presence should send diligent investors running for hills. TEUM has paid promoters, used a placement agent, and attracted large investors that are veterans of numerous previous stock promotions Honig was an investor in, many of which have since declined to near worthlessness. We discovered that TEUM’s relationship with Honig’s longtime securities law firm, Sichenzia Ross, is so close that the address that TEUM’s lists on its website as its “USA Headquarters” is actually Sichenzia’s main office. TEUM has issued tens of millions in shares, warrants, and convertible preferred securities in a series of complex private placements with the assistance of Sichenzia, who is being sued by a former client for allegedly helping create “ownership blockers” for Honig’s group as part of an alleged pump and dump scheme that left that company bankrupt and unable to even validate its number of shares outstanding (Sichenzia and Honig deny the allegations).
The TEUM “Miracle”
Pareteum’s origins trace to a languishing penny stock, Elephant Talk Communications, that had declining revenues and an audit opinion that expressed doubt about its ability to operate as a going concern up until March 2018. A new management team entered in late 2015, led by CEO and Chairman Hal Turner, who quickly engineered a reverse split and a series of private placements and acquisitions to rebrand the company as Pareteum, a “Global Cloud Communications Platform”. TEUM’s business is built on a backend software offering that primarily targets Mobile Virtual Network Operators (MVNO), which are essentially marketing businesses that provide wireless communications to customers by renting bandwidth from large carriers like T-Mobile or AT&T. The company’s market cap has grown from $25 million in 2016 to as high as $500 million this year, while the stock has surged amidst a stream of 238 press releases issued since the beginning of 2017 that frequently tout the company’s purported capabilities in buzzword categories such as internet of things, machine learning, super API, predictive analytics, smart cities, and blockchain. Despite a relatively small sales force, reported revenues have started to grow rapidly and the company now says its backlog is approaching $1 billion (As compared to trailing revenues of $50 million), catching the eye of sell side analysts who now model parabolic growth.
TEUM’s Management Team Has Extensive Ties to Previous Alleged Frauds and Failures
TEUM’s biographies of Turner and Chief Operating Officer, Denis McCarthy, fail to disclose their respective roles as CEO and CFO of Catcher Holdings, a now worthless stock that was owned by a group that included an entity controlled by Barry Honig, who was charged by the SEC last October with fraud for allegedly masterminding a series of pump and dump schemes. On May 22nd, CNBC reported there is a parallel criminal investigation into Honig’s alleged pump and dump ring being conducted by the U.S. Attorney’s Office of San Francisco.
Catcher had declared itself “a visionary technology leader” with clients “among the world’s largest private and public companies”. After joining in early 2007, Turner told investors Catcher “is a great company” and “will be a greater company through our execution”. But just weeks after completing an acquisition in December 2007, Turner suddenly left Catcher which quickly collapsed in April 2008 due to “insufficiency of working capital”. Turner resurfaced with McCarthy and TEUM’s now-CCO, Vic Bozzo, at Pac-West Telecom, but left in 2011 and that company later filed bankruptcy in 2013.
We also learned that TEUM’s CFO, Edward “Ted” O’Donnell, was sued by Audioeye investors for fraud after he allegedly “personally affected the fraudulent booking of revenues” that triggered a restatement erasing 92% of the company’s reported revenue over the relevant period. The lawsuit alleged that the fraud was designed to “give the market the false notion that revenue growth was accelerating” and “artificially inflate AudioEye’s stock price” (O’Donnell denied the allegations and the lawsuit appears to have been settled). O’Donnell resigned from AudioEye in March 2015 and joined TEUM in January 2017.
While Chairing TEUM’s Audit Committee, Laura Thomas was also the CFO of TowerStream, a nearly worthless equity owned by Honig. Thomas moved from the TEUM Board to an executive role at TEUM in December 2018 and resigned from TowerStream in January 2018.
TEUM’s longtime investor relations representative was Stephan Hart (aka Steven or Stephen Hart) who disappeared from TEUM press releases earlier this year after being added to the list of prohibited service providers by OTC markets. Hart was representing TEUM even though he was sentenced to prison in August 2015 for obstruction of justice and perjury following charges by the SEC for “illegal trading schemes” in December 2012.
TEUM’s Purported $900 Million Backlog Appears Significantly Exaggerated or Fictitious
After Turner took over and rebranded the company, TEUM began issuing dozens of press releases touting the growing number of new customers TEUM claims to have signed valuable contracts with. Turner has declared that “we’re on fire with relentless forward motion” and “highly successful in driving sales, lots and lots of contracts”. Turner has also explained the stated backlog means the “revenue value over the next 36 months, sitting there in contracts, awaiting implementation and deployment and that’s based upon the customer’s contractually executed schedules”. The Sell Side has relied on these statements to hail TEUM’s reported backlog growth as “stunning” and consensus analyst expectations now project TEUM’s sales growing from $32 million in 2018 to more than $175 million in 2020.
Doubts about the legitimacy of TEUM’s claims began to surface in March, when a blog post raised questions about the validity of several customers that were named by TEUM in press releases. Our own investigation flagged a variety of customers TEUM has hyped that appear completely incapable of producing anywhere near the material amounts of revenue that TEUM has suggested or implied.
For example, in October 2018 TEUM touted a contract with Naledi Telecom, who TEUM claimed was launching as the first MVNO in Lesotho, Africa, and one of three multi-million contracts purportedly totaling $15 million in aggregate over three years. Although Naledi’s website is not functional, Lesotho corporate records we obtained show that an entity using the trade name Naledi Telecom was formed in May 2018 with less than “1000” in share capital by a Zimbabwe national. Our investigators visited Naledi’s registered address but found Naledi wasn’t even listed in the building’s directory and the investigators found no activity at its supposed office number (below). The building manager told our investigators the office’s tenant had moved out and our investigators were directed to a different location in the area. They didn’t find Naledi at that address either, but instead the operations of a Lesotho newspaper business, where the individual who created Naledi informed them that Naledi is not operational, claiming it will launch at an unspecified later date.
Parallax Health Science was named by TEUM in the exact same press release as a multi-million contract and TEUM’s “first customer in the healthcare IT industry”. But Parallax is a nearly-worthless penny-stock with negligible assets that recorded a mere $11 thousand in revenues last year. Currently and at the time of TEUM’s press release, Parallax’s own SEC filings stated there is “substantial doubt about the company’s ability to operate as a going concern”. So how could Parallax possibly contribute millions in revenues for TEUM? Farcically, we learned that Parallax’s executives include O’Donnell’s former associates at AudioEye, including AudioEye’s former CEO who was a named defendant alongside O’Donnell in the alleged fraud. One Central, the third company mentioned in the same press release, at least appears to have active operations. However, a balance sheet it filed in the Netherlands reported just €662k in equity and 7 employees.
TEUM claims that a Thai company named One Development purportedly signed an individual three-year $50 million contract, one of the largest single deals that TEUM as ever announced. But we obtained financial statements that One Development filed in Thailand which report no revenue in 2018, operating losses for each of the three years presented, and total assets of just 9.3 million BHT, translating to just a mere $298k US. Our investigators couldn’t find an office for One Development at the address listed on the company’s LinkedIn page, and a person who answered One Development’s phone number refused to provide an address or the founder’s contact information to our investigators. One Development’s presentation materials explain that its business plan is to entice MVNOs to launch in Thailand and then sell them services. But even though the business was founded in 2013, One Development doesn’t appear to have gained much traction. Its founder has been operating a parallel MVNO consulting business, Yozzo, that reported a mere 18BHT in revenue last year (about 57 cents US). The only deal we’ve seen announced is a December 2018 partnership between One Development and a crypto-company named Electroneum to bring a crypto-app to MVNOs. However, the underlying coin has now lost more than 97% of its peak value. Once again, we question how this contract could possibly contribute anywhere near $50 million for TEUM?
Since the crypto-boom of late 2017, TEUM has repeatedly hyped contracts tied to crypto-businesses, including a “Blockchain Technology Partnership” with Airfox, a crypto company that TEUM named in at least 8 press releases. But we learned that Airfox settled charges with the SEC in November 2018 related to registration violations involving its sale of “AirTokens” and “agreed to return funds to harmed investors”.
Turner told investors the Airfox Blockchain deal “bodes well” for Pareteum’s “fundamental revenue growth and profitability” in a January 2018 press release (above left). But when the SEC questioned TEUM about its blockchain business in an October 2018 comment letter (below), the company admitted to the SEC that “Airfox has not deployed any mobile-phone related services” and “we have not and do not plan in the near future to generate any revenue from our relationship with Airfox”. Even though we can no longer find the Blockchain whitepaper TEUM previously announced it had published on its website, management continues to hype blockchain and announced in April a purported $22 million contract with an unnamed “Digital Currency Wi-Fi provider”.
Yes, Pareteum has some “real” customers. Elephant Talk had declining revenues and legacy contracts with a few large customers such as Vodaphone Spain. TEUM completed an October 2018 acquisition of Artillium, which added some European customers but only $11 million in trailing twelve-month revenues. Then TEUM parlayed its surging stock price to complete a February 2019 all-stock acquisition of iPass, which had contracts with various large companies but declining revenues. Yet we found TEUM still needed to use a series of embellishments and small or seemingly inactive customers just to round out a graphic included in a slide of “Notable Pareteum Partners and Customers” for its May 28th analyst day presentation (page 21). If TEUM is unable to display a simple slide of customers without resorting to these kinds of exaggerations, how could the true backlog and customer base possibly be even close to as robust as management claims it is? Our observations on the companies circled below in red include:
- The least of the problems is the double counting and self-counting that populates this graphic. Comically, TEUM includes logos of its own subsidiaries as if they were key partners or customers. *bliep, United Telecom, Ello Mobile, and Speak Up are Artillium companies specifically named in an SEC filing made by TEUM as part of that transaction. TEUM included the logos for both Vodaphone and Lowi.es, which is simply Vodaphone’s Spanish telecom business. Similarly, Belgacom is the former name and same company as Proximus, which lists scarlet as an affiliated brand in public filings.
- TEUM features the logo of Sol Mobile even though documents show the company was legally dissolved in in August 2017. TEUM first announced the UK-based Sol Mobile as its first MVNO customer back in December of 2016 and on the May 2017 earnings call, Turner told investors that “names that we’ve announced such as Sol Mobile and Pronto which are now beginning to come online”. It’s unclear if Sol, which was founded in 2015 and registered a co-working center in Dartford, progressed much beyond a startup.
- TEUM has repeatedly touted Pronto Telecommunications as a customer and features its logo in presentations. But Pronto’s founder and CEO is a real estate broker in Pittsburgh, Pronto’s website contains a prominent mis-spelling, offers no contact phone number, and lists the address of an apartment building as its headquarters.
- TEUM also features the logo of UK-based Bellingham Telecommunications. Yet a balance sheet that Bellingham filed with the UK companies house in 2018 reported a mere £282k in total assets exceeded by £415k in liabilities. The address displayed on Bellingham’s website matches that of a Bridgestreet rental apartment and Bellingham’s Linkedin reports only one employee. Multiple calls to the phone number on Bellingham’s website went unanswered.
- TEUM also inserted the logo of a company named Apeiron into its analyst day presentation, but the company’s website is no longer active. Apeiron still lists 14 employees on Linkedin and the address of a small office located in Bedford, Texas.
- The presentation lists three European companies IP Nexia, Tellink, and ACN that appear to have actual operations but financials these companies filed indicate they are relatively small. Tellink lost €239k last year on €1 million in revenue, IP Nexia lost €3 Million on declining revenues of €4.9 Million Euro, and ACN made £57k on declining revenues of £4.4 million.
- The presentation includes Eroski Movil, which was the MVNO business of a European supermarket chain that appears to have been an Elephant Talk customer. But Eroski announced its withdrawal from the mobile telephony business last year and stated, as translated by Google, that it will “cease to operate in the mobile telephony market and will cede its position as a service provider”. Eroski’s mobile website, which used the same logo that TEUM featured in its analyst day presentation, has since been deleted.
Previous TEUM investor pitchbooks have featured the logo of Exactta Communications, which says on its website that it distributes prepaid phone cards at four airports. But online searches reveal a series of customer complaints, Exactta’s Facebook page has gone dormant since 2017, and its website’s “Employees” webpage says it’s “under construction”. Multiple calls to Exactta’s US phone number listed on its website went unanswered.
In October 2018, TEUM named Global Connect as one five companies that signed contracts totaling $11 million and 800,000 connections. TEUM described Global Connect as “a communication services internet of things company with multinational clients focused on home automated solutions”. Yet a 2018 Balance Sheet that Global Connect filed in the UK lists only £74k in assets, the entity is registered to an accountant’s office, and we could find only one employee on Linkedin. A counter embedded at the bottom of the website listed less than 500 visitors. A second company mentioned in the same press release, WorldSim, appears to have some operations but reported only £264k in assets in its UK filing, indicating it is another small business.
Yonder Media Mobile, which we are told was suggested to be a customer at TEUM’s analyst day, received a series of loans totaling $3.2 million from TEUM starting last year, according to SEC filings. Yonder’s CEO received significant publicity in 2012 after Yonder’s predecessor company declared bankruptcy “taking more than $33 million worth of investors money with it. It never released a product” (see here, here). We found Yonder’s operating report dated May 15, 2019 posted online which articulates various grandiose plans Yonder has to acquire MVNOs and complete a music app. But, unsurprisingly, the document states the company is burning cash which was projected to dwindle to $700k at the end of May and was seeking large investments from a variety of overseas investors.
TEUM’s Backlog Conversion and Receivables Signal Serious Potential Accounting Problems
The accounting fraud that TEUM’s CFO allegedly perpetrated at AudioEye involved the booking of phantom revenues to artificially inflate the company’s stock price. Is it possible that this exact kind of scheme is now occurring at TEUM?
Bulls have taken comfort in management’s assurances that backlog has converted to revenue at over 100% of contractual rates thus far. Backlog turning into actual revenue, the thinking seems to go, is a sign that TEUM’s new contract wins must be high quality in nature. Conversely, we find TEUM’s backlog conversion rate highly problematic considering that our research has flagged customers that are small, defunct, or seem unlikely to be able to pay TEUM anywhere near the large contractual values that TEUM has touted. If these kinds of exaggerated contracts are now being recognized as revenue, as management’s commentary indicates, then we believe TEUM will face serious accounting problems.
This is exactly why we’re troubled that TEUM’s receivables have grown at sequential rates far faster than revenues in each of the last four quarters. For example, revenues grew 64% to $23M in Q1 2019 from $14M in Q4 2018 but receivables ballooned 86% to $28M from $15M over the same period. This is puzzling because TEUM’s own SEC filings state that “the company typically bills its customers at the end of each month, with payment to be received shortly thereafter”, which we believe should naturally result in relatively minimal receivables. But TEUM’s Days Sales Outstanding has reached 110 days as compared 39 days of Twilio (TWLO), a company that promoters like to compare TEUM to, suggesting that TEUM’s customers may already be falling behind on their bills.
TEUM’s small California auditor, Squar Milner, gives us no additional comfort. Squar has audited at least one company owned by Barry Honig, True Drinks Holdings (TRUU), an equity that is now virtually worthless. More importantly, the Public Company Accounting Oversight Board (“PCAOB”) uncovered significant deficiencies in its most recent inspection of Squar in 2017. The PCAOB stated in its report that “in other words, in these audits, the auditor [Squar] issued an opinion without satisfying its fundamental obligation to obtain reasonable assurance about whether the financial statements were free of material misstatement”. The PCAOB even identified two significant deficiencies in a Squar audit specifically related to the valuation of revenue:
TEUM Has Surrounded Itself with Veterans from Failed Stock Promotions
While Honig is not named as a TEUM investor, we uncovered a series of relationships that make it hard for us to rule out the possibility that his invisible hand could be at work. At absolute minimum, it’s clear to us that TEUM is backed by a seasoned crowd of veterans from dubious stock promotions:
- TEUM is represented by Sichenzia Ross, the securities law firm of record for at least 22 companies that Honig and/or John Stetson, an alleged member of the pump and dump ring, have invested in since 2009. Bizarrely, the relationship between TEUM and Sichenzia is so close that the address TEUM’s lists on its website as its “USA Headquarters” is actually Sichenzia’s Main Office. A 2017 Sichenzia press release states that Sichenzia has a long-term lease for the entire 37th floor that Pareteum currently lists as its address.
- TEUM has issued tens of millions in shares, warrants, and convertible preferred securities in a series of complex private placements that Sichenzia has assisted with. We note that Sichenzia and Honig are separately being sued for fraud by a former Sichenzia client, Mabvax Therapeutics, which is now a virtually worthless penny stock that the SEC says was the scene of a Honig-led pump and dump (“Company C” in the SEC’s complaint against Honig). Mabvax alleges that Sichenzia collaborated with Honig’s group to structure private placements as “ownership blockers” that left Mabvax unable to validate how many shares it has outstanding. Sichenzia and Honig deny the allegations.
- TEUM uses the same placement agent as Mabvax did, a Boca Raton broker named Dawson James Securities that also now issues favorable research reports on TEUM. According to our analysis, Dawson James has been engaged by 13 different companies that have been owned by Honig, most of which have declined more than 75% from their peak value and/or are now virtually worthless.
- While we are unable to identify all of TEUM’s private placement investors, two firms that have regularly invested alongside Honig, Iroquois Capital and IntraCoastal Capital, owned or controlled 13.2% of TEUM’s outstanding shares as of March 2018, according to an SEC filing. By our count, Iroquois and/or Intracoastal have collectively invested in a total of 34 publicly traded companies that were also owned by Honig, most of which have either declined more than 75% from their peak value or are now virtually worthless. A February 2019 SEC filing reported that Iroquois Capital has already dumped their entire TEUM stake. We note that Iroquois reportedly received an SEC subpoena as part of the investigation into Honig’s alleged pump and dump ring but was not named in the SEC complaint or been accused of wrongdoing.
- TEUM has paid stock promoters from Red Chip companies, which has previously touted numerous now worthless companies backed by Honig. RedChip’s founder has praised Honig and was quoted in a 2013 interview stating that “learning from him and working with him has been incredible”.
Just in isolation, we believe the mere presence of this collection of actors should send diligent investors running for hills.
In our opinion TEUM’s stock is completely uninvestible and we therefore see massive downside potential.
All Investors Are Encouraged to Conduct Their Own Due Diligence Into These Factors