Long Only, Deep Value, Long-Term Horizon
Contributor Since2017
CAIA Charterholder,
microcap investor,
long/short equity,
growth at reasonable price, deep value,
I like to invest and analyse stocks.
I look for niche stocks with great upside potential and downside protection.
Summary
- The Bear Cave’s allegations on GreenBox POS are largely unfounded.
- The stock offers significant potential upside due to the fall in stock price.
- The company continues on its fast growth trajectory that is unlikely to be disrupted in the near future.
Thesis
In this article, I will be explaining why the allegations by the Bear Cave on GreenBox POS (GBOX) are largely unfounded by addressing the points that were raised by the Bear Cave. GBOX has tumbled from a high of $20/share to just over $10/share as of the time of writing, largely due to the weakness in the overall crypto markets as well as the short report published by the Bear Cave. I took the liberty of reading his report and I will be addressing each of his points to the best of my abilities. Unfortunately, because the report written by the Bear Cave is hidden behind a paywall many of you might be unable to view it. However, I do recommend going to his site to read the article for yourself to judge if the points are valid. In this report, I will try to stay away from any form of defamation towards the Bear Cave, but I will try to rebuke some of his claims. It is clear that the author likes investing, and there is nothing wrong with that. However, I believe that there are some gaping holes in his arguments, most of which are because his claims are based on backwards-looking facts. Thus, I believe that we should not take his opinion at face value. This article will be divided into two main segments. For the first segment, I will be explaining the technology behind GBOX. For the second segment, I will be rebutting the points made by the Bear Cave.
Background
GBOX is a technology company that makes use of blockchain-based technology to facilitate payments and it offers significant improvements in terms of speed, security as compared to traditional payment technologies.
From the 10-K:
GreenBox POS is a technology company that develops, markets and sells innovative blockchain-based payment solutions, which we believe offer significant improvements for the payment solutions marketplace. Our core focus is to develop and monetize disruptive blockchain-based applications, integrated within an end-to-end suite of financial products, capable of supporting a multitude of industries. Our proprietary, blockchain-based ecosystem is designed to facilitate, record and store a virtually limitless volume of tokenized assets, representing cash or data, on a secured, immutable blockchain-based ledger. Payment processing in the blockchain world only requires recording a ledger, there is no movement of money. Secure tokens are used where users need an immediate transaction, in a safe, private, and hack-free environment, and where traditional banks may not work effectively, like cross border transactions or in under-banked verticals.
Technology
The Bear Cave raised a number of points with regards to GBOX. However, he did not explain how GBOX's technology works, which baffles me because I don't understand why someone would leave out the technology part of a tech company and write a short report on it. He described GBOX's investor presentation as "enigmatic" and then leave out any explanation on the technology part. I don't claim to be an expert on the subject and I did not graduate from Stanford, but I do have an engineering degree and I also understands how blockchain works and how to deploy it. I also have a CAIA charter and some experience working for a few investment funds. I hope that this gives me some credibility.
PCI level 1
If you take nothing away from this article just know this, GBOX has the PCI level 1 certificate. What is this certificate exactly? It is the highest, and most stringent, of the Payment Card Industry Data Security Standard (PCI DSS) levels which allows them to process transactions at unlimited volumes.
(source: bigcommerce)
Given the higher level of transactions associated with level 1, the validation requirements are the most stringent. For PCI level 1 compliance, the merchant is required to have yearly assessments of compliance by a Qualified Security Assessor (QSA), in addition to the requirements for levels 2, 3, and 4. Qualified Security Assessor (QSA) companies are independent security organizations that have been qualified by the PCI Security Standards Council to validate an entity's adherence to PCI DSS.
Explanation of their tech
GBOX uses blockchain technology, which is what is used to power Bitcoin (BTC-USD). However, unlike Bitcoin which operates using a public blockchain, GBOX operates a private and proprietary blockchain. This means that it is significantly more secure, has greater data privacy and is faster to settle as compared to legacy payment technologies.
For a full explanation of public vs private blockchain, you can watch this video. The video also goes on to explain why blockchain as a service is a great idea, which is something that GBOX is doing with its gen 3 white label bank offering, but that is out of the scope for this article.
(source: blockchainhub)
GBOX also gave some insights on the high-level view on how their technology works. GBOX also has a stable coin that is currently in the works, however that too will be out of the scope of this article.
(source: GBOX feb presentation)
(source: GBOX feb presentation)
Rebuttals to the Bear Cave
Background and returns of the author
I subscribed to the Bear Cave on substack and took the time to read the article so as to understand what he was saying about the company in order to conclude for myself if there are legitimate concerns. To understand his background, I recommend reading this article and watching this video. In all fairness, I believe that he is a person who likes investing a lot and power to him for that. However, throughout the article, it is rather apparent that he is nit-picking rather than focusing on the main point of it all, which is the technology powering GBOX.
First, what is substack, what are the credentials required to be a writer on substack and is it an editorial site? Substack is an online platform that provides publishing, payment, analytics, and design infrastructure to support subscription newsletters. Anyone can be a writer on substack, and according to substack themselves, it is a non-editorial site:
We don't commission or edit stories. We don't hire writers, or manage them. The writers, not Substack, are the owners. No one writes for Substack - they write for their own publications.
I also looked at the past returns of stocks recommended by the Bear Cave for paying subscribers and compiled it above. He is rather successful in driving stocks down in the short term over a 3 to 4 days period with an average return of -11% with the addition of GBOX, and 08% without GBOX. However, it seems that his picks are not that great over the long run with a return of 9% with the addition of GBOX and 15% without it. This likely means that his articles appeal to a wide audience due to his large subscriber base which causes his subscribers to either sell or short the stocks that he recommended, resulting in a fast downward spike. However, in the grand scheme of things his reports seem to have little to no effect on the fair value of the company over the long run. All of his picks can be seen here even for non paying readers, but you will not be able to read the content.
Points raised by the Bear Cave
Below are the points raised by the Bear Cave and I will address each of them one by one.
1. Questionable management - They are competent rather than questionable
2. Self-dealing - Not true, there is no evidence of self-dealing on the part of the management team. There is likely some traces of nepotism in the company, but that is not illegal. Self-dealing is an illegal act that happens when a fiduciary acts in their own best interest in a transaction, rather than in the best interest of their clients.Examples include taking a corporate opportunity, using corporate funds as a personal loan or purchasing company stock based on inside information received through being in the position of a fiduciary. Self-dealing is a violation of the duty of loyalty.
3. Numerous lawsuits - nobody is suing GBOX
4. Subcontracts work for the cannabis industry - they also partner with Visa and Fiserv
5.GreenBox's audit chairman was the CEO of a company that had its registration revoked by the SEC - I don't see how that is an issue.
6. GreenBox's co-founder and chairman declared for bankruptcy and paid a multi-million-dollar arbitration settlement amidst allegations of fraud. - The fraud part was disproven.
Numerous lawsuits
Let's start with the allegation of numerous lawsuits. Firstly, the Bear Cave did not state what he meant by numerous lawsuits, which would likely force his readers to jump to the wrong conclusion that a lot of individuals or organisations are suing GBOX. I find this allegation to be both misleading and baseless because upon reading the 10k, one will quickly and surely find out that there is no lawsuit against GBOX. The closest so-called "lawsuit" you can find in the 10k is a complaint filed against GBOX on which party has the rights to hold the funds and it is currently in arbitration, which is a private form of settlement between parties by appointing individuals as arbitrators, and where the court is not involved. Basically, it is not a lawsuit, and the resolution will not have a material adverse effect on operations or cash flow as seen in the 10k. All other complaints have already been resolved as well.
(source: 10k)
High-risk payment processors
There is also the allegation that GBOX partners with high-risk payment processors, notably in the cannabis industry.
To quote him directly:
GreenBox partners with high-risk payment processors, mainly in the cannabis industry. Exhibit 10.5 of the company's 10-K is a license agreement between GreenBox and MTrac Tech Corp., whereby MTrac can use GreenBox's technology to manage relationships with "High Risk Marijuana Retail Dispensaries." The license agreement may lack economic substance because MTrac is majority-owned by a GreenBox executive, and MTrac's CEO was later hired as GreenBox's Chief Operating OĎcer.
There are a few problems with this statement. Firstly, what is the meaning of a high-risk payment processor? A high-risk merchant account is a payment processing account for businesses considered to be of high risk to the banks. As high-risk businesses are more prone to chargebacks, they come with the need for paying higher fees for merchant services. High-risk merchants are often able to generate an impressive income. But, with high revenue comes high chargeback, fraud, and money laundering risk. As such, high-risk merchant accounts require that more complex payment processes be put in place (i.e. smart anti-fraud filters), and because these accounts are at a much greater risk of having to deal with an excessive amount of chargebacks, which are troublesome for everyone involved. I don't see how this is an issue for a company that has a PCI Compliance Level 1 certificate and is much more secure, with faster settlement speed and an AI technology fraud detection technology embedded within.
Secondly, he fails to mention that GBOX also partners with large reputable companies such as Visa and Fiserv. This is just one example of how the Bear Cave was nit-picking in his short report.
Audit issues
The Bear Cave cited the fact that the company disclosed a material weakness over financial controls from the 10-K as an issue with the company followed by highlighting that the average market cap of BF Borgers CPA's 10 most recent public clients is only $30 million on average.
Again, there are several issues with these claims because it shows an immature understanding of business operations. With regards to the issue with the audit report, I sent two of my friends the audit statement. One is working at KPMG as an auditor and the other an ex EY auditor. The summary of what they told me is basically that these are standard boilerplate templates and as long as it's not a qualified statement that was issued, there should be no problems with the accounts. The critical audit standard is simply the things that they want to highlight about the more judgemental accounts, and that if there are certain portions that the auditor wants to qualify, they will have to explicitly write it out. In this case, they are just describing the process that the company uses. Also, if there is anything fishy going on, it would require a lot of industry expertise to catch, thus it is highly unlikely that it would be exposed in this manner.
Secondly, management already stated in the 10-K that they are dealing with the internal controls issues right now, and can you really blame them for it since the company is growing so quickly.
From the 10-K:
Management believes that the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole. Due to the fact that our accounting staff consists of a Principal Financial Officer, a bookkeeper and external accounting consultants, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turnover issues within the department occur. We believe this will eliminate or greatly decrease any control and procedure issues we may encounter in the future.
With regards to his allegations on using a small audit firm with small clients. It is actually typical for Companies that just went public, especially small companies to have smaller audit firms due to the significantly higher cost that comes with hiring audit firms from the big 4. I know this because I've worked with investment bankers before regarding the potential IPO of the company of a family member which eventually fell through. Nonetheless, I gained some experience in that regard as I was the one doing the research and talking to the investment bankers. Not to mention that, up until very recently which is less than a year ago, the company was trading at less than 30 million dollars market cap. How likely is it that a company's management team would focus on the accounting statement rather than focusing their efforts on growing the company and clinching new deals?
Oral agreements
Another point that he brought up was that GBOX entered into an oral agreement with a client and subsequently sued the client for breaching the oral agreement. I don't see why this is a big deal because verbal contracts are legally binding. I don't understand why GBOX is the bad guy in this case when they are the victim. Remember, this company is just starting out, likely not everything is written in black and white.
Questionable management team
The Bear Cave then went on to talk about how 4 personnel in GBOX are questionable. There are several allegations pertaining to each person so I will only address the main one or most significant one.
|
William J Caragol, director and chairman of the audit committee Main allegation: CEO of a diagnostics company that fell over 99%. The SEC later revoked the company's registration. Why it is either wrong or doesn't matter: It doesn't matter because it was not revoked because of wrongdoings but because it did not file periodic reports with the commission over a period of time. |
|
Ben Errez, Chairman, co-founder, principal accounting officer Main allegation: Allegations of fraud in real estate business, donation of $13,000 to his son's Kayak team Why it is either wrong or doesn't matter: What the Bear Cave said about Ben Errez committing fraud is simply not true. It has been overturned by the judge. "The Cavanaughs had asked for $4.2 million, but Lukens disallowed some fraud charges, finding the Cavanaughs had not met the nine guidelines the State of Washington sets out to prove fraud. The final award will include attorney fees, accounting fees and interest and will be closer to $3 million." With regards to the donation. It does not reflect well on him, but more importantly, it is not illegal. |
|
Liron Nusinovich, Head of underwriting and KYC Main allegation: CEO's brother, thus guilty of nepotism Why it is either wrong or doesn't matter: Nepotism is not illegal. |
|
Kenneth Haller, Senior Vice President Main allegation: Owns majority stake in ChargeSavvy Why it is either wrong or doesn't matter: For some reason he implied that ChargeSavvy's acquisition price going from $31.2 million in stock to final closing price of $12 million in stock is a bad thing and then stated that Haller is a related party in the transaction. However, related party transactions are not illegal and is actually quite common in the business world. All of these related party transactions are also stated in the 10-K: "Haller brings considerable advantages to the Company's platform development and business development efforts and capabilities, including transactional business relations and a large network of agents, which the Company believes, are capable of processing $1 billion transactions annually (the "Haller Network")." |
New board members and CFO
According to Stockreversal who has been conversing with the management team since the company was trading on the OTC exchange, he believes that the company is in the works of hiring a CFO and they are looking to add two independent directors to the Board near term with significant financial sector experience which would likely provide more corporate oversight and strengthen the company's overall internal controls.
GBOX likely to miss revenue targets
The Bear Cave cited that the company raised projections from $12.0 to $14.0 million in EBITDA for the full year 2020 but went on to only make $0.3 million in adjusted EBITDA in 2020. Again, that is nit-picking because they did beat their projections in other aspects such as the fact that they projected $2.2 million in revenue for Q2 but made $2.3 million instead. Also, another reason for the deviation is likely because they were dealing with the uplisting to NASDAQ while also focusing on their Gen3 technology at the same time, thus they were unable to meet the targets.
Risks
However, there are some points that the Bear Cave pointed out which might be valid, thus I would consider them to be risks for the bull case. First is with regards to the practices of nepotism stated in the Bear Cave's reports. As mentioned earlier, though it is not illegal, it does reflect poorly on the management. Second, with regards to the company's projections. It is true that the company has some rather aggressive revenue targets, thus it would require great execution to pull it off.
Conclusion
The article published by the Bear Cave has many inconsistencies and seem to be a hit-piece with little substance upon further inspection. There have been many cases of short reports taking down a stock based on unfounded allegations and I believe that this is one such case. For example, GBOX reminds me of another similar company called Intelligent Systems Corporation (NYSEMKT:INS). The situation was really similar because it is a payment processing company and its stock price got brought down by a short report, but after a few weeks, it went back up to its original trading price before the short report, earning me a 100% gain. I wrote an article on it but unfortunately, I published it on alphaswap instead of seeking alpha. This is the link to the article.
This article was written by
CAIA Charterholder, microcap investor,long/short equity,growth at reasonable price, deep value, I like to i...
Long Only, Deep Value, Long-Term Horizon
Contributor Since2017
CAIA Charterholder,
microcap investor,
long/short equity,
growth at reasonable price, deep value,
I like to invest and analyse stocks.
I look for niche stocks with great upside potential and downside protection.
Disclosure: I am/we are long GBOX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (21)
The company needs to strengthen its corporate goverenance, which I expect it do going forward, but there is no doubt this is a company with strong technology that the largest and best companies in the industry want to partner with. Blockchain and digital coins are on the cusp of disrupting one of the largest industries in the world, financial services. I view this pullback as a gift.
MTrac was basically just licensing the payment technology from GBOX. The technology that they licensed from GBOX was a white label and thus MTrac branded it as their own. Furthermore, the two companies no longer have any business ties.
That is basically all that there is to the business dealings between the 2 companies. Also, it is worth pointing out that GBOX did this because it has no interests in service with high-risk clients, thus they granted MTrac. I see nothing concerning here, and I don't believe that GBOX's success would have much to do with the nature of Global Trac Solutions or MTrac's business. Furthermore, just because MTrac's fundamentals aren't great isn't going to spill over to GBOX because GBOX is basically only powering the technology for their payment services to deal with clients that GBOX does not necessarily want to deal with.
source:
MTrac annual report:
backend.otcmarkets.com/...
"MTrac Tech Corporation, a Nevada Corporation, is a privately held, wholly owned subsidiary of Global Payout, Inc. MTrac is a software technology, sales and marketing, and business development company focused on “high risk” and “high cost” industries. The Company’s flagship product is the MTrac payment platform offering a full-service solution with technology offerings including Payment Platform, Blockchain, Compliance, POS, E-Wallet, Mobile Application and Digital Payment Solutions. We are one network disrupting the status quo. It is MTrac’s creative vision through the use of its innovative technology solution to become the premier service provider offering the “Key to Cashless®.”
Last they disclosed in their press releases:
"SAN DIEGO, CA, June 12, 2020 (GLOBE NEWSWIRE) -- Global Trac Solutions, Inc. (OTCPink: PSYC) (“Global” “PSYC” or the “Company”) would like to announce to its valued shareholders and stakeholders that in an effort to more strategically focus the Company’s current growth and expansion initiatives within the burgeoning medicinal psychedelic industry, in addition to adapting to the challenges faced within a changing economic climate, the Company has made the decision to wind down all operations associated with its wholly-owned subsidiary, MTrac Tech Corporation effective immediately."
and
"In connection with its decision to wind down operations with MTrac, the Company has mutually and amicably cancelled its exclusive licensing agreement with its former technology partner GreenBox POS and will dedicate the next several weeks towards an effective and efficient phase out of any and all remaining business operations within MTrac."
That is basically all that there is to the business dealings between the 2 companies. I see nothing concerning here, and I don't believe that it has much to do with the nature of PSYC or MTrac's business, and just because MTrac's fundamentals isn't great isn't going to spill over to GBOX because GBOX is basically only powering the technology for their services. Saying otherwise would be similar to saying that just because a merchant's payment system is powered by Stripe, and the merchant has a poor business, it somehow spills over to Stripe and we should call Stripe a bad business as well. I don't think it works that way
You can find everything I mentioned on the link below, otherwise, I've also copy and pasted the relevant parts from PSYC's 10k. Thank you for reading:
backend.otcmarkets.com/...
About MTrac Tech Corporation: MTrac Tech Corporation is a Nevada Corporation and is a privately held wholly owned subsidiary of Global Trac Solutions, Inc. From February 2018 through approximately December 2019, MTrac operated as a software technology, sales and marketing, and business development company focused on "high risk" and " high cost" industries by offering a secure and compliant payment processing platform powered by patented innovative technology licensed from GreenBox POS. This technology was white labeled and branded under the name of “MTrac” (the “MTrac System”) which the Company marketed and delivered to a variety of key “high risk” and “high cost” industries and emerged as the Company’s primary revenue source from its full market launch in October 2018 through December 2019.
In December 2019, MTrac, commenced with a transition away from a payment processing service provider and towards establishing MTrac as an Independent Sales Organization (“ISO”) within the same high-risk market sector it had been operating in since February 2018.
On June 12, 2020, the Company announced, through a press release, its intent to effectively phase-out all businessrelated activities associated with MTrac and transition out of the cannabis industry in order to more effectively focus its efforts on expanding within the emerging medicinal psychedelic market space, resulting, in managements’ opinion, of an uninterrupted conversion from one business to another. This announcement also coincided with the termination of its Exclusive Licensing Agreement with GreenBox POS and Cultivate (see below).
During the last quarter, management effectively concluded all ongoing operations associated with MTrac as the Company maintained the business operations needed to transition to the current business plan related to the medicinal psychedelic market. As management concluded the MTrac business, the Company will continue to resolve any remaining and outstanding obligations, financial and otherwise, associated with MTrac business operations. MTrac remains as a wholly owned subsidiary of the Company.
….
GreenBox POS, LLC: Exclusive Licensing Agreement: on February 1st, 2018, we signed a joint venture agreement with GreenBox POS, LLC (OTCQB: GRBX) (“GreenBox”), (“GreenBox JV 1”) by which we acquired exclusive rights to utilize the GreenBox technology for High Risk merchants for one year. We paid GreenBox $360,000 in consideration of the grant of the one-year license to us and agreed upon other performance-based terms. GreenBox granted exclusive right to use its infrastructure technology and allow MTrac extensions to such technology, in support of MTrac business interests, commonly known as "High-Risk" clients, where GreenBox has no interest in servicing such clients.: On June 12, 2018 we replaced GreenBox JV 1 with a new exclusive licensing agreement (the “GreenBox 5 Year License 1”) which granted exclusive use of the GreenBox technology for High Risk industries for a period of 5 years. On October 2, 2018 the Company entered into an agreement with GreenBox and Cultivate Technologies, LLC (“Cultivate”) a Nevada Corporation, by which certain payment terms of the GreenBox 5 Year License were
modified (the “Unified Agreement”). On December 17, 2018, the Unified Agreement was cancelled and replaced by a new 5-year exclusive license agreement (the “Current Exclusive License”). On June 12, 2020, the Current Exclusive License discussed above was terminated by and between MTrac, GreenBox and Cultivate through the mutual agreement of the parties with neither MTrac nor the Company having any residual or current obligations to GreenBox and Cultivate and GreenBox and Cultivate having no residual or current obligations to MTrac. This termination was to part of the ongoing transition from a cannabisbased business to the Company’s current business plan related to the medicinal psychedelic market.
The point is GBOX only up listed to Nasdaq 2 months ago. Only 1 q earnings released as a public co. This Edwin guy is like 20 years old . He has a part-time college intern and shares a receptionist. He's good at self-promoting. Yelling "fire" in a crowded movie house. As far as his research . Looks like he thorws a dart at any quick moving small cap new tech co and hopes for the best. Signet bank and Visa... Do you think they just let anyone send out a press release ? SBNY is an $ 11 BB bank. Visa Fintech FastTrack program. I suppose Visa just let's anyone join!
Read any public company's 10K. It is littered with warnings and cautionary statements. Microsoft has 23 pages alone.
This guy got lucky . Hope he covered on Friday. That may have been the low
Fundamentally, Dorsey is a nobody and he has limited understanding of how business works. He may have been paid by the big guys so they can have a narrative justifying the price dump.
Notice how this tactic is similar to what Justice Kavanaugh underwent during his hearing.
A real shame that people can unjustly sling mud at others and walk away scott-free.
2. Self-dealing - partially true, but not illegal
what I meant to say is, there is no evidence of self-dealing on the part of the management team. There is likely some traces of nepotism in the company, but that is not illegal. There are some changes that are currently pending, so I can't edit the article right now, but I will do so later.
what is self-dealing
Self-dealing is an illegal act that happens when a fiduciary acts in their own best interest in a transaction, rather than in the best interest of their clients.
Examples include taking a corporate opportunity, using corporate funds as a personal loan or purchasing company stock based on inside information received through being in the position of a fiduciary. Self-dealing is a violation of the duty of loyalty.
www.google.com/...
The company has been losing money, represents itself with the most atrocious branding and marketing that I've seen in the space, and has been giving away margin by outsourcing nearly all its sales. And yet it has very cleverly spun the buzzword "blockchain" into an opportunity to raise money on pink sheets and then used the subsequent proceeds to acquire an established company that actually makes money, ChargeSavvy.
In this way, one could be forgiven for seeing GreenBox as similar to an empty SPAC-like vessel for ChargeSavvy to become publicly traded. Of course, this is an imperfect comparison because GreenBox actually has a handful of programmers building out some tech.
The author of this article may well be correct that the recent Bear Cave report has flaws in it.
Nonetheless, Greenbox hopes to compete with Stripe, PayPal, Braintree, et al, which is a tough environment. I'd need to see GreenBox actually stabilize, turn a profit, and show signs of real organic growth (beyond the IPO-fueled ChargeSavvy purchase) before I'd give serious consideration to investing.
