Stock price of Qutoutiao Inc. (Nasdaq: QTT) soared 4.56% on Tuesday, although a short-biased research firm reported the company’s fake revenue, non-existent cash and undisclosed related parties.
The Shanghai-based mobile entertainment company was reported on Tuesday that the majority of the company’s revenue in 2018 is fake by Wolfpack Research LLC, a New York-based activist research and due-diligence firm.
“Our analysis and on the ground due diligence indicate that approximately 74% of Qutoutiao’s 2018 revenues are fake and nearly 78% of its current cash balance is non-existent, ” Wolfpack wrote in the statement.
The short report said that Qutoutiao’s real revenues only totaled approximately 798 million yuan in 2018 rather than the amount of 3 billion yuan in its 2018 annual report. Qutoutiao reported 2.8 billion yuan of advertising and marketing revenues in 2018, where at least 1.29 billion yuan of additional fake revenues can be explained by “in-house advertising agent” of the company as the report suggests.
The short report said nearly half of Qutoutiao's advertisements came from undisclosed related parties, or the company itself after the analysis of 50000 ads on the platform.
The company recorded non-existent “advances from advertising customers” on the balance sheet of its in- house advertising agent, Shanghai Dianguan, then paying them out to Qutoutiao’s main operating entity in China, Shanghai Jifen, as the item of prepaid expenses, according to the short report.
“In doing so, Qutoutiao inflated the financials of both Jifen and Dianguan without any cash actually changing hands between the two,” the report said.
In the latest earnings report on December 3rd, Qutoutiao reported a narrowed net loss of $124.4 million, or 50 cents per ADS, compared with $150.6 million, or $1.30 per ADS, a year ago.
The company said in the statement that in the three months through September its revenue was $196.8 million, up 44% from the same period last year. Advertising and marketing remains the key revenue generator in the third quarter, with revenue in that sector hitting $193.3 million, up 54% year-over-year, the report said.
The short report said the mobile content aggregator, launched in 2016, pays users to click on ads with its current cash burn rate is over $300 million per year.
Qutoutiao announced in October to raise $100 million for its free book app Midu, which was named in July among distributors of pornography by Chinese regulators and forced to "clean up the problematic content during the rectification period, as reported by China Daily.
The stock in Qutoutiao closed on Tuesday at $2.98 per American depositary share.