Chinese mobile content aggregator Qutoutiao Inc. (Nasdaq: QTT) responded on Thursday to a short-selling report, denying the reported fake financial results.
Wolfpack Research LLC, a New York-based activist research firm, released a report on Tuesday alleging that the majority of Qutoutiao's revenue it reported for 2018 was overstated.
Shanghai-based Qutoutiao claimed that the short report had serious errors and completely deviated from the basic facts according to its official statement published in various Chinese media.
“The company firmly denied a series of unfounded allegations such as data fraud and strongly condemned Wolfpack Research for publishing false information and distorting the facts,” the company argued.
Qutoutiao was reported to prepare for the litigation procedures to sue the short seller and claimed to release a separate statement regarding the short report in the near future.
The short-seller claimed that Qutoutiao's revenues only reached approximately 798 million yuan in 2018, which is less than one third of its reported 3 billion yuan in its 2018 annual report.
After analyzing about 50,000 ads on the platform, the short-biased research firm found nearly half of Qutoutiao's advertisement revenue came from undisclosed related parties owned by Siliang Tan, the chairman and chief executive officer of Qutoutiao.
“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.
The company recorded non-existent "advances from advertising customers" on the balance sheet of its in-house advertising agent, Shanghai Dianguan, then paid them out to Qutoutiao's main operating entity in China, Shanghai Jifen, as the item of prepaid expenses, the short-seller alleged.
Through its flagship mobile application, Qutoutiao, which means "fun headlines" in Chinese, the company aggregates articles and short videos and presents customized feeds to users based on their profile, behavior, and social relationships.
In the third-quarter results posted last week, Qutoutiao said its losses narrowed to $124.4 million and its revenue rose 44% year-over-year to $196.8 million. It said its advertising and marketing business remained the key driver of growth, with revenue in that sector hitting $193.3 million, up 54% year-over-year.
The company was backed by Tencent Holdings Ltd. (HKEX: 0700), which led a pre-IPO investment of more than $100 million in the startup in March, 2018. The company raised $84 million in a sale of 12 million American depositary shares in September 2018.
Shares in Qutoutiao closed on Thursday at $2.85 per American depositary share, down 0.35%.