Montage Technology Limited (NASDAQ:MONT) reported outstanding revenue and earnings this morning, if you believe the numbers are real. We do not.
Unfortunately, the conference call was light on substance, as the company took no questions from the buyside. With one exception (Topeka Capital Markets), the only questions Montage did allow were from analysts whose firms helped to underwrite either the company's IPO or its recent secondary offering.
If you are a sell-side analyst covering MONT, the decision not to ask hard questions is pretty straightforward: "Do I want my firm to earn more investment banking revenues, or do I want my firm to earn less investment banking revenues?" It doesn't seem that anyone woke up this morning thinking "I want to make less money," as nobody on the call asked what percentage of revenues during the fourth quarter were attributable to MONT's websiteless, closely related to management, one-man-shop-cum-purported-mega-distributor-but-only-for-Montage-products, LQW.
Even as analysts were staying away from the obvious question, apparently CFO Mark Voll was nervous about it, as was evident when Blayne Curtis from Barclays tossed up a routine housekeeping softball. I would encourage readers to listen to the conference call recording themselves, as the transcript can't adequately express the defensive intonation on Voll's initial response. This exchange begins at 27:42 on the Bloomberg recording.
Blayne Curtis (Barclays): and then maybe just to housekeeping questions; 10% customers, I was wondering if you could--you obviously had some-- would you be willing to give those to me right now?
Mark Voll, CFO: uh, we had one 10% end customer
Curtis: Yeah, the actual number, or do I have to wait for the filing?
Voll: Uh, yeah so we had one ten perc uh I, I believe we had one customer at roughly 12 percent.
In our initial Seeking Alpha piece on MONT, we gave the company the benefit of the doubt with respect to their missing ownership filings with the SEC. At this point, we are no longer inclined to do so, after CEO Howard Yang filed a form SC 13G on February 13. According to an attorney whose practice includes these filings at one of the top five U.S. securities law firms, the filing is "on its face, fraught with mistakes." The CEO of a company is obviously not a passive investor with no intention to exert control. This should have been a 13D filing, which requires additional disclosure.
MONT's investor relations department initially told us that the company had filed its required insider ownership forms but that they were not showing up on the SEC website (or anywhere else) due to "a core feed not working."
"That sounds like an extremely lame excuse which wouldn't hold water with the SEC," says the securities attorney we interviewed. The company has been unable to successfully file forms which were due in early October? We believe it is more likely that the numerous forms 3 and forms 4, which management and directors should have filed, were simply not filed. Given Yang's recent 13G filing, it's reasonable to assume the company may not have competent advice regarding these filings.
The lack of appropriate SEC insider ownership filings, on its face, neither supports nor refutes the evidence fraud at LQW. But it does raise an interesting question: how good was the due diligence performed by Deutsche Bank and Barclays? They did a secondary offering for this company on January 31, 2014, apparently unaware that the company had delinquent insider ownership filings from early October 2013.
So far, the only evidence of due diligence by the sell-side surrounding LQW prior to the IPO is that at least one of the underwriters interviewed LQW's Anthony Ho. Interviewed. That's all. Of course, the underwriters would have probably done much more had LQW properly disclosed that LQW is majority-owned by the legal representative of a company belonging to MONT's President/co-founder's father, and that in LQW's most recent annual statement one of its two directors' home addresses was that of MONT's VP for Finance. Then again, had MONT disclosed those facts, it seems unlikely that either their IPO, or the secondary in which insiders and parents cashed out $20.2 million worth of stock, would have happened at all.
We continue to believe that the lack of disclosure in MONT's public filings regarding the relationship between MONT, its officers and their parents, its employees, and LQW, represents, on its face, an obvious violation of securities laws. We believe that the SEC is investigating MONT and that this investigation will reveal that LQW enabled MONT to greatly overstate its revenue and earnings and that the most likely eventual outcome for MONT is delisting. We remain short MONT.
Additional disclosure: Aristides Capital is the General Partner of a private fund which holds a net short position in MONT at the time of submission of this article. No principals or employees of Aristides Capital hold individual equity positions. The securities attorney mentioned in this article works for a law firm which is not currently one of the several firms litigating against MONT.