QTT: Fake Revenue, Non-Existent Cash, Undisclosed Related Parties

We Believe the Vast Majority of QTT’s Revenue is Fake; And So is its Cash

- Our analysis and on the ground due diligence indicate that ~74% of QTT’s 2018 revenues are fake and ~78% of its current cash balance is non-existent.

- In its SEC filings, QTT claims revenues of ¥3.02 billion in 2018. We pulled the 2018 SAIC filings for all of QTT’s subsidiaries and affiliated entities and found only ¥2.4 billion in aggregate revenue. After pulling detailed credit reports of QTT’s main operating VIE and its in-house “advertising agent,” we conclude that QTT’s real revenues only totaled approximately ¥798 million in 2018.

- We believe QTT generated at least ¥1.29 billion of additional fake revenues in 2018 by recording non-existent “advances from advertising customers” on the books of its in-house advertising agent, Shanghai Dianguan, then paying them out to QTT’s main operating VIE, Shanghai Jifen, as prepaid expenses. In doing so, QTT inflated the financials of both Jifen and Dianguan without any cash actually changing hands between the two.

- SAIC filings and credit reports indicate that fraudulent accounting artificially inflated Dianguan’s assets by ¥1.29 billion, or 1,140%. The vast majority of what Dianguan claims to be advances were then shifted to Jifen, enabling Jifen to overstate its 2018 SAIC revenue by at least ¥1.29 billion.

- We believe these non-cash, revenue inflating accounting entries could have been hidden in QTT’s 2018 20-F, when the company was flush with cash from its $96.6 million (¥663.2 million) September 2018 IPO, in addition to the more than $300 million (¥1 billion) the company raised via preferred stock issuance in the 12 months prior to its IPO.

- After the IPO, QTT raised another $171.1 million (¥1.18 billion) from the convertible loan it issued in March 2019, another $100 million (¥686.5 million) from its April 2019 secondary offering and another $50 million (¥343.3 million) from issuance of preferred stock for “Fun Literature,” the holding company of its Midu Novels app, in October 2019.

- These constant capital injections could not fill the ever-growing hole in QTT’s balance sheet. QTT’s business is a cash incinerator, whose burn apparently reached a breaking point during Q3 2019. During 3Q19, QTT claims to have moved ¥1.4 billion (i.e., more than 75% of its purported cash balance) into “short-term investments,” which were disclosed in QTT’s 2018 20-F to be China’s infamous “wealth management products.”

- QTT filed a registration statement to raise another $80 million through an at-the-market offering on November 19, 2019, when its ADSs closed at $2.98 – a discount of more than 70% from its last public offering, just 7 months prior.

- QTT does not provide quarterly cash flow statements, but by our calculation the company’s cash flow from operations was a staggering negative ¥1.75 billion in the first three quarters of 2019. After adding in QTT’s ¥1.29 billion of what we believe to be non-existent revenues from 2018, it becomes clear to us that the ¥3.42 billion QTT has raised since its IPO last September is barely enough to keep the company solvent. We believe QTT only has approximately ¥459 million of cash left in the bank – at its current burn rate, this is barely enough to keep the lights on through the end of December.