{ "docId": "019dd923-622c-750b-8b98-aa28094dc4c9", "docSlug": "8dad2ca06fc6", "documentTitle": "Kornit Digital Ltd. (KRNT)", "authorId": "54_Spruce_Point_Capital", "authorName": "Ben Axler", "documentKindSlug": "activist-deck", "documentKindLabel": "Activist deck", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2019-05-07 00:00:00", "orientation": "landscape", "aspectRatio": 1.3333334, "pageNumber": 7, "pageCount": 60, "prevPage": 6, "nextPage": 8, "slideType": "villain_critique", "function": "expose_contradiction", "density": "dense", "nDataPoints": 3, "notes": "The slide uses a series of bullet points to build a case for financial manipulation and aggressive accounting practices.", "elementsJson": [ "headline_text", "bullet_list", "callout_box" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b98-aa28094dc4c9/7", "deckHref": "/decks/019dd923-622c-750b-8b98-aa28094dc4c9", "deckJsonHref": "/decks/019dd923-622c-750b-8b98-aa28094dc4c9.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b98-aa28094dc4c9#slide-7", "components": [ { "bbox": null, "kind": "callout", "text": "Based on the warrant vesting formula, we can determine that total payments by Amazon to Kornit in 2018 were 105% of total 2018 operating cash flow.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-1ac3-70f9-8548-31d08e2a3bb2", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.7, "w": 0.95, "x": 0.03, "y": 0.22 }, "kind": "list", "text": "Selling digital printers is akin to selling a commodity product in a hyper competitive industry. In order to entice Amazon, Kornit issued it cashless warrants (a weak form that requires no capital commitment by Amazon) for its stock, which should be viewed as price discounts and are netted against sales.\nBased on the warrant vesting formula, we can determine that total payments by Amazon to Kornit in 2018 were 105% of total 2018 operating cash flow. This suggests underlying organic cash flow decline from its remaining business.\nIn addition to warrants (and price discounts to list price), Amazon also gets price rebates, and Kornit is not adequately disclosing the rebate terms in the contract or in the 20-F. This amounts to an effective “triple incentive” to win Amazon\nBased on our research, we believe the rebates will kick-in up to a year afterwards, causing short-term inflation in Kornit's cash flow, and will be a drag on Kornit's operating cash flow in 2019.\nKornit uses the non-standard Monte Carlo analysis to value the warrants, instead of the more common Black-Scholes method, allowing it wider discretion to value the warrants. It claims it cannot issue warrant expense guidance. Warrants are effectively options, and plenty of public companies issue guidance on stock compensation expense.\nKornit avoided including warrants in its diluted share count calculation, despite the fact 1.1m are vested and exercisable, with an approximately market value of $16m. Kornit's diluted EPS is lower than it appears.\nWarning: There’s a discrepancy between reported Amazon revenues in Kornit’s filings. In addition, because it appears Kornit received more cash than revenues booked from Amazon, deferred revenues should have increased more than reported.\nWarning: Kornit initially tried to exclude the warrant cost from Non-GAAP EPS, an aggressive tactic that the SEC questioned, and made it restate results. In our view, this illustrates how aggressive management is using the warrants.\nExtreme Warning: Kornit’s CFO was the CFO, and named in the option backdating scandal, at MRV Communications (Nasdaq: MRVC), which was delisted to the pink sheets, restated financials and settled a shareholder lawsuit. He omits from his bio that he started his career at Ernst & Young, which served as MRVC’s auditor and as Kornit’s. We observe that Kornit backdated the warrant expense in 2016 – before the Amazon deal was announced in Jan 2017. The backdating amount in Q4’16 has represented the single largest charge since inception, which suggest front-loading of expense recognition and could allow Kornit to inflate future revenues.", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "61d5b28e-7472-4876-893d-4f4fafa1a833", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "metric", "text": "operating cash flow: 105%", "attrs": null, "subkind": "primary", "toolName": "Quantification", "toolSlug": "quantification", "confidence": null, "componentId": "019dd953-1ac3-70f9-8548-35c3f51f115f", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.04, "w": 0.6, "x": 0.03, "y": 0.16 }, "kind": "title", "text": "Kornit's Issue of Warrants and Rebates To Amazon Are Highly Suspicious:", "attrs": null, "subkind": "action-title", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "60e48674-8bd2-40d7-a512-dceac0d5911c", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.65, "x": 0.28, "y": 0.03 }, "kind": "title", "text": "Spruce Point Believes Digital (Nasdaq: KRNT) Is A \"Strong Sell\"", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "76a7d6ab-55b1-428c-aa04-adb87134f33a", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [ { "name": "fraud-exposure", "slug": null, "matchId": "dc27def7-a810-4128-99b9-a4ce3e23a7b6", "evidence": "The slide systematically lists accounting irregularities and management history to build a case for financial fraud.", "confidence": 0.9 } ], "arcBeats": [ { "to": 10, "from": 3, "beatId": "80c8a885-9efe-47d2-9126-46fe54467bf4", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "Problem and complication", "beatSlug": "complication", "evidence": "Slides 3-10 present precedent tables, critiques of Kornit's financials, and questions for management.", "position": 1, "confidence": 0.8, "parentBeatName": null, "parentBeatSlug": null } ], "loops": [], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }