Wilson Asset Management

The accusations hit Nearmap shares in morning trade on Thursday, sending the stock tumbling 10 per cent to $2.08. It pared some losses to sit at $2.16 by the time trading was halted just 30 minutes after the report was made public.

In its 27-page blistering assault on the company, J Capital said Nearmap was laying off US sales staff and offering discounts “in a panicked attempt to improve margins, kneecapping its efforts to grow”.

“Nearmap is apparently trying to hide its US failure with accounting tricks to pull forward revenue. Without that seemingly aggressive revenue recognition, we believe revenue growth in the US could have been half what was reported,” J Capital co-founder Tim Murray said.

J Capital is short the stock and will profit from its share price falling. Short sellers borrow stock and then sell it with the intention of buying it back at a lower price and returning it to the lender. The short seller then pockets the difference.

Speaking to The Australian, Mr Murray said he began digging into the company late last year, spending more than four months compiling and analysing research before publishing his report.

He began his investigation by calling stakeholders in the US to get a feel for how the market was going.

“From the very first call, I had a lot of very strong evidence about why they’ve been so unsuccessful in the US,” he said.

“The way the market is structured (in the US), the aerial image company goes to the county and bids for the right to (take aerial imagery) over a period of time. That way they know what their margin is before they take off.

“The problem for Nearmap is they flew first and then said ‘Hey, buy my subscription’. So they were underwater on costs before they even got started,” Mr Murray said.

Nearmap was also very much focused on selling images and rather than onselling derived data, unlike its competitor Eagleview, Mr Murray said.

“It’s only in very recent times they realised they needed to get onto it to be competitive. They bought Pushpin, which is a good company, but it’s just too little, too late,” he added.

The short seller, which took aim at logistics software maker WiseTech a year ago, said its research on Nearmap identified “aggressive revenue recognition” of at least $11.7m in fiscal 2020, or 12 per cent of total revenue.

“Nearmap capitalised capture costs years ago, but it only began to exclude total capture costs from operating cash flows in 2019.

“We believe this is done to dress up poor operating cash flows. If capture costs had been counted as an operating cash flow expense, then operating cash flow would have been sharply negative: minus $12m instead of the positive $12m reported. That is a $24m swing,” Mr Murray said.

J Capital believes Nearmap is bringing forward revenue.

“Contract liabilities — the unearned payments that are received in advance of revenue recognition — declined in proportion to reported revenue for both fiscal 2020 and fiscal 2019. The way to do this would be to sneak a bit of unearned revenue into current revenue by taking an over-generous view of services provided.”

Despite entering the US market seven years ago, Nearmap failed to monetise its unique product, allowing competitors to overtake it, the short seller said.

“The company incurs twice the costs of the leading US competitor to complete the same surveys and has a vanishingly small US market share after seven years of trying.

“Its analytic technology lags far behind the competition. Sales to insurers, about 41 per cent of the total, may be challenged in a potential patent dispute with (its) key US competitor.

“Throwing money at the problem isn’t helping,” Mr Murray said.

The short seller claimed to have spoken with five competitors, seven former employees, and 17 clients or prospective clients. From these conversations it said it learned that Nearmap had failed to succeed in any key sector in the US.

The report comes a week before Nearmap is due to hand down its first-half results.

“Expect more losses and more hype about the prospects in the US when the company reports on the 2021 first-half on February 16,” J Capital said.

Wilson Asset Management equity analyst Sam Koch said the report “brought new things to light”.

“They’ve done a thorough job in speaking with former employees, competitors, clients and prospective clients” he said.

But he cautioned that, in general, short seller reports should be taken with a grain of salt.

Wilson Asset Management is not currently a shareholder in Nearmap, having exited its position in August last year.

“We felt as though we could wait for a better entry point, given the risk that the business could push out their cash-flow break-even target in pursuit of growth offshore,” Mr Koch said.

Short sellers have been under attack in recent weeks as an army of day traders set out to drive share prices of shorted stocks higher. Among the short squeeze attacks were GameStop and AMC Entertainment.

Hedge Fund Melvin Capital lost more than 50 per cent as a result of the squeeze, while other short sellers have warned they will no longer go public with their research, in a win for fraudsters.

Mr Murray, who co-founded J Capital in 2010, said the GameStop bubble was instigated by people holding positions who wanted to push the price up.

“It’s just stock promoters. A couple of people getting on the bulletin boards and promoting their own positions. If I was to do that, if I said ‘hey, let’s all go short this company’, there’d be action taken against me. But because it’s on the long side, they get away with it.”

Bronte Capital founder John Hempton last week said he would no longer make public his short positions for fear of inadvertently triggering a price rise in those stocks.

Mr Murray said J Capital would continue publishing its research and disclosing its shorts, despite the rising tensions. But he acknowledged the shift taking place in the market and the intense focus on short sellers.

“Our company has evolved significantly over the more-than 10 years we’ve been operating it. Markets change and we’re a small player. If we don’t change we don’t survive. So, yes, of course we’re quite careful about all of these things.”