After seven incantations over the decades, Wecast is now a mishmash of China-linked businesses, controlled by Chinese parties and overseen by a Chinese chairman toting 40% of the company’s common stock. Meanwhile, the company rips through millions of dollars, subtly pushing average stockholders toward watching their shares get watered down.
Formerly called You On Demand Holdings, the video-on-demand provider operates primarily in China. After numerous business changes, Wecast now hopes to develop a consumer management platform for businesses and consumers ... or maybe headsets ... or whatever idea strikes their fancy tomorrow.
Here is an executive summary:
*Controversial underwriter Chardan Capital Markets helped take this company public through a reverse merger into a shell company… a less than auspicious introduction to the public.
*The stock has surged on two silly announcements of mergers… with companies owned by none other than Wecast’s Chinese chairman. One bogus “merger” is really a loan deal and the other bogus “merger” is a freebie thrown in apparently because it’s worthless and easy to hype.
*The chairman’s companies off-loaded to Wecast include a third-tier Chinese publication. The other company sells scooters and furniture ... not our definition of a leading “global supply chain” manager.
*The chairman who controls the company is a Chinese entertainment guru who has helped grind his former company into the ground.
*Wecast's Valentine's Day announcement sounds like pure promotion designed to drive up the stock. Wecast wants investors to believe that it's really a tech company ... rather than a failed video provider that just bought a scooter company.
*Wecast is more a tiny scooter-and-furniture maker than a global supply chain manager or video-on-demand provider … or headset maker. This company can't decide on a business.
* 1. Rat's Nest of Related Party Deals
The stock ran up following two mergers with companies owned by Wecast's chairman.
*Merger 1: Wecast announced the Feb. 1 completion of a merger with Sun Video Group to buy 51% of M.Y. Products. The company name was changed from You On Demand to Wecast Network Inc.
The hype: Sun says it will generate $15 million profit within 12 months of closing or return the shares.
The hitch: M.Y. Products is owned by Sun Video. Sun is owned by chairman Bruno Wu. This debt deal is off if Sun Video doesn't reach its target. If Sun Video were really able to reach $15 million profit in a year, no one would be able to buy it for a mere $50 million. The deal sounds fishy to us.
*Merger 2: Wecast on Feb. 2 acquires 55% of Wide Angle Group Limited.
The hype: Wide Angle is an industrial/trade media and commerce company. Wecast gets the Wide Angle shares from BT Capital Global Limited... which is owned by guess who? Chairman Bruno Wu and his Sun Seven Stars.
The cost: Nothing. "WCST will pay no additional monetary or stock consideration for the acquisition."
The hitch: Wecast's chairman threw in his company, Wide Angle, for free.
Why on earth would he do that? It could be that Wide Angle is worthless. It could be the chairman wants to promote the stock. Or maybe both.
*2. Who's Your Daddy And You Say He's Selling Scooters?
Let's look at the two companies, owned by the chairman, which are intricately bound to Wecast.
First, Wide Angle is just a third-tier politically oriented magazine ... published in China:
Second, M.Y. Products is 100% owned by Sun Video, an affiliate of Mr. Wu, and Sun Seven Stars.
M.Y. Products claims on its website that it's a "leading company of Wecast global supply chain management." The company further asserts it helps Chinese manufacturers that export products to the US. Mighty big claims:
(Source: PR Newswire, Company)
But Wayback Machine shows M.Y. Products is a different kind of critter.
Yep, the M.Y. Products website just last October clearly states they manufacture lots of goods under various brand names:
(Source: Wayback Machine)
And rather than "supply chain management," M.Y. Products has been making and selling ... Scooters and furniture:
That's right. The scooters are marketed to kids in the U.S., Denmark and China. Rockboard currently lists M.Y. Products as its mailing address:
(Source: Web archive; MY Products)
The above looks like a hobby website to us.
Below is more verification of what M.Y. Products really does....
(Source: BizStanding Business Directory)
Indeed, M.Y. Products was incorporated nine years ago. The scooter/furniture company shares a warehouse with three other businesses in Franklin, Indiana at 400 N. Forsythe Street.
Hmmm. So scooters and furniture fall jaw-droppingly short of "global supply chain management!"
*3. Adios, Suckers
It's always disconcerting when officers throw up their hands and leave a company. Especially when the dearly departed is the chief financial officer who undoubtedly knows the company finances better than anyone. And such a departure is an even bigger red flag when the CFO ducks out after less than a year on the job.
|Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.|
On January 30, 2017, Ms. Mei Chen, the Chief Financial Officer (“CFO”) of the Company notified the Board of Directors (the “Board”) of her resignation from her position as CFO, effective February 4, 2017. Ms. Chen’s resignation was not because of any disagreement with the Company known to an executive officer of the Company on any matter relating to the Company’s operations, policies or practices. The Company thanks Ms. Chen for her service to the Company. On January 30, 2017, the Board appointed Mr. Yi Xu as the Chief Operating Officer, as well as the interim CFO and principal accounting officer of the Company, effective February 4, 2017.
Unfortunately, no one less than the CEO, Mingcheng Tao, initiated the leadership dash from Wecast. He suddenly resigned in December:
|Item 5.02||Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.|
Mingcheng Tao Resignation
On December 4, 2016, Mr. Mingcheng Tao, the Chief Executive Officer and director of the Board of Directors of the Company (the “Board”) of Wecast Network, Inc. (the “Company”) notified the Board of his resignation from his position as CEO and from the Board, effective immediately. Mr. Tao’s resignation was not because of any disagreement with the Company known to an executive officer of the Company on any matter relating to the Company’s operations, policies or practices. The Company thanks Mr. Tao for his service to the Company.
(Source: Company SEC filing)
It's bad news when the top leaders flee... and especially worrisome with these little Chinese reverse-take-overs...
*4. Reverse Take-Over; Controversial Underwriter
Did someone say, "RTO?"
(Source: Company SEC filing)
Chardan is the brainchild of Kerry Propper, whose father started the similarly named Chardan Capital (without the word "Markets"). In a 2010 profile of the younger Propper, Observer wrote:
" In the meantime, Mr. Propper’s business is evolving. Late last year, he and his father were sued by investors in a $1.25 million deal for a Chinese firm called Huiheng Medical. Its CFO said on a conference call that the company was “spending substantial amounts of money paying bribes to officials in control of the Chinese hospitals,” the suit says. According to records, it was settled this year. "It was a non-event," Mr. Propper said. "
USA Today reported that Chardan Capital Markets was censured and fined $40,000 for three violations of short-selling rules. In 2003, the federal government sued the father and son for allegedly failing to make promised payments to a limited partnership that received Small Business Administration money.
So, certainly not the most promising blastoff into the public arena. Now, about the company's big guy ...
*5. Chairman's Background
Chairman Wu is such a significant contributor to Wecast that investors have got to consider his background.
Mr. Wu is a Chinese entertainment guru married to a Chinese actress. He worked for Sun New Media as both chairman and chief executive.
Mr. Wu was quoted in a 2007 press release describing that company's Hail Mary to create an "enhanced" business strategy and name change to NextMart (NXMR):
"Dr. Bruno Wu, Chairman and CEO of NextMart Inc. commented, "By changing the company's name to NextMart, we have established a powerful brand name under which we can market all of our information and e-commerce services to customers. This a critical first step for building the foundation of China's largest shopping community, with an initial focus on women's fashion products over the next 24-36 months. Our enhanced focus gives us the opportunity to leverage our core competence of media and marketing, as well as our suite of technologies, our know-how, and our market connections."
But the technologies, know-how and market connections apparently didn't materialize as expected.
The company proceeded to fall apart. Here's where NextMart stands now:
(Source: OTC Markets)
Mr. Wu remains a controlling Wecast shareholder who deals with a legacy of one solid business failure and, in our view, a developing failure ... named Wecast.
*6. Quarterly Losses Persist; Institutions Say, "No Thanks"
The stock attracts virtually no institutions, leaving shares in the hands of retail investors and the Chinese chairman ... a potential set up for extreme volatility on the downside.
Lack of big banks' interest is not shocking ... considering the quarterly losses that go on and on and on, quarter after quarter:
With Wecast's recurring losses since inception and an accumulated deficit exceeding $92 million, auditors have substantial doubts the company can continue as a going concern.
*7. Almost No Cash Left; Diluting Shareholders
Here's the cash mess Wecast found itself buried in last quarter:
(Source: Company SEC filing, TheStreetSweeper)
And here's how - since its expenses exceed revenue - Wecast rapidly burns through cash:
(Sources: Company SEC filings, TheStreetSweeper)
So Wecast had little choice but to come up with cash by selling 1.136 million shares of the company stock last November to Mr. Wu's controlled company, Sun Seven Stars. That desperate sale raised $2 million so Wecast could keep its doors open.
The money-guzzler had to come up with even more dollars ... in the form of that promissory note convertible to stock that Wecast sneakily, in our view, called a "merger."
Wecast's stock-selling history, along with financial messiness, convinces us there's more potential ahead for diluting existing stockholders.
*8. Latest Hype
Wecast issued a promotional press release on Valentine's Day with the announcement that testing of virtual reality and augmented reality headsets is nearing completion. The release drops all the big buzz words like "VR," "AR", "SaaS," and "artificial intelligence."
(Source: Company press release)
This is pure hype.
Before this release, the first time Wecast used "VR," in any SEC filing was in Feb. 1, 2017, regarding the merger with Sun Video (which is really just a small-time manufacturer):
And before the Valentine's Day release, Wecast filings had never before mentioned "commerce technology solution" or "SaaS" or "virtual reality" or "augmented reality."
So now Wecast suddenly wants investors to believe that it's really a tech company ... rather than a money-losing video provider that just bought a scooter company.
The recent promotional release also underscores Wecast’s inability to develop and focus on a valid business plan.
*9. The Reality Of Virtual Reality
Meanwhile, dozens of real companies are spending hundreds of millions of dollars, even billions in the VR and AR field in which Wecast suddenly purports to be an expert.
The market is already dominated by giants selling headsets, including:
*Facebook/Oculus VR – Oculus is the indisputable leader, so hot that Facebook spent $2 billion for a pre-shipment product.
*Microsoft – Microsoft’s HoloLens focuses on headset uses such as spatial mapping, gesture recognition and voice and speech recognition. Unlike others, HoloLens is wireless.
*Google – Google’s $15 Google Cardboard gaming-focused headset is designed for using VR apps on Android smartphones. Google is also selling its Daydream headset.
*WorldViz – The company’s 3D interactive and immersive visualization is aimed at universities, government institutions and private businesses.
Other established rivals include Bricks & Goggles, Marxent Labs, Unity Technologies, Magic Leap, Vuzix, CastAR, etc., etc.
Wecast can't legitimately expect to enter into this brutally competitive market filled with well-resourced giants.
So Wecast appears to be a Chinese-controlled scooter and furniture company that parades around as a global supply chain manager and video-on-demand provider and consumer management platform developer ... and now a headset maker. Wecast's chairman facilitates "mergers" with his own companies - one of which is a freebie and the other is actually a debt deal.
The company has gone through numerous operational changes and still can't seem to decide what it should be doing.
Both the chief executive and chief financial officer have recently thrown on their goggles and scooted away from the whole mess. We think stockholders may be wise to do the same.
This thing is blowing apart and when the smoke clears, we expect the stock to simmer down to 20 cents per share.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in WCST and stand to profit on any future declines in the stock price.
* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to [email protected]